PROSPECTUS SUPPLEMENT
(To Prospectus dated October 10, 1996)
$61,948,522
(Approximate)
Bear Stearns Mortgage Securities Inc.
Pass-Through Certificates,
Series 1996-10
The Pass-Through Certificates, Series 1996-10 (the "Certificates"), consist
of the Class identified in the chart below. It is a condition to their issuance
that the Certificates receive the ratings (set forth under "Summary of Terms --
Certificate Rating") of Moody's Investors Service, Inc. ("Moody's") and Fitch
Investors Service, L.P. ("Fitch").
Prospective investors should consider the factors set forth on page S-3 and
under "Yield and Prepayment Considerations."
(cover continued on next page)
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN BSMSI,
THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. THE CERTIFICATES ARE NOT
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, BSMSI OR ANY OF THEIR
AFFILIATES, OR ANY OTHER PERSON. DISTRIBUTIONS ON THE CERTIFICATES WILL BE
PAYABLE SOLELY FROM ASSETS TRANSFERRED OR PLEDGED TO THE TRUST
FOR THE BENEFIT OF THE CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Approximate
Initial Principal Amount Pass-Through Rate
Class A-1 Certificates $61,948,522 (1)
_______________
(1) The effective per annum interest rate borne by the Certificates during each
Interest Accrual Period (as defined herein) with respect to a Distribution
Date (as defined herein) will equal a fraction, expressed as a percentage
truncated at the fourth decimal place, the numerator of which is equal to
the aggregate amount in respect of interest received by the Trustee on the
Pooled Certificates for the related Interest Accrual Period (net of the
related Trustee Fee (as defined herein)) multiplied by 12, and the
denominator of which is the principal amount of the Certificates
immediately prior to such Distribution Date. Under certain circumstances,
the principal amount of the Certificates could be paid in full while
interest would remain payable, in which case, the calculation of the
effective per annum interest rate borne by the Certificates would not be
meaningful. The effective per annum interest rate borne by the Certificates
during the first Interest Accrual Period is projected to be approximately
8.82%.
The Certificates will be purchased by Bear, Stearns & Co. Inc. (the
"Underwriter") from Bear Stearns Mortgage Securities, Inc. ("BSMSI") and will be
offered by the Underwriter from time to time in negotiated transactions at
varying prices to be determined at the time of sale. Proceeds to BSMSI from the
sale of the Certificates are expected to be approximately 99.125% of the
aggregate principal balance of the Certificates, plus accrued interest thereon
from December 25, 1996 to but not including the Closing Date, but before
deducting expenses payable by BSMSI, estimated to be $200,000.
The Certificates are offered by the Underwriter when, as and if issued,
delivered to and accepted by the Underwriter and subject to certain other
conditions. Delivery of the Certificates is expected to be made in book entry
form only, through the same day funds settlement system of The Depository Trust
Company on or about December 27, 1996.
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is December 23, 1996
<PAGE>
(cover continued from previous page)
The Certificates will represent, in the aggregate, the entire beneficial
ownership interest in a trust (the "Trust") consisting primarily of a portion of
Federal National Mortgage Association ("FNMA") Guaranteed REMIC Pass-Through
Certificates, FNMA REMIC Trust 1994-6, Class F (the "Pooled FNMA Certificates")
and all of Federal Home Loan Mortgage Corporation ("FHLMC") Multiclass Mortgage
Participation Certificates, Series 1910, Class SC (the "Pooled FHLMC
Certificates," and together with the Pooled FNMA Certificates, the "Pooled
Certificates"). The Pooled FNMA Certificates are entitled to receive monthly
distributions of principal based on the FNMA Principal Distribution Amount (as
defined herein) on each FNMA Distribution Date (as defined herein) until the
principal balance is reduced to zero. The Pooled FNMA Certificates bear interest
based on the London interbank offered quotations for one-month Eurodollar
deposits ("LIBOR"), and will be entitled to receive interest based on the FNMA
Interest Distribution Amount (as defined herein) on each FNMA Distribution Date.
The FNMA Interest Distribution amount may be distributed after the principal
balance of the Pooled FNMA Certificates has been reduced to zero. The Pooled
FHLMC Certificates are entitled to receive monthly distributions of interest on
the notional principal balance thereof at a rate per annum equal to 8.6% less
LIBOR, subject to a maximum rate of 8.6% per annum and a minimum rate of 0% per
annum.
The Pooled FNMA Certificates are guaranteed as to timely distribution of
principal and, to the extent set forth under "Description of the Certificates -
Fannie Mae Guaranty" in Exhibit I, interest by FNMA. FHLMC guarantees to the
record holder of the Pooled FHLMC Certificates the timely payment of interest at
the rate described above.
The Guaranteed REMIC Pass-Through Certificates (the "Underlying FNMA
Series"), of which the Pooled FNMA Certificates are one class, represent
beneficial ownership interests in FNMA REMIC Trust 1994-6 (the "FNMA Trust").
The assets of the FNMA Trust include (i) a single "interest only" FNMA Stripped
Mortgage-Backed Security included in FNMA Stripped Mortgage- Backed Security
Trust 000180-GN (the "Trust 180 SMBS"), (ii) certain other "interest only"
Stripped Mortgage Backed Securities described in Annex 1 (the "IO SMBS" and,
together with the Trust 180 SMBS, the "FNMA SMBS") and (iii) all of the Class
5-C REMIC Certificates (the "Underlying FNMA REMIC Certificates") evidencing
beneficial ownership interests in FNMA REMIC Trust 1994-5 (the "Underlying FNMA
REMIC Trust"). The Class 5-C Certificates are "principal only" Certificates.
Underlying the assets in the FNMA Trust are certain FNMA Mortgage Pass-Through
Certificates (the "MBS") and certain "fully modified pass-through" mortgage
backed securities ("GNMA Certificates") guaranteed as to timely payment of
principal and interest by the Government National Mortgage Association. Each MBS
represents a beneficial ownership interest in a pool of first lien,
single-family, fixed rate residential mortgage loans having the characteristics
described herein. Each GNMA Certificate is based on and backed by a pool of
first lien, single-family, fixed-rate residential mortgage loans (together with
the mortgage loans underlying the MBS, the "FNMA Mortgages") which are either
insured by the Federal Housing Administration or partially guaranteed by the
Department of Veterans Affairs. See "Description of the Pooled Certificates"
herein for additional information concerning the FNMA Trust, the FNMA SMBS and
the Underlying FNMA REMIC Certificates.
The Multiclass Mortgage Participation Certificates, Series 1910 (the
"Underlying FHLMC Series" and, with the Underlying FNMA Series, each an
"Underlying Series"), of which the Pooled FHLMC Certificates are one class, will
receive payments from the cash flows provided by four groups of assets (the
"FHLMC Assets") which are, or are or are backed by, FHLMC Gold Mortgage
Participation Certificates ("Gold PCs") and/or FHLMC Gold Giant Mortgage
Participation Certificates ("Gold Giant PCs"). Underlying the Gold PCs and Gold
Giant PCs are pools of fixed-rate, first lien, residential mortgages and
mortgage participations (the "FHLMC Mortgages").
Distributions of principal and interest on the Certificates with respect to
a month will be made on the 25th day of such month (each, a "Distribution Date")
or, if such day is not a Business Day (as defined herein), then on the next
succeeding Business Day. A "Business Day" means a day other than a Saturday, a
Sunday or a day on which banking institutions in New York, New York or the city
in which the corporate trust office of the Trustee is located are authorized or
obligated by law or executive order to be closed. On each Distribution Date,
holders of Certificates will be entitled to receive interest from funds received
as interest on the Pooled Certificates and principal from funds received as
principal on the Pooled Certificates, as more fully described herein under
"Description of the Certificates".
THE CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE CERTIFICATES UNLESS THE INVESTOR
UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD, LIQUIDITY AND MARKET
RISKS ASSOCIATED WITH THE CERTIFICATES.
The Certificates are complex securities and it is important that each
investor in the Certificates possess, either alone or together with an
investment advisor, the expertise necessary to evaluate the information
contained and incorporated in this Prospectus Supplement in the context of that
investor's financial situation.
The yield to maturity on the Certificates will depend on the purchase
price, the rate and timing of principal payments on the Pooled Certificates
which in turn will be affected by the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the FNMA
Mortgages and the FHLMC Mortgages (collectively, the "Mortgage Loans" and with
respect to any Pooled Certificates, the "Underlying Mortgage Loans" or a
"Mortgage Pool"). Generally, the Mortgage Loans may be prepaid at any time
without penalty. The yield to maturity on the Certificates will also be
sensitive to the level of LIBOR. Mortgage Loan prepayment rates are likely to
fluctuate significantly from time to time as is the level of LIBOR. Investors
should consider the associated risks, including:
- Low levels of LIBOR can reduce the interest due on the Pooled FNMA
Certificates. High levels of LIBOR can significantly reduce the
interest due on the Pooled FHLMC Certificates. Generally, a high level
of LIBOR will have a negative effect on the yield to investors in the
Certificates.
- If the notional balances of the FNMA SMBS underlying the Pooled FNMA
Certificates are reduced to zero while the principal balance of the
Pooled FNMA Certificates remains outstanding, and the notional balance
of the Pooled FHLMC Certificates is reduced to zero (or,
alternatively, in the case of the Pooled FHLMC Certificates, if
increased LIBOR levels reduce the interest rate payable on such
certificates to zero), no interest may be payable on the Certificates.
- Slight variations in Mortgage Loan characteristics could substantially
affect the weighted average lives and yields of the Certificates.
- The Pooled Certificates were issued as parts of different Underlying
Series and the rates of prepayments on the FNMA Mortgages and the
FHLMC Mortgages will be different. Under various circumstances,
including differing prepayment rates of the FNMA Mortgages and the
FHLMC Mortgages, either the Pooled FNMA Certificates or the Pooled
FHLMC Certificates could mature and investors would be exposed to the
risk of indirectly owning only one of the Pooled Certificates.
- The yield to investors in the Certificates can be expected to decrease
to the extent that the notional principal balance of the Pooled FHLMC
Certificates reduces faster than anticipated.
- The Pooled FNMA Certificates have not received full distributions of
interest at the rate calculated according to their interest rate
formula since the July 1996 FNMA Pooled Certificate Distribution Date.
As of the December 1996 FNMA Pooled Certificate Distribution Date, the
Interest Deficiency (as defined herein) in respect of the Pooled FNMA
Certificates was approximately $124,227. There can be no assurance as
to whether the Pooled FNMA Certificates will in the future receive
full distributions of interest at the rate calculated according to
their interest rate formula on a timely basis or as to the payment of
any of the Interest Deficiency (as defined herein).
- The yield to maturity of Certificates purchased at a discount or
premium will be more sensitive to the rate and timing of payments
thereon. Holders of Certificates purchased at a discount (or premium)
should consider the risk that a slower (or faster) than anticipated
rate of principal payments on Mortgage Loans could result in an actual
yield that is lower than the anticipated yield.
To the extent statements contained herein do not relate to historic or
current information, this Prospectus Supplement may be deemed to contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "1934 Act"). Actual results could differ
materially from those projected in such statements as a result of the matters
set forth below, under "Summary of Terms -- Yield and Prepayment Considerations"
and "Yield and Prepayment Considerations" and elsewhere in this Prospectus
Supplement.
There is currently no secondary market for the Certificates and there can
be no assurance that one will develop. The Underwriter intends to establish a
market in the Certificates, but is not obligated to do so. There is no assurance
that any such market, if established, will continue.
No election will be made to treat the Trust or any of its assets as a "real
estate mortgage investment conduit" ("REMIC") for Federal income tax purposes.
Certificates offered by this Prospectus Supplement constitute a separate
series of Certificates being offered by BSMSI pursuant to its Prospectus dated
October 10, 1996, of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full. Prospective investors are also urged to read the documents
relating to the Pooled Certificates described under "Description of the Pooled
Certificates -- Additional Information."
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying prospectus dated October 10, 1996 (the "Prospectus"). A
description of the Pooled Certificates being deposited into the Trust is set
forth under "Description of the Pooled Certificates -- General". Unless
otherwise specified herein, references herein to an amount or percentage of
Pooled Certificates refers to the amount or percentage calculated based on the
aggregate outstanding principal balance or notional principal balance as
reported by the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") with respect to the Underlying Series
(in the case of the Pooled FNMA Certificates, "Pooled Certificate Principal
Balance") of such Pooled Certificates as of November 25, 1996 in the case of the
Pooled FNMA Certificates and December 15, 1996 in the case of the Pooled FHLMC
Certificates after giving effect to distributions made on the Pooled FNMA
Certificates on or prior to such dates.
Title of Series............................ Pass-Through Certificates,
Series 1996-10, Class A-1 (the
"Certificates").
Trust...................................... The Certificates will represent
the entire beneficial ownership
interest in a trust (the "Trust")
formed pursuant to a Pooling
Agreement (the "Agreement")
between Bear Stearns Mortgage
Securities Inc., as depositor
("BSMSI" or the "Depositor"), and
First Trust National Association,
as trustee (the "Trustee"). BSMSI
is an affiliate of Bear, Stearns
& Co. Inc. (the "Underwriter").
See "The Seller" in the
Prospectus.
Book-Entry;
Denominations.............................. The Certificates will be
registered as a single
Certificate held by a nominee of
The Depository Trust Company
("DTC"), and beneficial interests
will be held by investors through
the book-entry facilities of DTC
in minimum denominations of
$25,000 and increments of $1 in
excess thereof. Notwithstanding
the foregoing, one Certificate
may be held by investors in a
different denomination to
accommodate the remainder of the
initial principal amount of the
Certificates. See "Description of
the Certificates -- Book Entry;
Physical Certificates" herein.
Pooled Certificates........................ The Trust will include primarily
the Pooled Certificates, which
will consist of all or a portion
of FNMA Guaranteed REMIC Pass-
Through Certificates, FNMA REMIC
Trust 1994-6, Class F (the
"Pooled FNMA Certificates") and
FHLMC Multiclass Mortgage
Participation Certificates,
Series 1910, Class SC (the
"Pooled FHLMC Certificates," and
together with the Pooled FNMA
Certificates, the "Pooled
Certificates"). See also
"Description of the Pooled
Certificates" herein.
The Pooled FNMA Certificates are
guaranteed as to timely
distribution of principal and, to
the extent set forth under
"Description of the Certificates
- Fannie Mae Guaranty" in Exhibit
I, interest by FNMA. FHLMC
guarantees to the record holder
of the Pooled FHLMC Certificates
the timely payment of interest at
the rate described herein under
"Description of the Pooled
Certificates -- Pooled FHLMC
Certificates -- Distributions of
Interest."
The Pooled FNMA Certificates were
issued pursuant to a Trust
Agreement dated as of September
1, 1987, as supplemented by an
issue supplement thereto dated as
of January 1, 1994 (the
"Underlying FNMA Agreement"). The
Guaranteed REMIC Pass- Through
Certificates (the "Underlying
FNMA Series"), of which the
Pooled FNMA Certificates are one
class, represent beneficial
ownership interests in FNMA REMIC
Trust 1994-6 (the "FNMA Trust").
The assets of the FNMA Trust
include (i) a single "interest
only" FNMA Stripped
Mortgage-Backed Security included
in FNMA Stripped Mortgage-Backed
Security Trust 000180-GN (the
"Trust 180 SMBS"), (ii) certain
other "interest only" Stripped
Mortgage-Backed Securities
described in Annex 1 (the "IO
SMBS" and, together with the
Trust 180 SMBS, the "FNMA SMBS")
and (iii) all of the Class 5-C
REMIC Certificates (the
"Underlying FNMA REMIC
Certificates") evidencing
beneficial ownership interests in
FNMA REMIC Trust 1994-5 (the
"Underlying FNMA REMIC Trust").
The Class 5-C Certificates are
"principal only" Certificates.
Underlying the assets in the FNMA
Trust are certain FNMA Mortgage
Pass-Through Certificates (the
"MBS") and certain "fully
modified pass-through" mortgage
backed securities ("GNMA
Certificates") guaranteed as to
timely payment of principal and
interest by the Government
National Mortgage Association
("GNMA"). Each MBS represents a
beneficial ownership interest in
a pool of first lien,
single-family, fixed rate
residential mortgage loans having
the characteristics described
herein. Each GNMA Certificate is
based on and backed by a Pool of
first lien, single-family,
fixed-rate residential mortgage
loans (together with the mortgage
loans underlying the MBS, the
"FNMA Mortgages") which are
either insured by the Federal
Housing Administration ("FHA") or
partially guaranteed by the
Department of Veterans Affairs
("VA"). See "Description of the
Pooled Certificates" herein for
additional information concerning
the FNMA Trust, the FNMA SMBS and
the Underlying FNMA REMIC
Certificates.
The FHLMC Certificates were
issued under a Multiclass
Mortgage Participation
Certificate Agreement, dated as
of October 1, 1995, and a Terms
Supplement dated November 29,
1996 (the "Underlying FHLMC
Agreement" and, collectively with
the Underlying FNMA Agreement,
the "Underlying Agreements"). The
Multiclass Mortgage Participation
Certificates, Series 1910 (the
"Underlying FHLMC Series" and,
with the Underlying FNMA Series,
each an "Underlying Series"), of
which the Pooled FHLMC
Certificates are one class, will
received payments from the cash
flows provided by four groups of
assets (the "FHLMC Assets") which
are, or are backed by, FHLMC Gold
Mortgage Participation
Certificates ("Gold PCs") and/or
FHLMC Gold Giant Mortgage
Participation Certificates ("Gold
Giant PCs"). Underlying the Gold
PCs and Gold Giant PCs are pools
of fixed-rate, first lien,
residential mortgages and
mortgage participations (the
"FHLMC Mortgages").
The notional principal balance of
the Pooled FHLMC Certificates
reduces proportionately with the
principal balance of the FHLMC
Multiclass Mortgage Certificates,
Series 1910, Class FB (the "FHLMC
Class FB Certificates"). The
FHLMC Class FB Certificates
receive principal payments from a
portion of the FHLMC Assets (the
"FHLMC Group 1 Assets") and is a
support class (a "Support Class")
which receives principal payments
only after scheduled payments
have been made on certain other
classes of the Underlying FHLMC
Series.
In the case of the Pooled FNMA
Certificates, the distribution
date is the 25th day of each
month (the "FNMA Pooled
Certificate Distribution Date")
and, in the case of the Pooled
FHLMC Certificates, the
distribution date is the 15th day
of each month (the "FHLMC Pooled
Certificate Distribution Date"
and, with the FNMA Pooled
Certificate Distribution Date, a
"Pooled Certificate Distribution
Date") or if, in each case, such
day is not a business day as
defined in the applicable
Underlying Agreement, then the
next succeeding business day, as
so defined in each case.
Exhibit I hereto contains the
Prospectus Supplement dated
December 8, 1993 to the
Prospectus dated December 29,
1992 of FNMA relating to the
Underlying FNMA Series and the
related Prospectus (the
"Underlying FNMA Prospectus").
Exhibit II hereto contains the
Offering Circular Supplement
dated October 15, 1996 to the
Offering Circular dated October
1, 1995 of FHLMC relating to the
Underlying FHLMC Series and the
related Offering Circular (the
"Underlying FHLMC Offering
Circular" and, collectively with
the Underlying FNMA Prospectus,
the "Underlying Prospectuses").
Investors should purchase
Certificates only if they have
read and understood this
Supplement, the Prospectus, the
Underlying Prospectuses and the
other documents described under
"Description of the Pooled
Certificates--Additional
Information."
It should be noted that there
have been material changes in
facts and circumstances since the
dates of the Underlying
Prospectuses, including changes
in prepayment rates, prevailing
interest rates and other economic
factors, which may limit the
usefulness of, and be directly
contrary to the assumptions used
in preparing the information set
forth in, such documents.
Annex 1 hereto sets forth
approximate information for each
of the Pooled Certificates. The
tables and the descriptions of
the Pooled Certificates herein
are subject to and qualified by
reference to the provisions of
the Underlying Agreements and the
Underlying Prospectuses and the
other prospectuses related to the
Pooled Certificates or the other
mortgage-backed securities issued
as part of the Underlying Series.
The information set forth in the
tables and elsewhere herein has
been derived from FNMA and FHLMC,
but such information has not been
independently verified. This
information comprises all
material information on the
subject that the Depositor and
the Underwriter possess or can
acquire without unreasonable
effort and expense.
Closing Date............................... On or about December 27, 1996
(the "Closing Date").
Distribution Dates......................... Distributions of principal and
interest on the Certificates with
respect to a month will be made
on the 25th day of such month
(each, a "Distribution Date") or,
if such day is not a Business Day
(as defined herein), then on the
next succeeding Business Day. A
"Business Day" means a day other
than a Saturday, a Sunday or a
day on which banking institutions
in New York, New York or the city
in which the corporate trust
office of the Trustee is located
are authorized or obligated by
law or executive order to be
closed. The first Distribution
Date is expected to be January
27, 1997. In addition, if the
Trustee has not received a
distribution on, or distribution
information with respect to,
either of the Pooled Certificates
by noon on the Distribution Date
(the "Determination Time"), the
distribution allocable to such
Pooled Certificates will not be
made on the Distribution Date,
but, (i) if such distribution and
such distribution information are
received by noon on the third
Business Day after the
Determination Time, it will be
made on the third Business Day
after the Determination Time (a
"Supplemental Distribution Date")
or (ii) if received after noon on
the third Business Day after the
Determination Time, it will be
made on the next succeeding
Distribution Date, and in neither
case will additional interest be
paid thereon.
Record Date................................ Distributions will be made on
each Distribution Date to holders
of record as of the close of
business on the last Business Day
of the calendar month preceding
the month in which such
Distribution Date occurs;
provided that for this purpose
the Distribution Date is deemed
to occur on the 25th of each
month, without regard to whether
such day is a Business Day (the
"Record Date"). See "Description
of the Certificates --
Distributions of Interest and
Principal."
Original Principal Amount.................. The initial aggregate principal
amount of the Certificates (the
"Original Principal Balance")
will be equal to the Pooled
Certificate Principal Balance of
the Pooled FNMA Certificates
following the December 1996 FNMA
Pooled Certificate Distribution
Date.
Distributions of Interest
and Principal.............................. The effective per annum interest
rate borne by the Certificates
during the one month period
beginning on the 25th day of the
month preceding the month of the
Distribution Date and ending on
the 24th day of the month of the
Distribution Date (each, an
"Interest Accrual Period") will
equal a fraction, expressed as a
percentage truncated at the
fourth decimal place, the
numerator of which is equal to
the aggregate amount in respect
of interest received by the
Trustee on the Pooled
Certificates for the related
Interest Accrual Period (net of
the related Trustee Fee),
multiplied by 12, and the
denominator of which is the
principal amount of the
Certificates immediately prior to
such Distribution Date. Under
certain circumstances, the
principal amount of the
Certificates could be paid in
full while interest would remain
payable, in which case, the
calculation of the effective per
annum interest rate borne by the
Certificates would not be
meaningful. The effective per
annum interest rate borne by the
Certificates during the first
Interest Accrual Period is
projected to be approximately
8.82%.
The Pooled FNMA Certificates are
entitled to receive monthly
distributions of principal based
on the FNMA Principal
Distribution Amount (as defined
herein) on each FNMA Pooled
Certificate Distribution Date
until the principal balance
thereof is reduced to zero. The
Pooled FNMA Certificates bear
interest based on the London
interbank offered quotations for
one-month Eurodollar deposits
("LIBOR"), and will be entitled
to receive interest based on the
FNMA Interest Distribution Amount
(as defined herein) on each FNMA
Pooled Certificate Distribution
Date. The FNMA Interest
Distribution amount may be
distributed after the principal
balance of the Pooled FNMA
Certificate has been reduced to
zero. The Pooled FHLMC
Certificates are entitled to
receive monthly distributions of
interest on the notional
principal amount thereof at a
rate per annum equal to 8.6% less
LIBOR, subject to a maximum rate
of 8.6% per annum and a minimum
rate of 0% per annum.
On each Distribution Date,
holders of the Certificates will
be entitled to receive interest
from funds received as interest
on the Pooled Certificates and
principal from funds received as
principal on the Pooled
Certificates, as more fully
described herein under
"Description of the
Certificates."
Optional Termination by
the Depositor............................ The Trust may be terminated, at
the option of the Depositor on
any Distribution Date on or after
the date on which the aggregate
Pooled Certificate Principal
Balance has declined to 10% or
less of the aggregate Pooled
Certificate Principal Balance on
the Closing Date. In such event,
the Certificateholders will
receive the unpaid principal
balance of the Certificates plus
accrued interest thereon plus, in
the case of the Pooled FNMA
Certificates, any Interest
Deficiency (as defined herein)
and interest thereon as described
under "Description of the Pooled
Certificates -- Pooled FNMA
Certificates -- Distributions of
Interest.". See "Description of
the Certificates -- Optional
Termination."
Mandatory Termination................... The Trust will be terminated on
the Distribution Date following
the first Distribution Date on
which the principal balance of
the Pooled FNMA Certificates has
been reduced to zero and no
further amount is payable in
respect of any Interest
Deficiency (as defined herein)
and interest thereon as described
under "Description of the Pooled
Certificates--Pooled FNMA
Certificates--Distributions of
Interest" or the notional
principal balance of the Pooled
FHLMC Certificates has been
reduced to zero. Upon such
termination, the holders of the
Certificates will receive their
pro rata portion of the remaining
Pooled Certificate. See
"Description of the Certificates
-- Mandatory Termination."
Exchange of Certificates................ Beginning on the Distribution
Date in January 1998, holders of
a minimum of 10% of the
outstanding principal amount of
the Certificates will be entitled
to exchange such Certificates for
a pro rata portion of each of the
Pooled Certificates. Holders of
Certificates to be exchanged will
be charged an exchange fee by the
Trustee equal to the greater of
(i) $500 and (ii) 0.02% of the
outstanding principal amount of
such Certificates.
Yield and Prepayment
Considerations............................. General Considerations. The yield
to maturity and weighted average
life of the Certificates will be
affected by, among other things,
the amount and timing of
principal and interest payments,
the payment priorities and other
characteristics of the Pooled
Certificates, the occurrence of
an optional or mandatory
termination with respect to the
Pooled Certificates and the
purchase price paid for the
Certificates. In addition to the
discussion below, prospective
investors should review the
discussion under "Yield and
Prepayment Considerations"
herein.
Mortgage Loan Prepayments. If
prevailing mortgage rates fall
significantly below the mortgage
rates on the FNMA Mortgages or
the FHLMC Mortgages
(collectively, the "Mortgage
Loans" and with respect to any
Pooled Certificates, the
"Underlying Mortgage Loans" or a
"Mortgage Pool"), the Mortgage
Loans are likely to be subject to
higher prepayment rates than if
prevailing rates remain at or
above the mortgage rates on the
Mortgage Loans. Other factors
affecting prepayments of Mortgage
Loans include changes in
mortgagors' housing needs, job
transfers, unemployment, net
equity in the mortgaged
properties and servicing
decisions. The Mortgage Loans may
be prepaid at any time without
penalty and usually have
due-on-sale clauses. Since FNMA
and FHLMC guarantee the timely
payment of installments of
principal of and interest on the
respective Underlying Mortgage
Loans, losses in respect of the
respective Underlying Mortgage
Loans will have the effect of a
prepayment.
Timing of Payments. The timing
and amount of payments on the
Mortgage Loans may significantly
affect an investor's yield. In
general, the earlier a prepayment
of principal on a Mortgage Loan,
the greater will be the effect on
an investor's yield to maturity.
As a result, the effect on an
investor's yield of principal
prepayments occurring at a rate
higher (or lower) than the rate
anticipated during the period
immediately following the
issuance of the Certificates will
not be offset by a subsequent
like reduction (or increase) in
the rate of principal
prepayments.
Underlying Securities. The Trust
contains Pooled Certificates
which were issued at different
times, are backed by different
Mortgage Pools, have different
allocations of principal and
interest among various classes,
and will perform differently in
various interest and prepayment
rate environments. In addition,
the Pooled FNMA Certificates are
backed by three underlying
securities that are also
unrelated. The performance
characteristics of the
Certificates will reflect a
combination of the performance
characteristics of the Pooled
Certificates. As a result, it may
be more difficult to analyze the
likely yield and payment
experience of the Certificates.
Discounts and Premiums. In the
case of any Certificates
purchased at a discount, a slower
than anticipated rate of
principal payments, other things
being equal, could result in an
actual yield that is lower than
the anticipated yield. In the
case of any Certificates
purchased at a premium, a faster
than anticipated rate of
principal payments, other things
being equal, could result in an
actual yield that is lower than
the anticipated yield.
Reinvestment Risk. Since
prevailing interest rates are
subject to fluctuation, there can
be no assurance that investors in
the Certificates will be able to
reinvest the distributions
thereon at yields equaling or
exceeding the yield on the
Certificates. Yields on any such
reinvestments may be lower, and
may even be significantly lower,
than the yield on the
Certificates. Generally, when
prevailing interest rates
increase, prepayment rates on
mortgage loans tend to decrease,
resulting in a reduced return of
principal to investors at a time
when reinvestment at such higher
prevailing rates would be
desirable. Conversely, when
prevailing interest rates
decline, prepayment rates on
mortgage loans tend to increase,
resulting in a greater return of
principal to investors at a time
when reinvestment at comparable
yields may not be possible.
Prospective investors in the
Certificates should consider the
related reinvestment risks in
light of other investments that
may be available to such
investors.
Pooled FNMA Certificates. The
Pooled FNMA Certificates have not
received full distributions of
interest at the rate calculated
according to their interest rate
formula since the July 1996 FNMA
Pooled Certificate Distribution
Date. As of the December 1996
FNMA Pooled Certificate
Distribution Date, the Interest
Deficiency (as defined herein) in
respect of the Pooled 1996 FNMA
Certificates was approximately
$124,227. There can be no
assurance as to whether holders
of the Pooled FNMA Certificates
will in the future receive full
distributions of interest at the
rate calculated according to
their interest rate formula on a
timely basis or as to the payment
of any of the Interest
Deficiency.
Pooled FHLMC Certificates. The
notional principal balance of the
Pooled FHLMC Certificates reduces
proportionately with the
aggregate outstanding principal
balance of the FHLMC Class FB
Certificates. Accordingly, the
amount and timing of payments on
the Pooled FHLMC Certificates,
and accordingly the yield on the
Certificates, will be sensitive
to the rate and timing of
principal payments on such FHLMC
Class FB Certificates.
The FHLMC Class FB Certificates
are a Support Class in the
Underlying FHLMC Series. As a
Support Class, the FHLMC Class FB
Certificates support the
stability of scheduled principal
payments of certain other classes
of the Underlying FHLMC Series.
Thus, the FHLMC Class FB
Certificates are likely to be
much more sensitive to FHLMC
Mortgage prepayments than any
class it supports. The FHLMC
Class FB Certificates may receive
no principal payments for
extended periods of time and may
receive principal payments that
vary widely from period to
period. Relatively fast
prepayments of FHLMC Mortgages
underlying the FHLMC Group 1
Assets may significantly shorten,
and relatively slow FHLMC
Mortgage prepayments may
significantly extend, the life of
the FHLMC Class FB Certificates.
A rapid rate of principal
prepayments on the FHLMC
Mortgages underlying the FHLMC
Group 1 Assets will have a
negative effect on the yield on
the Certificates. Similarly, the
exercise of any optional
redemption rights with respect to
the Underlying Series of which
the Pooled FHLMC Certificates are
a part may have a materially
negative effect on the yield on
the Certificates. If the life of
the FHLMC Class FB Certificates
is significantly shortened, the
life of the Pooled FHLMC
Certificates will be
significantly shortened and the
yield to investors in the
Certificates can be expected to
decrease.
If the notional balances of the
FNMA SMBS underlying the Pooled
FNMA Certificates are reduced to
zero while the principal balance
of the Pooled FNMA Certificates
remains outstanding, and the
notional balance of the Pooled
FHLMC Certificates is reduced to
zero (or, alternatively, in the
case of the Pooled FHLMC
Certificates, if increased LIBOR
levels reduce the interest rate
payable on such certificates to
zero), no interest may be payable
on the Certificates.
LIBOR. The amount of interest
payable on the Pooled FNMA
Certificates will be sensitive,
and the amount of interest
payable on the Pooled FHLMC
Certificates will be highly
sensitive, to the level of LIBOR.
In general, a high level of LIBOR
will reduce the yield to
investors in the Certificates. In
addition, a high rate of
principal payments (including
prepayments) on the FHLMC
Mortgage Loans underlying the
FHLMC Group 1 Assets and/or a
high level of LIBOR will have a
materially negative effect on the
amount of interest payable on the
Pooled FHLMC Certificates.
Limited Assets in Trust. The
assets of the Trust consist of
only the Pooled FNMA Certificates
and the Pooled FHLMC
Certificates. Because the Pooled
FHLMC Certificates and the Pooled
FNMA Certificates were issued as
parts of different Underlying
Series, the rates of prepayment
of the Pooled FHLMC Certificates
will be different from the rates
of prepayment on the Pooled FNMA
Certificates. Under various
circumstances, the principal
balance of the Pooled FNMA
Certificates or the notional
principal balance of the Pooled
FHLMC Certificates could be
reduced to zero prior to the
other Pooled Certificates. In
addition, either the Pooled FNMA
Certificates or the Pooled FHLMC
Certificates could be repurchased
as described under "The Pooling
Agreement -- Assignment of Pooled
Certificates" or either of the
Underlying Agreements could be
terminated. In such event, the
Trust would consist solely of the
Pooled FNMA Certificates or the
Pooled FHLMC Certificates, as the
case may be, and investors would
be exposed to the risk of
indirectly owning only such
Pooled Certificates.
Liquidity.................................. There is currently no secondary
market for the Certificates, and
there can be no assurance that
one will develop. The Underwriter
intends to establish a market in
the Certificates, but it is not
obligated to do so. There is no
assurance that any such market,
if established, will continue.
Each Certificateholder will
receive monthly reports
pertaining to the Certificates as
described under "The Pooling
Agreement -- Reports to
Certificateholders" herein. There
are a limited number of sources
which provide certain information
about mortgage pass-through
certificates in the secondary
market; however, there can be no
assurance that any of these
sources will provide information
about the Certificates. Investors
should consider the effect of
limited information on the
liquidity of the Certificates.
Certain Federal Income Tax
Consequences............................... No election will be made to treat
the Trust as a real estate
mortgage investment conduit (a
"REMIC") for federal income tax
purposes. For federal income tax
purposes, the Trust will be
classified as a grantor trust
under Subpart E, part I of
Subchapter J of the Code and not
as a partnership or as an
association taxable as a
corporation. Special
considerations may apply to
certain pass- through entities
that hold the Certificates. See
"Certain Federal Income Tax
Considerations" herein.
ERISA Considerations....................... Fiduciaries of employee benefit
plans subject to Title I of the
Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), should consider the
ERISA fiduciary investment
standards before authorizing an
investment by a plan in the
Certificates. In addition,
fiduciaries of employee benefit
plans or other retirement
arrangements (such as individual
retirement accounts or certain
Keogh plans) which are subject to
Title I of ERISA, and/or Section
4975 of the Code, as well as any
entity, including an insurance
company general account, whose
underlying assets include plan
assets by reason of a plan or
account investing in such entity
(collectively, "Plan(s)"), should
consult with their legal counsel
to determine whether an
investment in the Certificates
will cause the assets of the
Trust ("Trust Assets") to be
considered plan assets pursuant
to the plan asset regulations set
forth in 29 C.F.R. ' 2510.3-101,
thereby subjecting the Plan to
the prohibited transaction rules
with respect to the Trust Assets
and the Trustee to the fiduciary
investment standards of ERISA, or
cause the excise tax provisions
of Section 4975 of the Internal
Revenue Code of 1986, as amended
(the "Code") to apply to the
Trust Assets, unless some
exemption granted by the
Department of Labor applies to
the acquisition, holding or
transfer of the Certificates.
Subject to the considerations set
forth under "ERISA
Considerations" herein and in the
Prospectus, the purchase or
holding of the Certificates by,
on behalf of, or with plan assets
of, a Plan may qualify for
exemptive relief under Prohibited
Transaction Exemption 90-30.
Legal Investment........................... Institutions whose investment
activities are subject to legal
investment laws and regulations
or to review by certain
regulatory authorities may be
subject to restrictions on
investment in the Certificates.
Any such institution should
consult its legal advisors in
determining whether and to what
extent there may be restrictions
on its ability to invest in the
Certificates. The Certificates
will constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984
("SMMEA"). See "Legal Investment"
herein and in the Prospectus.
Rating..................................... As a condition of their issuance,
the Certificates will be rated
"Aaa" by Moody's and "AAA" by
Fitch. Moody's and Fitch are
referred to herein as the "Rating
Agencies."
The ratings of the Certificates
should be evaluated independently
from similar ratings on other
types of securities. A rating is
not a recommendation to buy, sell
or hold securities and may be
subject to revision or withdrawal
at any time by the rating
Agencies. See "Ratings" herein.
BSMSI has not requested a rating
of the Certificates by any rating
agency other than the Rating
Agencies. However, there can be
no assurance as to whether any
other rating agency will rate the
Certificates or, if it does, what
rating would be assigned by such
other rating agency. The rating
assigned by such other rating
agency to the Certificates could
be lower than the respective
ratings assigned by the Rating
Agencies.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the Certificates
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the Prospectus and the provisions of the Agreement
relating to the Certificates offered hereby.
Book Entry; Physical Certificates
The Certificates will be represented by a single certificate registered in
the name of Cede & Co. ("Cede") as the nominee of DTC, and beneficial interests
therein will be held by investors through the book-entry facilities of DTC, in
minimum denominations of $25,000 and increments of $1 in excess thereof, except
that one Certificate may be held by investors in a different denomination. The
Certificate registered in the name of Cede can be held in physical certificate
form by investors only if (i) BSMSI advises the Trustee and the Certificate
Insurer in writing that DTC is no longer willing or able to discharge properly
its responsibilities as depository with respect to the Certificates and BSMSI is
unable to locate a qualified successor within 30 days or (ii) BSMSI, at its
option, elects to terminate the book-entry system through DTC.
With respect to the Certificate registered in the name of Cede, all
references herein to actions by holders of the Certificates shall refer to
actions taken by DTC upon instructions from its participants, and all references
herein to distributions, notices, reports and statements to holders of the
Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the case may be, for distribution to the beneficial owners of
the Certificates in accordance with DTC procedures. 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 beneficial owner of a Certificate to pledge such
Certificate to persons or entities who do not participate in the DTC system may
be limited. In addition, beneficial owners of Certificates held through DTC may
experience delays in the receipt of distributions on such Certificates. The book
entry procedures of DTC are more fully described under "Description of the
Certificates -- Book-Entry Registration" in the Prospectus.
Certificates in physical certificate form will be transferable and
exchangeable on a "Certificate Register" to be maintained by the Trustee at the
office or agency of the Trustee maintained for that purpose in St. Paul,
Minnesota. Certificates surrendered to the Trustee for registration of transfer
or exchange must be accompanied by a written instrument of transfer in form
satisfactory to the Trustee. No service charge will be made for any registration
of transfer or exchange of Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required. Such office or
agency of the Trustee is currently located at 180 East 5th Street, St. Paul,
Minnesota 55101.
Payments of Interest and Principal
Distributions of principal and interest on the Certificates with respect to
a month will be made on the 25th day of such month (each, a "Distribution Date")
or, if such day is not a Business Day (as defined below) then on the next
succeeding Business Day. A "Business Day" means a day other than a Saturday, a
Sunday or a day on which banking institutions in New York, New York or St. Paul,
Minnesota, the city in which the corporate trust office of the Trustee is
located, are authorized or obligated by law or executive order to be closed. The
first Distribution Date is expected to be January 27, 1997. In addition, if the
Trustee has not received a distribution on, or distribution information with
respect to, either of the Pooled Certificates by noon on the Distribution Date
(the "Determination Time"), the distribution allocable to such Pooled
Certificates will not be made on such Distribution Date, but (i) if such
distribution and such distribution information are received by noon on the third
Business Day after the Determination Time, it will be made on the third Business
Day after the Determination Time (a "Supplemental Distribution Date") or (ii) if
received after noon on the third Business Day after the Determination Time, it
will be made on the next succeeding Distribution Date, and in neither case will
additional interest be paid thereon. Notwithstanding the foregoing, for
accounting purposes, each Distribution Date is deemed to occur in the same month
as the concurrent or immediately preceding Pooled Certificate Distribution Date.
Distributions will be made on each Distribution Date to holders of record
as of the close of business on the last Business Day of the calendar month
preceding the month in which such Distribution Date occurs; provided that for
this purpose the Distribution Date is deemed to occur on the 25th of each month,
without regard to whether such day is a Business Day (the "Record Date").
The effective per annum interest rate borne by the Certificates during the
one month period beginning on the 25th day of the month preceding the month of
the Distribution Date and ending on the 24th day of the month of the
Distribution Date (each, an "Interest Accrual Period") will equal a fraction,
expressed as a percentage truncated at the fourth decimal place, the numerator
of which is equal to the aggregate amount in respect of interest received by the
Trustee on the Pooled Certificates for the related Interest Accrual Period (net
of the related Trustee Fee), multiplied by 12, and the denominator of which is
the principal amount of the Certificates immediately prior to such Distribution
Date. Under certain circumstances, the principal amount of the Certificates
could be paid in full while interest would remain payable, in which case, the
calculation of the effective per annum interest rate borne by the Certificates
would not be meaningful. The effective per annum interest rate borne by the
Certificates during the first Interest Accrual Period is projected to be
approximately 8.82%.
On each Distribution Date, holders of the Certificates will be entitled to
receive interest from funds received as interest on the Pooled Certificates, and
principal from funds received as principal on the Pooled Certificates.
The Trustee will cause all distributions received on the Pooled
Certificates by the Trustee in its capacity as holder of the Pooled
Certificates, from whatever source, to be deposited directly into one or more
accounts held in trust by the Trustee for the benefit of the Certificateholders
(such accounts referred to collectively herein as the "Certificate Account").
On each Distribution Date, the Trustee will apply the Available Funds (as
defined herein) on deposit in the Certificate Account as of such Distribution
Date, in the following manner and order of priority:
(A) from amounts with respect to interest received on the Pooled
Certificates:
first, to the Trustee, to pay the portion of the Trustee Fee
not being covered by a withdrawal from the Trustee Fee Escrow Account
(as defined herein) and, after payment of the Trustee Fee, to deposit
the Escrow Amount (as defined herein) in the Trustee Fee Escrow
Account; and
second, to the Certificateholders as distributions of
interest, the Interest Distribution Amount (as defined herein) less the
Trustee Fee and the Escrow Amount for such Distribution Date and the
portion, if any, of the Interest Distribution Amount less the Trustee
Fee and the Escrow Amount for any prior Distribution Date which remains
unpaid;
(B) from amounts with respect to principal received on the Pooled
Certificates, to the Certificateholders as distributions of principal, the
lesser of (i) the Principal Distribution Amount (as defined herein) for such
Distribution Date and for any prior Distribution Date which remains unpaid and
(ii) the Class Balance (as defined herein) of the Certificates immediately prior
to such Distribution Date; and
(C) from any remaining amounts, to the extent of the balance, if any, of
such Available Funds still remaining, to the Certificateholders, as additional
distributions of interest.
"Available Funds" means, as of any Distribution Date, the aggregate amount
on deposit in the Certificate Account.
The "Trustee Fee" means, with respect to any Distribution Date, the monthly
fee equal to 1/12th of the product of 0.015% and the Certificate Balance
immediately prior to the Distribution Date, but not less than $210.00 with
respect to any Distribution Date. In addition, an amount equal to 1/12th of the
product of 0.0025% and the Certificate Balance immediately prior to each
Distribution Date (the "Escrow Amount") will be deposited by the Trustee in a
separate escrow account (the "Trustee Fee Escrow Account'). The Trustee Fee
Escrow Account will not be part of the Trust. Any amount deposited in the
Trustee Fee Escrow Account will be permitted to be invested as described in the
Agreement. If on any Distribution Date, the Trustee Fee exceeds the amount of
interest received on the Pooled Certificates for such Distribution Date, the
Trustee shall withdraw the amount of the excess from the Trustee Fee Escrow
Account. If the Trustee resigns or is removed and a successor trustee is
appointed, any amounts on deposit in the Trustee Fee Escrow Account shall
thereafter be held by and for the benefit of the successor trustee. Any funds
remaining in the Trustee Fee Escrow Account upon the termination of the Trust
will be remitted to the Depositor or any successor thereto.
The Pooled Certificates to which the following definitions of Interest
Distribution Amount and Principal Distribution Amount relate are discussed under
"Description of the Pooled Certificates -- Pooled FNMA Certificates" and
"--Pooled FHLMC Certificates" herein. The full name of each abbreviated
Underlying Series is set forth under "Description of the Pooled Certificates --
General." Copies of the Underlying Agreements are available from the
Underwriter, at 245 Park Avenue New York, New York, Attention: Mortgage
Department.
The "Interest Distribution Amount" means, as to any Distribution Date, the
aggregate of the interest payments received by the Trustee in respect of the
Pooled Certificates on the applicable immediately preceding and concurrent
Pooled Certificate Distribution Dates.
The "Principal Distribution Amount" means, as to any Distribution Date, the
aggregate of the principal payments received by the Trustee in respect of the
Pooled Certificates on the applicable concurrent Pooled Certificate Distribution
Date.
Notwithstanding the foregoing, if, as described under the "The Pooling
Agreement -- Assignment of Pooled Certificates," the Depositor breaches a
representation or warranty with respect to the Pooled Certificates which
materially and adversely affects the interests of the Certificateholders and the
Depositor repurchases, or, in the case of the Pooled FNMA Certificates, elects
to substitute one or more mortgage related securities for, a Pooled Certificate,
the foregoing definition will be modified with respect to the related
Distribution Date to delete the portion thereof relating to the Pooled
Certificate being repurchased or, in the case of the Pooled FNMA Certificates,
substituted for and to reflect, in the case of a repurchase, the repurchase
price received with respect thereto as described under "The Pooling Agreement --
Assignment of Pooled Certificates" or in the case of a substitution, the
addition of a comparable provision with respect to the new mortgage related
security or securities.
The "Class Balance" of the Certificates means the principal amount of the
Certificates outstanding as of any date of determination, which is equal to the
Original Principal Balance of the Certificates minus the aggregate of all
distributions of principal previously made on the Certificates pursuant to the
distribution provisions of the Agreement.
The sole source of payment on the Certificates will be distributions on the
Pooled Certificates. The Certificates will not be guaranteed by the Depositor,
Bear, Stearns & Co. Inc., the Trustee or any other person.
Optional Termination
The Trust may be terminated at the option of the Depositor on any
Distribution Date on or after the date on which the aggregate Pooled Certificate
Principal Balance has declined to 10% or less of the aggregate Pooled
Certificate Principal Balance on the Closing Date. In such event, the
Certificateholders will receive the unpaid principal balance of the Certificate
plus accrued interest thereon, plus, in the case of the Pooled FNMA Certificate,
any Interest Deficiency (as defined herein) and interest thereon as described
under "Description of the Pooled Certificates - Pooled FNMA Certificates -
Distribution of Interest." Following such purchase, the Available Funds then on
deposit in the Certificate Account will be disbursed to the Trustee,
Certificateholders and other persons entitled thereto, in accordance with the
terms of the Agreement.
Mandatory Termination
The Trust will be terminated on the Distribution Date following the first
Distribution Date on which the principal balance of the Pooled FNMA Certificates
has been reduced to zero and no further amount is payable in respect of any
Interest Deficiency (as defined herein) and interest thereon as described under
"Description of the Pooled Certificates-- Pooled FNMA Certificates--Distri-
butions of Interest" or the notional principal balance of the Pooled FHLMC
Certificates has been reduced to zero. Upon such termination, the holders of the
Certificates will receive their pro rata portion of the remaining Pooled
Certificate. See "Description of the Certificates - Mandatory Termination."
Exchange of Certificates
Beginning on the Distribution Date in January 1998, holders of a minimum of
10% of the outstanding principal amount of the Certificates will be entitled to
exchange such Certificates for a pro rata portion of each of the Pooled
Certificates. Holders of Certificates to be exchanged will be charged an
exchange fee by the Trustee equal to the greater of (i) $500 and (ii) .02% of
the outstanding principal amount of such Certificates. Holders will be required
to provide the Trustee with irrevocable written notice, accompanied by the
exchange fee, of any proposed exchange of Certificates at least five Business
Days prior to the proposed date of such exchange, which must be a Business Day.
<PAGE>
DESCRIPTION OF THE POOLED CERTIFICATES
General
The Certificates will represent, in the aggregate, the entire beneficial
ownership interest in the Trust containing primarily a portion of Federal
National Mortgage Association Guaranteed REMIC Pass-Through Certificates, FNMA
REMIC Trust 1994-6, Class F and Federal Home Loan Mortgage Corporation
Multiclass Mortgage Participation Certificates, Series 1910, Class SC. The
"Pooled Certificate Class Percentage" means, for each class of Pooled
Certificates, the percentage which the Pooled Certificates constitute of its
class and is 43.93% in the case of the Pooled FNMA Certificates and 100.00% in
the case of the Pooled FHLMC Certificates.
The Pooled FNMA Certificates are guaranteed as to timely distribution of
principal and, to the extent set forth under "Description of the Certificates --
Fannie Mae Guaranty" in Exhibit I, interest by FNMA. FHLMC guarantees to the
record holder of the Pooled FHLMC Certificates the timely payment of interest at
the rate described herein under "Description of the Pooled Certificates --
Pooled FHLMC Certificates -- Distributions of Interest."
The Pooled FNMA Certificates were issued pursuant to the Underlying FNMA
Agreement. The Underlying FNMA Series of which the Pooled FNMA Certificates are
one class, represents beneficial ownership interests in the FNMA Trust. The
assets of the FNMA Trust consist of (i) a single "interest only" FNMA Stripped
Mortgage-Backed Security evidencing the beneficial ownership interest in the
interest distributions made in respect of the Class 58-IO REMIC Certificates
evidencing beneficial ownership interests in FNMA REMIC Trust 1992-G58 and
included in FNMA Stripped Mortgage-Backed Security Trust 000180-GN, (ii)
"interest only" FNMA Stripped Mortgage-Backed Securities evidencing the
respective beneficial ownership interests in certain interest distributions made
in respect of certain "fully modified pass-through" mortgage-backed securities
GNMA Certificates guaranteed as to timely payment of principal and interest by
GNMA, held in the form of the respective FNMA Guaranteed MBS Pass-Through
Certificates and included in the respective FNMA Stripped Mortgage-Backed
Security Trusts and (iii) all of the Class 5-C REMIC Certificates evidencing
beneficial ownership interests in FNMA REMIC Trust 1994-5. The assets of Trust
1992-G58 consist of certain GNMA Certificates. The assets of Trust 1994-5
consist of a single "principal only" FNMA Stripped Mortgage- Backed Security
evidencing the beneficial ownership interest in certain principal distributions
made in respect of certain FNMA Guaranteed Mortgage Pass-Through Certificates
held in the form of FNMA Guaranteed MBS Pass-Through Certificate CL-190250 and
included in the FNMA Stripped Mortgage-Backed Security Trust 000250-CL. Each MBS
will represent a beneficial ownership interest in a pool of first lien,
single-family, fixed rate residential mortgage loans having the characteristics
described herein. Each GNMA Certificate is based on and backed by a pool of
first lien, single-family, fixed-rate residential mortgage loans which are
either insured by the FHA or partially guaranteed by the VA.
The FHLMC Certificates were issued under the Underlying FHLMC Agreement.
The Multiclass Mortgage Participation Certificates, Series 1910, of which the
Pooled FHLMC Certificates are one class, will receive payments from the cash
flows provided by four groups of assets which are, or are backed by, FHLMC Gold
Mortgage Participation Certificates and/or FHLMC Gold Giant Mortgage
Participation Certificates. Underlying the Gold PCs and Gold Giant PCs are pools
of fixed-rate, first lien, residential mortgages and mortgage participations.
The notional principal balance of the Pooled FHLMC Certificates reduces
proportionately with the principal balance of the FHLMC Class FB Certificates.
The FHLMC Class FB Certificates receive principal payments from the FHLMC Group
1 Assets and is a Support Class which receives principal payments only after
scheduled payments have been made on certain other classes of the Underlying
FHLMC Series.
The FNMA Pooled Certificate Distribution Date is the 25th day of each month
and the FHLMC Pooled Certificate Distribution Date is the 15th day of each month
or if, in each case, such day is not a business day as defined in the applicable
Underlying Agreement, then the next succeeding business day, as so defined in
each case.
Additional characteristics of the Pooled Certificates are described below
and in Exhibit I, Exhibit II and Annex 1.
Pooled FNMA Certificates
Distributions of Interest
Interest on the Pooled FNMA Certificates is calculated on the basis of a
360-day year consisting of twelve 30- day months and is distributable monthly on
each FNMA Distribution Date. Interest to be distributed on a FNMA Pooled
Certificate Distribution Date will accrue on the Pooled FNMA Certificates during
the one-month period beginning on the 25th day of the month preceding the month
of the FNMA Distribution Date and ending on the 24th day of the month of the
FNMA Distribution Date (a "FNMA Interest Accrual Period").
Interest to be distributed on the Pooled FNMA Certificates on a FNMA Pooled
Certificate Distribution Date will be in an amount (the "FNMA Interest
Distribution Amount") equal to the lesser of (a) the sum of (i) one month's
interest on the outstanding principal balance of the Pooled FNMA Certificates
immediately prior to such FNMA Pooled Certificate Distribution Date, (ii) any
unpaid Interest Deficiency (as defined below) and (iii) interest, if any,
accrued on a compounded basis on any unpaid Interest Deficiency and (b) the sum
of (i) the aggregate distributions of interest concurrently made on the Trust
SMBS and (ii) distributions of principal concurrently made on the Underlying
REMIC Certificates following the reduction of the principal balance of the
Pooled FNMA Certificates to zero.
On each FNMA Pooled Certificate Distribution Date, the FNMA Interest
Distribution Amount will be applied to the distribution of interest on the
Pooled FNMA Certificates in the following order:
(i) an amount equal to the interest accrued on the principal
balance of the Pooled FNMA Certificates during the immediately
preceding FNMA Interest Accrual Period;
(ii) an amount equal to the interest, if any, accrued and
unpaid on the principal balance of the Pooled FNMA Certificates prior
to the immediately preceding FNMA Interest Accrual Period that has not
been previously paid (an "Interest Deficiency"); and
(iii) an amount equal to the interest, if any, accrued on a
compounded basis and unpaid on any unpaid Interest Deficiency during
each FNMA Interest Accrual Period as to which such Interest Deficiency
remained unpaid to the FNMA Pooled Certificate Distribution Date on
which such Interest Deficiency is paid, at the per annum rate in effect
from time to time with respect to the Pooled FNMA Certificates.
On each FNMA Pooled Certificate Distribution Date following the reduction
of the principal balance of the Pooled FNMA Certificates to zero and the payment
in full of all accrued and unpaid interest thereon (including any unpaid
Interest Deficiency together with interest thereon), all distributions from any
remaining assets of the FNMA Trust will be distributed monthly to holders of the
residual class of the underlying FNMA Series (the "FNMA Residual Class").
The Pooled FNMA Certificates will bear interest during each FNMA Interest
Accrual Period subject to the applicable Maximum and Minimum Interest Rates, at
the rate determined as described below:
Maximum Minimum Formula for Calculation
Interest Rate Interest Rate of Interest Rate
------------- ------------- -----------------------
10.00% 2.00% LIBOR + 200 basis points
Each LIBOR value in respect of the Pooled FNMA Certificates will be
established as provided in the underlying FNMA Agreement by FNMA two business
days prior to the commencement of the related FNMA Interest Accrual Period. The
establishment of each LIBOR value by FNMA and FNMA's determination of the rate
of interest for the Pooled FNMA Certificates for the related FNMA Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Each such rate of interest may be obtained by telephoning FNMA at 1-800-BEST-MBS
or 202-752-6547.
Under certain circumstances of increased LIBOR levels, the FNMA Interest
Distribution Amount may not be sufficient to pay the full amount of interest
accrued on the Pooled FNMA Certificates at the LIBOR based formula rate. Any
such unpaid Interest Deficiency on a particular FNMA Pooled Certificate
Distribution Date will be carried forward, with interest, to subsequent FNMA
Pooled Certificate Distribution Dates. If an unpaid Interest Deficiency remains
on the FNMA Distribution Date upon which the principal balance of the Pooled
FNMA Certificates is reduced to zero, all distributions on any Trust SMBS and
Underlying REMIC Certificates remaining in the FNMA Trust will be applied to the
payment of any such unpaid Interest Deficiency (together with any accrued and
unpaid interest thereon) on such date and each FNMA Distribution Date thereafter
before any distributions are made to the FNMA Residual Class. Once the notional
principal balances of the respective Trust SMBS and the principal balance of the
Underlying REMIC Certificates have been reduced to zero, holders of the Pooled
FNMA Certificates will have no future entitlement to any unpaid Interest
Deficiency (or any accrued and unpaid interest thereon).
If the notional balances of the FNMA SMBS are reduced to zero while the
principal balance of the Pooled FNMA Certificates remains outstanding, and the
balance of the Pooled FNMA Certificates equals the balance of the Underlying
FNMA REMIC Certificates, no further payments of interest will be made on the
Pooled FNMA Certificates.
The Pooled FNMA Certificates have not received full distributions of
interest at the rate calculated according to their interest rate formula since
the July 1996 FNMA Pooled Certificate Distribution Date. As of the December 1996
FNMA Pooled Certificate Distribution Date, the Interest Deficiency in respect of
the Pooled FNMA Certificates was approximately $124,227. There can be no
assurance as to whether holders of the Pooled FNMA Certificates will in the
future receive full distributions of interest at the rate calculated according
to their interest rate formula on a timely basis or as to the payment of any of
the Interest Deficiency.
Distributions of Principal
Principal will be distributed monthly on the Pooled FNMA Certificates in an
amount (the "FNMA Principal Distribution Amount") equal to the sum of (i) the
distribution of principal concurrently made on the Underlying REMIC Certificates
and (ii) the amount ("Excess Interest") by which the aggregate distributions of
interest concurrently made on the Trust SMBS exceeds the sum of (a) the interest
accrued on the Pooled FNMA Certificates during the preceding FNMA Interest
Accrual Period, (b) any unpaid Interest Deficiency and (c) interest, if any,
accrued on a compounded basis and unpaid on any such unpaid Interest Deficiency.
On each FNMA Distribution Date, the FNMA Principal Distribution Amount will
be distributed as principal of the Pooled FNMA Certificates until the principal
balance thereof is reduced to zero.
Optional Liquidation
At the option of the holders of the FNMA Residual Class representing in the
aggregate 100% of the ownership percentages thereof, the FNMA Trust may adopt a
plan of complete liquidation pursuant to which the holders of the FNMA Residual
Class, or their designees, will purchase the Trust SMBS and Underlying REMIC
Certificates remaining in the FNMA Trust at such time. The holders of the FNMA
Residual Class, however, may not exercise this option unless (i) the outstanding
principal balance of the Underlying FNMA Series is less than 10% of the original
principal balance thereof, (ii) the proceeds of such liquidation are at least
equal to the sum of (x) the outstanding principal balance of the Pooled FNMA
Certificates and (y) any accrued and unpaid interest thereon (including any
unpaid interest deficiency and interest accrued thereon) and (iii) FNMA has
received an opinion of counsel, satisfactory to it, that such purchase will be
part of a "qualified liquidation" of the FNMA Trust within the meaning of
Section 860F(a)(4)(A) of the Code. Upon such liquidation (i) the Pooled FNMA
Certificates will then be redeemed for an amount equal to the sum of (x) the
outstanding principal balance thereof at the time of such redemption and (y) any
accrued and unpaid interest thereon (including any unpaid interest deficiency
and interest accrued thereon) and (ii) the FNMA Residual Class will be redeemed
for an amount equal to the excess of (x) the aggregate liquidation proceeds over
(y) the amount distributable to the Pooled FNMA Certificates in redemption
thereof. Such liquidation will effect an early retirement of both the Pooled
FNMA Certificates and the FNMA Residual Class.
Pooled FHLMC Certificates
Distributions of Interest
Interest on the Pooled FHLMC Certificates will be calculated on the basis
of a 360 day year of twelve 30 day months and is distributable monthly on each
FHLMC Pooled Certificate Distribution Date. The accrual period (the "FHLMC
Accrual Period") for the Pooled FHLMC Certificates is the 15th of the month
preceding the related FHLMC Pooled Certificate Distribution Date to the 15th of
the month of that FHLMC Pooled Certificate Distribution Date.
The Pooled FHLMC Certificates will bear interest during each FHLMC Accrual
Period, subject to the applicable Maximum and Minimum Interest Rates, at the
rate determined as described below:
Maximum Minimum Formula for Calculation
Interest Rate Interest Rate of Interest Rate
------------- ------------- -----------------------
8.6% 0% 8.6% - LIBOR
Each LIBOR value in respect to the Pooled FHLMC Certificates will be
established as provided in the Underlying FHLMC Agreement on the second business
day before the FHLMC Accrued Period begins. FHLMC's determination of LIBOR and
its calculation of coupons will be final, except in the case of clear error.
Investors can get LIBOR levels and coupons for current and precluding FHLMC
Accrual Periods from FHLMC's Internet Web-Site or by writing or calling FHLMC's
Investor Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia 22102
(outside Washington, D.C. metropolitan area, phone 800-336-FMPC; within
Washington, D.C., metropolitan area, phone 703- 450-3777).
The Pooled FHLMC Certificates have a notional principal balance and are not
entitled to receive distributions of principal. The notional principal balance
of the Pooled FHLMC Certificates reduces proportionately with the principal
balance of the FHLMC Class FB Certificates. The FHLMC Class FB Certificates
receive principal payments from the FHLMC Group 1 Assets and is a Support Class
which receives principal payments only after scheduled payments have been made
on certain other classes of the Underlying FHLMC Series. For a description of
the payment priorities among the classes relating to the FHLMC Group 1 Assets,
see Exhibit 2.
Optional Liquidation
FHLMC may at its option redeem the outstanding classes of the Underlying
FHLMC Series in whole, but not in part, on any FHLMC Pooled Certificate
Distribution Date when the aggregate outstanding principal amount of such
classes, after giving effect to principal payments to be made on such FHLMC
Pooled Certificate Distribution Date, would be less than 1% of the aggregate
original principal amount of such classes. FHLMC will give notice of any
optional redemption of the holders of outstanding classes of the underlying
FHLMC Series not less than 30 or more than 60 days before the date of
redemption. Any optional redemption will be at a redemption price equal to 100%
of the unpaid principal amount of the classes redeemed, plus accrued and unpaid
interest for the FHLMC Accrual Period relating to the applicable FHLMC Pooled
Certificate Distribution Date.
In order to effect an optional redemption, FHLMC will adopt a plan of
complete liquidation meeting the requirements of a "qualified liquidation" under
Section 860F(a) (4) of the Internal Revenue Code. Pursuant to the plan, FHLMC
will liquidate all of the FHLMC Assets, at fair market value as determined by
FHLMC and apply the net proceeds of liquidation (together with funds contributed
by FHLMC if the net proceeds are insufficient) to pay the redemption price.
Following any redemption any remaining proceeds from the liquidation of the net
of liquidation expenses, will be distributed pro rata to the holders of the
residual class of the Underlying FHLMC Series.
All decisions as to the making of an optional redemption, including the
time of any optional redemption, will be at FHLMC's sole discretion. FHLMC will
be under no obligation to any holder to make an optional redemption, even if
redemption would be in the holder's interest.
The Underlying Mortgage Loans
The Mortgage Loans consist of conventional, fixed rate, one- to
four-family, fully-amortizing, level monthly payment, first mortgage loans with
original maturities of up to approximately 30 years.
Additional Information
The descriptions of the Pooled Certificates and the Mortgage Loans do not
purport to be complete. Documents relevant to the Pooled FNMA certificates
include the following:
- FNMA Prospectus Supplement dated December 8, 1993 to Prospectus dated
December 29, 1992 (attached as Exhibit I hereto)
- FNMA Guaranteed REMIC Pass-Through Certificates Prospectus dated
December 29, 1992.
- FNMA Guaranteed Mortgage Pass-Through Certificates Prospectus dated
December 1, 1993.
- FNMA Stripped Mortgage-Backed Security Prospectus dated December 1,
1992.
- FNMA Guaranteed MBS Pass-Through Certificates Prospectus dated
December 1, 1992.
- FNMA Underlying FNMA REMIC Trust Prospectus Supplement dated December
21, 1992 to Prospectus dated December 29, 1992.
- FNMA Trust 1992-G58 Prospectus dated September 10, 1992.
- FNMA Information Statement dated February 16, 1993 and any supplements
thereto.
Documents relevant to the Pooled FHLMC Certificates include the following:
- FHLMC Offering Circular Supplement dated October 15, 1996 to Offering
Circular dated October 1, 1995 (attached as Exhibit II hereto)
- FHLMC Multiclass Mortgage Participation Certificates Offering Circular
dated October 1, 1995.
- FHLMC Mortgage Participation Certificates Offering Circular dated
September 1, 1995.
- FHLMC Giant Participation Certificates and Other Structured
Pass-Through Participation Certificates Offering Circular dated
September 1, 1995.
- FHLMC Information Statement dated March 29, 1996, its Information
Statement supplements dated May 15, 1996, August 14, 1996 and November
14, 1996 and any other Information Statement Supplements published
subsequently by FHLMC.
Copies of the respective Prospectus Supplements, Prospectuses and the other
documents set forth above relating to the Pooled Certificates may be obtained
from the Underwriter by writing Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, New York 10167, Attention: Mortgage Department.
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
General Considerations
The yield to maturity and weighted average life of the Certificates will be
affected by, among other things, the amount and timing of principal payments,
including prepayments (for this purpose the term "prepayments" includes payments
resulting from refinancing, liquidations, purchases by the original transferors
or others), and interest payments on the Mortgage Loans, the payment priorities
and other characteristics of the Pooled Certificates, the purchase price paid
for the Certificates and the occurrence of an optional termination with respect
to the Certificates or the Pooled Certificates. No representation is made as to
the anticipated rate of prepayments on the Mortgage Loans or the anticipated
yield to maturity of the Certificates. Prospective investors are urged to
consider their own estimates as to the anticipated rate of future prepayments on
the Mortgage Loans and the suitability of the Certificates to their investment
objectives. If prevailing mortgage rates fall significantly below the mortgage
rates on the Mortgage Loans, the Mortgage Loans are likely to be subject to
higher prepayment rates than if prevailing rates remain at or above the mortgage
rates on the Mortgage Loans. Other factors affecting prepayments of Mortgage
Loans include changes in mortgagors' housing needs, job transfers, unemployment,
net equity in the mortgaged properties and servicing decisions. The Mortgage
Loans may be prepaid at any time without penalty and generally have due-on-sale
clauses. Since FNMA and FHLMC guarantee the timely payment of installments of
principal of and interest on the respective Underlying Mortgage Loans, losses in
respect of the respective Underlying Mortgage Loans will have the effect of a
prepayment.
The timing and amount of payments, including prepayments, on the Mortgage
Loans may significantly affect an investor's yield. In general, the earlier a
prepayment of principal on the Mortgage Loans, the greater will be the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments.
The Pooled Certificates were issued at different times, are backed by
different Mortgage Pools, have different allocations of principal and interest
and payment priorities among various classes, are subject to optional
termination to the extent described herein and in the Underlying Agreements, and
will perform differently in various interest and prepayment rate environments.
In addition, the Pooled FNMA Certificates are backed by three underlying
securities that are also unrelated. The performance characteristics of the
Certificates will reflect a combination of the performance characteristics of
the Pooled Certificates. As a result, it will be difficult to predict the likely
yield and payment experience of the Certificates.
Since interest generally will be due on each Mortgage Loan on the first day
of the month, but the distribution of such interest will not be made until the
Pooled Certificate Distribution Dates and then the amounts received with respect
to a Pooled Certificate Distribution Date will not be distributed until the
related Distribution Date, the yield to investors in the Certificates will be
lower than the yield produced without such delays. Since the amount of the
distributions on the Certificates is based on information in respect of the
Underlying Series, if such information is not received in a timely manner,
payments will not be made until the following Distribution Date and the yield to
investors may be lower than the yield produced if such information had been
received in a timely manner.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments, other things being equal, could result
in an actual yield that is lower than the anticipated yield. In the case of any
Certificates purchased at a premium, a faster than anticipated rate of principal
payments, other things being equal, could result in an actual yield that is
lower than the anticipated yield.
Since prevailing interest rates are subject to fluctuation, there can be no
assurance that investors in the Certificates will be able to reinvest the
payments thereon at yields equaling or exceeding the yields on the Certificates.
Yields on any such reinvestments may be lower, and may even be significantly
lower, than yields on the Certificates. Prospective investors in the
Certificates should consider the related reinvestment risks in light of other
investments that may be available to such investors.
The notional principal balance of the Pooled FHLMC Certificates reduces
proportionately with the principal balance of the FHLMC 1910-FB Certificates.
Accordingly, the amount and timing of payments on the Pooled FHLMC Certificates,
and accordingly the yield on the Certificates, will be sensitive to the rate and
timing of principal payments on such FHLMC 1910-FB Certificates.
The FHLMC Class FB Certificates are a Support Class in the Underlying FHLMC
Series. As a Support Class, the FHLMC Class FB Certificates support the
stability of scheduled principal payments of certain other classes of the
Underlying FHLMC Series. Thus, the FHLMC Class FB Certificates are likely to be
much more sensitive to FHLMC Mortgage prepayments than is any class it supports.
The FHLMC Class FB Certificates may receive no principal payments for extended
periods of time and may receive principal payments that vary widely from period
to period. Relatively fast prepayments of FHLMC Mortgages underlying the FHLMC
Group 1 Assets may significantly shorten, and relatively slow prepayments of
FHLMC Mortgages underlying the FHLMC Group 1 Assets may significantly extend,
the life of the FHLMC Class FB Certificates. A rapid rate of principal
prepayments on the FHLMC Mortgage Loans underlying the FHLMC Group 1 Assets will
have a negative effect on the yield on the Certificates. Similarly, the exercise
of any optional redemption rights with respect to the Underlying Series of which
the Pooled FHLMC Certificates are a part may have a materially negative effect
on the yield on the Certificates. If the life of the FHLMC Class FB Certificates
is significantly shortened, the life of the Pooled FHLMC Certificates will be
significantly shortened and the yield to investors in the Certificates can be
expected to decrease.
The yield to investors in the Certificates will also be affected by changes
in LIBOR. In general, a high level of LIBOR will reduce the yield to investors
in the Certificates. Changes in LIBOR may not correlate with changes in mortgage
interest rates. It is possible that lower mortgage interest rates could occur
concurrently with a decrease in the level of LIBOR. Conversely, higher mortgage
interest rates could occur concurrently with a decrease in the level of LIBOR.
If the notional balances of the FNMA SMBS underlying the Pooled FNMA
Certificates are reduced to zero while the principal balance of the Pooled FNMA
Certificates remains outstanding, and the notional balance of the Pooled FHLMC
Certificates is reduced to zero (or, alternatively, in the case of the Pooled
FHLMC Certificates, if increased LIBOR levels reduce the interest rate payable
on such certificates to zero), no interest may be payable on the Certificates.
The amount of interest payable on the Pooled FNMA Certificates will be
sensitive, and the amount of interest payable on the Pooled FHLMC Certificates
will be highly sensitive, to the level of LIBOR. In general, a high level of
LIBOR will reduce the yield to investors in the Certificates. In addition, a
high rate of principal payments (including prepayments) on the FHLMC Mortgage
Loans underlying the FHLMC Group 1 Assets and/or a high level of LIBOR will have
a materially negative effect on the amount of interest payable on the Pooled
FHLMC Certificates.
The assets of the Trust consist of only the Pooled FNMA Certificates and
the Pooled FHLMA Certificates. Because the Pooled FNMA Certificates and the
Pooled FNMA Certificates were issued as parts of different Underlying Series,
the rates of prepayment of the Pooled FHLMC Certificates will be different from
the rates of prepayment on the Pooled FNMA Certificates. Under various
circumstances, the principal balance of the Pooled FNMA Certificates or the
notional principal balance of the Pooled FHLMC Certificates could be reduced to
zero. In addition, either the Pooled FNMA Certificates or the Pooled FHLMC
Certificates could be repurchased as described under "The Pooling Agreement -
Assignment of Pooled Certificates" or either of the Underlying Agreements could
be terminated. In such an event, the Trust would consist solely of the Pooled
FNMA Certificates or the Pooled FHLMC Certificates and investors would be
exposed to the risk of indirectly owning only such Pooled Certificates.
Assumed Final Distribution Date
The "Assumed Final Distribution Date" for distributions on the Certificates
is the Distribution Date in April 2024. The Assumed Final Distribution Date is
the Distribution Date one month after the Pooled Certificate Distribution Date
on which the final scheduled distribution on the last to mature of the Pooled
Certificates is scheduled to be made. Since the rate of payment of principal on
the Mortgage Loans can be expected to exceed the rate of payments used in
calculating such final scheduled distribution, the date of the final
distribution on the Certificates is expected to be earlier, and could be
substantially earlier, than the Assumed Final Distribution Date.
Weighted Average Lives
The weighted average life of a security refers to the average amount of
time that will elapse from the applicable settlement date until each dollar of
principal of such security will be distributed to the investor. The weighted
average life of a Certificate is determined by (i) multiplying the amount of
payments made in respect of principal on such Certificate on each Distribution
Date by the number of years from the Closing Date to such Distribution Date;
(ii) summing the results and (iii) dividing the sum by the aggregate amount of
the principal payments on such Certificate referred to in clause (i). The
weighted average lives of the Certificates will be influenced by, among other
factors, the rate at which principal is paid on the Mortgage Loans.
SPA Model
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The standard prepayment assumption model used in
this Memorandum ("SPA") represents an assumed rate of prepayment each month of
the then outstanding principal balance of a pool of new mortgage loans. SPA does
not purport to be either a historical description of the prepayment experience
of any pool of mortgage loans or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans
underlying the Pooled Certificates. 100% SPA assumes prepayment rates of 0.2%
per annum of the then outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter (for example 0.4% per annum in the second month)
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the mortgage loans, 100% SPA assumes a constant
prepayment rate of 6% per annum. Multiples will be calculated from this
prepayment rate series; for example, 125% SPA assumes prepayment rates will be
0.25% per annum in month one, 0.5% per annum in month two, reaching 7.5% per
annum in month 30 and remaining constant at 7.5% per annum thereafter. 0% SPA
assumes no prepayments.
Pricing Assumption
The Certificates were structured assuming, among other things, a prepayment
assumption of 210% SPA with respect to the Pooled Certificates. The prepayment
assumptions to be used for pricing purposes for the Certificates may vary as
determined at the time of sale. The actual prepayment rates may vary
considerably from the rates used for any pricing assumption.
Decrement and Weighted Average Life Table
The following tables indicate the percentages of the Original Principal
Balance of the Certificates outstanding after certain dates and the weighted
average lives (in years), assuming various constant percentages of SPA and LIBOR
levels.
For each of the following tables it was assumed, among other things, that
(i) the Trust consists of the Pooled Certificates in the principal and/or
notional amounts described in Annex 1 hereto; (ii) the Original Principal
Balance of the Certificates will be $61,948,522; (iii) Distribution Dates on the
Certificates occur on the 25th of each month commencing in January 1997; (iv)
each Mortgage Loan underlying a mortgage backed security issued by FNMA or a
participation certificate issued by FHLMC has a mortgage rate, remaining term to
maturity and loan age equal to the weighted average mortgage rate, weighted
average remaining term to maturity and weighted average loan age, respectively,
of all of the Mortgage Loans underlying such mortgage backed security or
participation certificate; (v) the Mortgage Loans prepay at the constant
percentages of SPA specified in the tables; (vi) all amounts due with respect to
the Mortgage Loans underlying the Pooled Certificates are applied to the payment
of the respective Pooled Certificates on the 25th day of each month; (vii) there
are no optional terminations of the Certificates or the Pooled Certificates;
(viii) the settlement date is the Closing Date, which is December 27, 1996; (ix)
each month consists of 30 days; (x) any reinvestment income on funds in the
Certificate Account will be paid to the Trustee and will not be available to
make principal and interest payments on the Certificates; (xi) the only expenses
to be paid on any Distribution Date by the Trust will be the monthly payment of
the Trustee Fee which is assumed to equal 1/12 of the product of 0.0175% and the
Certificate Balance immediately prior to the applicable Distribution Date, but
without giving effect to the minimum Trustee Fee of $210.00 for any Distribution
Date; (xii) the effective interest rate borne by the Certificates during the
first Interest Accrual Period is 8.8212% per annum; and (xiii) interest rates
applicable to the Certificates for each Interest Accrual Period subsequent to
the first Interest Accrual Period will be calculated based on the indicated
level of LIBOR.
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Principal Balance Outstanding
of the Certificates
LIBOR = 0.00%
--------------------------------------------------------------------------------------------------------
% of SPA
--------------------------------------------------------------------------------------------------------
0% 50% 100% 210% 350% 500%
-------------- ------------ ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 1997 96 96 96 90 78 66
December 25, 1998 91 91 85 72 52 50
December 25, 1999 86 83 71 53 32 33
December 25, 2000 81 72 58 36 17 18
December 25, 2001 76 62 48 21 4 7
December 25, 2002 71 51 38 8 0 0
December 25, 2003 64 41 27 0 0 0
December 25, 2004 56 31 16 0 0 0
December 25, 2005 48 22 6 0 0 0
December 25, 2006 39 14 0 0 0 0
December 25, 2007 30 7 0 0 0 0
December 25, 2008 21 0 0 0 0 0
December 25, 2009 12 0 0 0 0 0
December 25, 2010 2 0 0 0 0 0
December 25, 2011 0 0 0 0 0 0
December 25, 2012 0 0 0 0 0 0
December 25, 2013 0 0 0 0 0 0
December 25, 2014 0 0 0 0 0 0
December 25, 2015 0 0 0 0 0 0
December 25, 2016 0 0 0 0 0 0
December 25, 2017 0 0 0 0 0 0
December 25, 2018 0 0 0 0 0 0
December 25, 2019 0 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0
Weighted Average 8.3 6.2 5.0 3.3 2.3 2.3
Life (in years)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Principal Balance Outstanding
of the Certificates
LIBOR = 1.59%
-------------------------------------------------------------------------------------------------------
% of SPA
-------------------------------------------------------------------------------------------------------
0% 50% 100% 210% 350% 500%
------------- ------------ ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 1997 97 97 97 92 79 67
December 25, 1998 94 94 88 75 55 52
December 25, 1999 90 87 76 57 35 36
December 25, 2000 87 78 64 41 20 22
December 25, 2001 84 69 55 26 8 10
December 25, 2002 80 60 45 14 0 2
December 25, 2003 75 51 35 2 0 0
December 25, 2004 68 42 25 0 0 0
December 25, 2005 61 33 15 0 0 0
December 25, 2006 53 26 6 0 0 0
December 25, 2007 46 19 0 0 0 0
December 25, 2008 37 11 0 0 0 0
December 25, 2009 29 2 0 0 0 0
December 25, 2010 20 0 0 0 0 0
December 25, 2011 11 0 0 0 0 0
December 25, 2012 1 0 0 0 0 0
December 25, 2013 0 0 0 0 0 0
December 25, 2014 0 0 0 0 0 0
December 25, 2015 0 0 0 0 0 0
December 25, 2016 0 0 0 0 0 0
December 25, 2017 0 0 0 0 0 0
December 25, 2018 0 0 0 0 0 0
December 25, 2019 0 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0
Weighted Average Life 9.9 7.2 5.6 3.6 2.5 2.4
(in years)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Principal Balance Outstanding
of the Certificates
LIBOR = 3.59%
--------------------------------------------------------------------------------------------------
% of SPA
--------------------------------------------------------------------------------------------------
0% 50% 100% 210% 350% 500%
------- ----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 1997 99 99 99 93 81 69
December 25, 1998 98 98 92 79 58 55
December 25, 1999 96 93 82 62 39 40
December 25, 2000 95 86 72 47 25 27
December 25, 2001 94 79 64 34 14 16
December 25, 2002 93 72 56 22 4 8
December 25, 2003 90 65 47 11 0 3
December 25, 2004 85 57 39 2 0 0
December 25, 2005 80 50 30 0 0 0
December 25, 2006 75 45 22 0 0 0
December 25, 2007 70 40 14 0 0 0
December 25, 2008 64 32 6 0 0 0
December 25, 2009 58 25 0 0 0 0
December 25, 2010 51 18 0 0 0 0
December 25, 2011 44 10 0 0 0 0
December 25, 2012 36 2 0 0 0 0
December 25, 2013 32 0 0 0 0 0
December 25, 2014 23 0 0 0 0 0
December 25, 2015 14 0 0 0 0 0
December 25, 2016 5 0 0 0 0 0
December 25, 2017 0 0 0 0 0 0
December 25, 2018 0 0 0 0 0 0
December 25, 2019 0 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0
Weighted Average Life 13.5 9.3 6.8 4.1 2.7 2.7
(in years)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Principal Balance Outstanding
of the Certificates
LIBOR = 5.59%
---------------------------------------------------------------------------------------------------
% of SPA
---------------------------------------------------------------------------------------------------
0% 50% 100% 210% 350% 500%
------- ----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 1997 100 100 100 94 81 70
December 25, 1998 100 100 94 80 59 57
December 25, 1999 100 96 84 64 42 42
December 25, 2000 100 90 75 50 29 28
December 25, 2001 100 84 68 38 19 17
December 25, 2002 100 78 62 28 10 10
December 25, 2003 98 72 54 19 2 5
December 25, 2004 94 66 47 11 0 1
December 25, 2005 91 60 40 4 0 0
December 25, 2006 87 56 33 0 0 0
December 25, 2007 83 52 27 0 0 0
December 25, 2008 78 47 21 0 0 0
December 25, 2009 73 41 16 0 0 0
December 25, 2010 68 35 11 0 0 0
December 25, 2011 62 30 6 0 0 0
December 25, 2012 56 24 1 0 0 0
December 25, 2013 54 18 0 0 0 0
December 25, 2014 47 13 0 0 0 0
December 25, 2015 39 7 0 0 0 0
December 25, 2016 31 1 0 0 0 0
December 25, 2017 22 0 0 0 0 0
December 25, 2018 12 0 0 0 0 0
December 25, 2019 2 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0
Weighted Average Life 16.5 11.2 7.9 4.4 3.0 2.8
(in years)
- -----------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Principal Balance Outstanding
of the Certificates
LIBOR = 7.59%
----------------------------------------------------------------------------------------------------
% of SPA
----------------------------------------------------------------------------------------------------
0% 50% 100% 210% 350% 500%
------ ------------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 1997 100 100 100 94 81 70
December 25, 1998 100 100 94 80 59 57
December 25, 1999 100 96 84 64 42 42
December 25, 2000 100 90 75 50 29 28
December 25, 2001 100 84 68 38 19 17
December 25, 2002 100 78 62 28 10 10
December 25, 2003 98 72 54 19 2 5
December 25, 2004 94 66 47 11 0 1
December 25, 2005 91 60 40 4 0 0
December 25, 2006 87 56 33 0 0 0
December 25, 2007 83 52 27 0 0 0
December 25, 2008 78 47 21 0 0 0
December 25, 2009 73 41 16 0 0 0
December 25, 2010 68 35 11 0 0 0
December 25, 2011 62 30 6 0 0 0
December 25, 2012 56 24 1 0 0 0
December 25, 2013 54 18 0 0 0 0
December 25, 2014 47 13 0 0 0 0
December 25, 2015 39 7 0 0 0 0
December 25, 2016 31 1 0 0 0 0
December 25, 2017 22 0 0 0 0 0
December 25, 2018 12 0 0 0 0 0
December 25, 2019 2 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0
Weighted Average Life 16.5 11.2 7.9 4.4 3.0 2.8
(in years)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Principal Balance Outstanding
of the Certificates
LIBOR = 8.60%
-------------------------------------------------------------------------------------------------
% of SPA
-------------------------------------------------------------------------------------------------
0% 50% 100% 210% 350% 500%
------------ ----------- ----------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 1997 100 100 100 94 81 70
December 25, 1998 100 100 94 80 59 57
December 25, 1999 100 96 84 64 42 42
December 25, 2000 100 90 75 50 29 28
December 25, 2001 100 84 68 38 19 17
December 25, 2002 100 78 62 28 10 10
December 25, 2003 98 72 54 19 2 5
December 25, 2004 94 66 47 11 0 1
December 25, 2005 91 60 40 4 0 0
December 25, 2006 87 56 33 0 0 0
December 25, 2007 83 52 27 0 0 0
December 25, 2008 78 47 21 0 0 0
December 25, 2009 73 41 16 0 0 0
December 25, 2010 68 35 11 0 0 0
December 25, 2011 62 30 6 0 0 0
December 25, 2012 56 24 1 0 0 0
December 25, 2013 54 18 0 0 0 0
December 25, 2014 47 13 0 0 0 0
December 25, 2015 39 7 0 0 0 0
December 25, 2016 31 1 0 0 0 0
December 25, 2017 22 0 0 0 0 0
December 25, 2018 12 0 0 0 0 0
December 25, 2019 2 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0
Weighted Average Life 16.5 11.2 7.9 4.4 3.0 2.8
(in years)
</TABLE>
<PAGE>
Pre-Tax Yield Table
The significance of the effects of prepayments and changes in LIBOR on the
Certificates is illustrated in the following table entitled "Sensitivity of the
Certificates to Prepayments and LIBOR," which shows the pre-tax yield (on a
corporate bond equivalent basis) to the holders of such Certificates under
different constant percentages of SPA and levels of LIBOR. The yields of such
Certificates set forth in the following table were calculated using the
assumptions specified above under "---Decrement and Weighted Average Life
Tables" and assuming that (i) on each LIBOR determination date LIBOR will be at
the level shown, (ii) the aggregate purchase price (expressed as a percentage of
the Original Principal Balance) of the Certificates is 99.25% (not including
accrued interest, which is added to such price in calculating the yields set
forth in the table below) and (iii) the Certificates are purchased on December
27, 1996.
The yield to investors in the Certificates will be sensitive to the level
of LIBOR and to the rate and timing of principal payments (including
prepayments) of the Mortgage Loans, which generally can be prepaid at any time.
Generally, a high rate of principal payments (including prepayments) and/or a
high level of LIBOR will have a material negative effect on the yield to
investors in the Certificates.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased level of LIBOR.
Sensitivity of the Certificates
to Prepayments and LIBOR
(Pre-Tax Yield to Maturity)
% of SPA
-----------------------------------------------------
LIBOR 50% 100% 210% 350% 500%
- ----- ------- -------- ------ -------- ----------
0.00% 12.89% 13.56% 13.93% 6.86% 5.35%
1.59 11.96 12.57 12.97 7.46 6.28
3.59 10.98 11.51 11.95 8.32 7.52
5.59 10.04 10.77 11.23 9.31 8.83
7.59 8.26 8.93 10.19 10.15 8.36
8.60 7.32 7.93 9.19 9.78 8.11
The yields set forth in the above table were calculated by determining the
monthly discount rates which when applied to the assumed stream of cash flows to
be paid on the Certificates, would cause the discounted present value of such
assumed stream of cash flows to equal the assumed purchase price of the
Certificates indicated, and converting such monthly rates to corporate bond
equivalent rates. Such calculation does not take into account variations that
may occur in the interest rates at which investors may be able to reinvest funds
received by them as payments of principal of and interest on the Certificates
and consequently does not purport to reflect the return of any investment in the
Certificates when such reinvestment rates are considered.
Actual Experience Will Vary from Assumptions
Discrepancies will exist between the characteristics of the actual Pooled
Certificates and Mortgage Loans and characteristics of the Pooled Certificates
and Mortgage Loans assumed in preparing the tables contained herein. To the
extent that the Pooled Certificates and Mortgage Loans have characteristics
which differ from those assumed in preparing the tables, the Certificates may
mature earlier or later than indicated by the tables, and the weighted average
lives and pre-tax yields and the cash flows on the Certificates may also differ.
In addition, it is unlikely that the Mortgage Loans will prepay at any constant
rate. The timing of changes in the rate of prepayment may significantly affect
the yield realized by a holder of the Certificates.
THE POOLING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling Agreement between
BSMSI, as the depositor, and First Trust National Association as the Trustee
(the "Agreement" ). BSMSI will provide to a prospective or actual
Certificateholder without charge, upon written request, a copy (without
exhibits) of the Agreement. Requests should be addressed to Bear Stearns
Mortgage Securities Inc., 245 Park Avenue, New York, New York 10167.
Assignment of Pooled Certificates
At the time of issuance of the Certificates, the Depositor will cause the
Pooled Certificates to be assigned to the Trustee. The Depositor will represent,
among other things, that as of the Closing Date (i) it is the owner of the
Pooled Certificates free and clear of any lien or adverse interests of any
person and (ii) that it has acquired its ownership in the Pooled Certificates in
good faith without notice of any adverse claim.
Upon discovery or receipt of notice by either the Depositor or the Trustee
of a breach of any of the representations and warranties regarding the Pooled
Certificates which materially and adversely affects the interests of the
Certificateholders, the Depositor or the Trustee, the party discovering such
breach will give prompt notice to the other. Within thirty days of the earlier
of either discovery by or notice to the Depositor of any such breach, the
Depositor shall use its best efforts promptly to cure such breach in all
material respects and, if such breach cannot be cured, the Depositor shall, at
the election of the Majority Certificateholders, repurchase each Pooled
Certificate affected by the breach at a repurchase price equal to (i) with
respect to any Pooled FNMA Certificate, the outstanding Pooled Certificate
Principal Balance thereof as of the date of repurchase plus accrued interest
thereon plus any Interest Deficiency and interest thereon as described under
"Description of the Pooled Certificates - Distributions of Interest", and (ii)
with respect to any Pooled FHLMC Certificates, the highest bid obtained from
three dealers then active in the market for such Pooled FHLMC Certificates (or
such lesser number as may then be active). In the event the Trustee is able to
obtain a bid from only one active dealer, then the Trustee may obtain an opinion
(a "FMV Opinion") of an investment banking firm of national reputation (other
than an affiliate of the Depositor) to determine whether such bid is at least
equal to the fair market value of such Pooled FHLMC Certificates and the
repurchase price shall be the higher of the bid or the fair market value as
stated in any such FMV Opinion. If the Trustee is unable to obtain a bid from
any active dealer, then the Trustee shall obtain a FMV Opinion and the
repurchase price shall be equal to the fair market value of such Pooled FHLMC
Certificates as stated in such FMV Opinion.
Notwithstanding the foregoing, in the case of the FNMA Pooled Certificates,
for a period of two years following the Closing Date, in lieu of repurchasing
Pooled Certificates as described above, the Depositor may substitute therefor
one or more mortgage related securities issued by GNMA, FNMA or FHLMC (each a
"Substitute Pooled Certificate") which meet the following criteria: (i) such
substitution shall be with at least one floating rate certificate which is
entitled to received interest based on LIBOR and which has a formula of LIBOR
plus a minimum of 200 basis points (ii) the sum of the outstanding principal
amounts of the Substitute Pooled Certificates equals or exceeds the sum of the
outstanding principal amounts of the Pooled Certificates being substituted for
and (iii) the Substitute Pooled Certificates as of the date of substitution (a)
ultimately are backed by mortgage loans (I) with a weighted average pass-through
rate no more than 50 basis points below or no more than 50 basis points above
the weighted average pass-through rate of the FNMA Mortgages and (II) which are
conventional, fixed rate, one- to four-family, fully amortizing, level payments,
first mortgage loans with original maturities of up to 30 years, (b) the
inclusion of which in the Trust Fund will not result in a withdrawal or
downgrading in the ratings assigned to the Certificates by the Rating Agencies,
written confirmation of which shall be provided by the Rating Agencies to the
Trustee and (c) will not cause the Trust to lose its status as a grantor trust
for federal income tax purposes as indicated in an opinion of counsel to be
provided to the Trustee.
Accounts
The Trustee shall establish and maintain the Certificate Account in the
name of the Trustee for the benefit of the Certificateholders. The Certificate
Account shall be an Eligible Account as defined in the Agreement. The Trustee
will cause all distributions received on the Pooled Certificates by the Trustee
in its capacity as holder of the Pooled Certificates, from whatever source, to
be deposited directly into the Certificate Account. Amounts on deposit in the
Certificate Account will be invested in certain investments permitted by the
Agreement ("Permitted Investments"). Any income on such investments will be paid
to the Trustee as additional compensation and losses on such investments shall
be reimbursed by the Trustee from its own funds.
Reports to Certificateholders
On each Distribution Date, the Trustee will prepare, and will forward by
mail, a statement to each Certificateholder and to the Depositor stating:
(i) the Available Funds for such Distribution Date;
(ii) the Interest Distribution Amount and the Principal Distribution Amount
for such Distribution Date and, with respect to each, the components
thereof as described in the definitions of such terms and as reported
in the related distribution information;
(iii) the Certificate Balance before and after applying payments on such
Distribution Date;
(iv) the effective interest rate on the Certificates for such Distribution
Date;
(v) the outstanding principal and/or notional amount, as the case may be,
immediately prior to and after taking into account distributions made
on such Distribution Date of, and the current interest rate, on each
of the Pooled Certificates on such Distribution Date;
(vi) the amount of the Trustee Fee for such Distribution Date; and
(vii) with respect to the Pooled FNMA Certificates, the total amount of
Deferred Interest due thereunder prior to and after taking into
consideration any increase or reduction thereof on the related FNMA
Pooled Certificate Distribution Date if such information is available
to the Trustee.
In the case of the information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall also be expressed as a dollar amount per single
Certificate.
In addition, the Trustee promptly will furnish to the Depositor and, upon
request, to the Certificateholders, copies of any notices, statements, reports
or other information, including, without limitation, the Pooled Certificate
Distribution Date Statements received by the Trustee in its capacity as the
holder of the Pooled Certificates.
On or before March 31st of each calendar year, commencing in 1998, the
Trustee will prepare and deliver by first class mail to the Depositor and each
person who at any time during the prior calendar year was a Certificateholder of
record a statement containing the information required to be contained in the
regular monthly report to Certificateholders, as set forth in clauses (ii) and
(v) above aggregated for such prior calendar year or in the case of a
Certificateholder, the applicable portion thereof during which such person was a
Certificateholder. Such obligation of the Trustee will be satisfied to the
extent that substantially comparable information is provided by the Trustee
pursuant to any requirements of the Code and regulations thereunder as from time
to time are in force.
Amendments
The Agreement may be amended by the Depositor and the Trustee, without the
prior written consent of any Certificateholder (i) to cure any ambiguity or
mistake, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Agreement that
are not materially inconsistent with other provisions of the Agreement and (iv)
to make such modifications as may be required in connection with a substitution
or repurchase of a Pooled Certificate permitted under the Agreement; provided,
however, that such amendment will not, as evidenced by an opinion of counsel
delivered to the Trustee, adversely affect in any material respect the interests
of any Certificateholder. The Agreement may also be amended by the Depositor and
the Trustee and the holders of Certificates evidencing more than 50% of the
aggregate Class Balance of the Certificates (the "Majority Certificateholders")
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or modifying in any manner
the rights of Certificateholders; provided, however, that no such amendment may
(i) reduce in any manner the amount of, or delay the timing of, amounts required
to be distributed on any Certificate without the consent of the holder of such
Certificate; (ii) modify the provisions of the Section of the Agreement
governing amendments of the Agreement, without the consent of the holders of all
Certificates; or (iii) be made unless the Trustee has received an opinion of
counsel (at the expense of the party seeking such amendment) that such amendment
will not adversely affect the status of the Trust as a grantor trust for federal
income tax purposes.
Certificateholder Action
No Certificateholder will have any right to institute any action, suit or
proceeding in equity or at law upon or under or with respect to the Agreement
unless such holder previously has given to the Trustee and the Depositor a
written notice of default and unless also the Majority Certificateholders have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee thereunder and have offered to the Trustee
such reasonable indemnity as each may require against the costs, expenses and
liabilities to be incurred therein or thereby, and the Trustee, for 30 days
after its receipt of such notice, request and offer of indemnity, will have
neglected or refused to institute any such action, suit or proceeding.
Termination
The respective obligations and responsibilities of the Depositor and the
Trustee created by the Agreement will terminate upon the final distribution to
Certificateholders by the Trustee of all amounts required to be distributed
pursuant to the Agreement. Such distribution will occur, among other
circumstances, if the Depositor exercises its option to purchase the Pooled
Certificates as described herein under "Description of the Certificates --
Optional Termination."
Indemnification of the Trustee
The Trustee and its directors, officers, employees and agents, will be
indemnified by the Trust against any loss, liability or expense arising out of
or incurred in connection with, the exercise and performance of any powers and
duties of the Trustee under the Agreement, with certain exceptions described in
the Agreement. The Trustee and its directors, officers, employees and agents
will not be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of the
obligations and duties of the Trustee.
Certain Matters Regarding the Trustee
The Trustee for the Certificates will be First Trust National Association.
The Trustee's corporate office is located at 180 East 5th Street, St. Paul,
Minnesota 55101, Attention: Structured Finance Department, and its Bondholder
Services telephone number is (612) 973-6700.
The Trustee may at any time resign and be discharged from the trust by
giving 30 days' written notice thereof to the Depositor and the
Certificateholders. Upon receiving such notice of resignation, the Depositor
shall (in the latter case, with the written consent of the Certificate Insurer)
promptly appoint a successor trustee. If no successor trustee has been so
appointed and has accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. If at any time the
Trustee fails to meet the eligibility requirements or is incapable of acting, or
certain insolvency events occur, then the Depositor shall remove the Trustee and
appoint a successor trustee. The Majority Certificateholders may at any time
remove the Trustee and appoint a successor trustee. No resignation, discharge or
removal of the Trustee will become effective until a successor trustee shall
have assumed the Trustee's responsibilities and obligations under the Agreement.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion represents the opinion of Stroock & Stroock &
Lavan, special tax counsel to the Trust ("Tax Counsel"), as to the material
Federal income tax consequences of the purchase, ownership and disposition of
Certificates. However, the discussion does not purport to deal with Federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Prospective investors are urged
to consult their own tax advisors in determining the Federal, state, local,
foreign and any other tax consequences to them of the purchase, ownership and
disposition of Certificates.
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. No ruling on any of the
issues discussed below will be sought from the Internal Revenue Service (the
"IRS"). As a result, the IRS may disagree with all or part of the discussion
below.
The following discussion is based on the determination that all of the
Pooled Certificates are REMIC Regular Interests. Such determination that all of
the Pooled Certificates are REMIC Regular Interests is based upon information
contained in each of the Underlying Prospectuses pursuant to which the Pooled
Certificates were initially offered. Neither the Depositor nor the Underwriter
has independently investigated any of the underlying trusts (whether through
review of organizational documentation or investigation of events occurring
subsequent to the dates of the related Underlying Prospectuses or otherwise) to
determine whether both the underlying trusts actually qualify as REMICs and any
related Pooled Certificate actually qualifies as a REMIC Regular Interest.
Tax Characterization of the Trust
Tax counsel is of the opinion that the Trust will be classified for federal
income tax purposes as a grantor trust and not as an association taxable as a
corporation or a taxable mortgage pool taxable as a corporation. Accordingly,
each holder of a Certificate will be treated for federal income tax purposes as
the owner of an undivided interest in the Pooled Certificates included in the
Trust. As further described below, each holder of a Certificate therefore must
report on its federal income tax return the gross income from the portion of the
Pooled Certificates that is allocable to such Certificate and may deduct the
portion of the expenses incurred by the Trust that is allocable to such
Certificate, at the same time and to the same extent as such items would be
reported by such holder if it had purchased and held directly such interest in
the Pooled Certificates and incurred directly its share of expenses incurred by
the Trust.
A Certificateholder that is an individual, estate or trust will be allowed
deductions for such expenses only to the extent that the sum of those expenses
and the holder's other miscellaneous itemized deductions exceeds two percent of
such holder's adjusted gross income. In addition, in the case of a
Certificateholder who is an individual, certain otherwise allowable itemized
deductions will be reduced, but not by more than 80%, by an amount equal to 3%
of such Certificateholder's adjusted gross income in excess of a statutorily
defined threshold. Moreover, a Certificateholder that is not a corporation
cannot deduct such expenses for purposes of the alternative minimum tax (if
applicable). Such deductions will include servicing and administrative fees paid
to the Trustee.
Status of the Certificates as Real Property Loans
The Certificates will be "real estate assets" for purposes of Section
856(c)(5)(A) of the Code and "loans...secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code (and interest income
on the Certificates to that extent generally will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code) to the extent the REMIC Regular Interests represented
by the Certificates are qualified assets.
Taxation of Certificateholders
A Certificateholder must allocate the purchase price of its Certificates
among its share of the Pooled Certificates based upon the relative fair market
value of the Pooled Certificates as of the date such Certificateholder purchased
its Certificates.
A Certificateholder will be required to include in income its share of
interest income, original issue discount ("OID") and market discount on the
Pooled Certificates in accordance with the accrual method and tax accounting
method and rules applicable to OID and market discount. All of the Pooled
Certificates are REMIC Regular Interests; therefore a Certificateholder as the
owner of a share of the Pooled Certificates will be taxed on the income from
such Pooled Certificates in accordance with the discussions in the Prospectus
under "Certain Federal Income Tax Consequences -- REMIC Regular Certificates"
using assumptions specific to each Pooled Certificate. In particular, in certain
prepayment scenarios, a Certificateholder could recognize ordinary income with
respect to one Pooled Certificate while a loss with respect to the other Pooled
Certificate is deferred and treated as a capital loss.
Sales of the Certificates
A Certificateholder that sells a Certificate will recognize gain or loss
equal to the difference between the amount realized in the sale and its adjusted
basis in the Certificate. In general, such adjusted basis will equal the
holder's cost for the Certificate, increased by the amount of any income
previously reported with respect to the Certificate and decreased by the amount
of any losses previously reported with respect to the Certificate and the amount
of any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Certificate are held as
capital assets. However, to the extent that such Certificate represents an
interest in a Pooled Certificate with more than a de minimis amount of discount
other than OID, such gain will be treated as ordinary interest income to the
extent of the portion of such discount that accrued during the period in which
the seller held the Certificate and that was not previously included in income.
In addition, gain arising from the sale of a Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent the gain
attributable to a Pooled Certificate does not exceed the excess, if any, of (i)
the amount that would have been includible in the seller's income with respect
to such Pooled Certificate had income accrued thereon at a rate equal to 110% of
"the applicable Federal rate" (generally, an average of current yields on
Treasury securities), over (ii) the amount actually includible in the
Certificateholder's income with respect to such Pooled Certificate.
Foreign Investors
A Certificateholder which is not a "United States person" (hereinafter
defined) and is not subject to Federal income tax as a result of any direct or
indirect connection to the United States other than its ownership of a
Certificate generally will not be subject to United States income or withholding
tax in respect of payments of interest or OID on a Certificate, provided that
the holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the beneficial owner
of the Certificate under penalties of perjury, certifying that such holder is
not a United States person and providing the name and address of such holder).
For these purposes, the term "United States person" means a citizen or a
resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, or a trust that
is not treated as a foreign trust under Section 7701 (a) of the Code.
Taxable Mortgage Pools
Entities classified as "taxable mortgage pools" are subject to corporate
level tax on their net income. A "taxable mortgage pool" is generally defined as
an entity or a portion of an entity that meets the following requirements: (i)
the entity is not a REMIC, (ii) substantially all of the assets of the entity
are debt obligations, and more than 50 percent of such debt obligations consist
of real estate mortgages (or interests therein), (iii) the entity is the obligor
under debt obligations with two or more maturities, and (iv) payments on the
debt obligations on which the entity is the obligor bear a relationship to the
payments on the debt obligations which the entity holds as assets. With respect
to requirement (iii), the Code authorizes the IRS to provide by regulations that
equity interests may be treated as debt for purposes of determining whether
there are two or more maturities. If the Certificates were treated as
obligations of a taxable mortgage pool, the Trust would be ineligible to file
consolidated returns with any other corporation and could be liable for
corporate tax.
The legislative history of the taxable mortgage pool provisions states that
entities treated as grantor trusts will not be considered to be taxable mortgage
pools. Based in part on the legislative history, Tax Counsel is of the opinion
that the Trust is not a taxable mortgage pool taxable as a corporation.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impossible to predict
the income tax consequences to the Certificateholders in all of the state taxing
jurisdictions in which they are subject to tax. Certificateholders are urged to
consult their own advisors with respect to state income and franchise taxes.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA should
consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the Certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor, or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively,
"Plan(s)"), should consult with their legal counsel to determine whether an
investment in the Certificates will cause the assets of the Trust ("Trust
Assets") to be considered plan assets pursuant to the plan asset regulations set
forth at 29 C.F.R. ' 2510.3-101 (the "Plan Asset Regulations"), thereby
subjecting the Plan to the prohibited transaction rules with respect to the
Trust Assets and the Trustee to the fiduciary investments standards of ERISA, or
cause the excise tax provisions of Section 4975 of the Code to apply to the
Trust Assets, unless an exemption granted by the Department of Labor applies to
the purchase, sale, transfer or holding of the Certificates and the operation
and management of the Trust and its assets. In particular, investors that are
insurance companies should consult with their legal counsel with respect to the
United States Supreme Court case John Hancock Mutual Life Insurance Co. v.
Harris Trust and Savings Bank, 114 S. Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be plan assets under certain circumstances. Investors should
analyze whether that decision or federal legislation recently enacted affecting
insurance company general accounts (see Section 1460 of the Small Business Job
Protection Act of 1996) may have an impact with respect to purchases of
Certificates.
Prohibited Transaction Exemption 90-30 ("PTE 90-30") may be applicable to
the purchase, sale or transfer of the Certificates and the operation and
management of the Trust and its assets. The definition of an allowable "Trust"
under PTE 90-30 requires that the corpus of the Trust contain only three
categories of obligations: certain direct obligations (not here applicable),
"guaranteed governmental mortgage pool certificates" as defined in the Plan
Asset Regulations and fractional, undivided interests in either of the above
types of obligations. Both the Prospectus pursuant to which the Pooled FNMA
Certificates were offered and the Offering Circular relating to the Pooled FHLMC
Certificates state that FNMA and FHLMC, respectively, had been advised by their
respective counsel that each such respective class of Pooled Certificates should
qualify as "guaranteed governmental mortgage pool certificates" within the
meaning of the Plan Asset Regulations. Accordingly, such Pooled Certificates
should qualify as an allowable type of Trust obligation under PTE 90- 30.
However, any Plan fiduciary which proposes to cause a Plan to purchase
Certificates should consult with its own counsel and should make its own
determination as to the availability of exemptive relief under PTE 90-30, both
with respect to whether the Pooled Certificates qualify as "guaranteed
governmental mortgage pool certificates" and whether all of the specific and
general conditions of PTE 90-30 are satisfied with respect to any potential
prohibited transaction relating to the purchase, sale and transfer of the
Certificates and the operation and management of the Trust and its assets.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such governmental plan may be subject to
Federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for the availability of any exemptive relief under any Similar Law.
LEGAL INVESTMENT
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may be
subject to restrictions on investment in the Certificates. Any such institution
should consult its legal advisors in determining whether and to what extent
there may be restrictions on its ability to invest in the Certificates. The
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Certificates are being purchased from BSMSI by the Underwriter,
an affiliate of BSMSI, upon issuance. Distribution of such Certificates will be
made from time to time in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. In connection with the purchase and sale
of the Certificates, the Underwriter may be deemed to have received compensation
from BSMSI in the form of underwriting discounts. BSMSI will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
1933 Act, or will contribute to payments the Underwriter may be required to make
in respect thereof. BSMSI will acquire the Pooled Certificates from the
Underwriter.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
BSMSI and the Underwriter by Stroock & Stroock & Lavan, New York, New York.
CERTIFICATE RATING
As a condition to their issuance, the Certificates will be rated "Aaa" by
Moody's and "AAA" by Fitch.
The rating assigned by Moody's to the Certificates address the likelihood
of the receipt by Certificateholders of all distributions to which such
Certificateholders are entitled. The rating is based principally on the
guarantees of FNMA and FHLMC on the Pooled Certificates. Moody's ratings do not
represent any assessment of the likelihood that prepayments will be made by
borrowers or the degree to which such prepayments will differ from that
originally anticipated. The rating does not address the possibility that, as a
result of prepayments, Certificateholders may suffer a lower than anticipated
yield on the Certificates.
The rating by Fitch on the Certificates addresses the likelihood of the
receipt by Certificateholders of all distributions to which such
Certificateholders are entitled. Fitch takes into consideration the credit
quality of the Mortgage Loans, structural and legal aspects associated with the
Certificates and the extent to which the payment stream on the Pooled
Certificates is adequate to make payments required under the Certificates. The
rating of Fitch does not constitute a statement regarding frequency of
prepayments on the Mortgage Loans or the corresponding effects on yield to
investors, and does not represent any assessment of the likelihood or rate of
prepayments.
The yield of the certificates is sensitive to principal prepayments on the
mortgage loans backing underlying interest-only securities, which the rating on
the certificates does not address. If prepayments are faster than anticipated,
investors may fail to receive interest payments on certain payment dates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Certificates are subsequently lowered for any reason, no person or entity is
obligated to provide any additional credit support or credit enhancement with
respect to the Certificates.
BSMSI has not requested a rating of the Certificates by any rating agency
other than Moody's and Fitch. However, there can be no assurance as to whether
any other rating agency will rate the Certificates or, in such event, what
rating would be assigned to the Certificates by such other rating agency. The
rating assigned by such other rating agency to the Certificates may be lower
than the rating assigned by or Moody's or Fitch.
<PAGE>
GLOSSARY
The abbreviations used for each Pooled Certificate are set forth under
"Description of the Pooled Certificates -- General"
Agreement...................................................................-4
Assumed Final Distribution Date.............................................22
Available Funds.............................................................14
BSMSI.......................................................................-1
Business Day ...............................................................-2
Cede........................................................................13
Certificates................................................................-1
Certificate Account.........................................................14
Certificate Register........................................................13
Class Balance...............................................................15
Closing Date................................................................-6
Code........................................................................12
Depositor...................................................................-4
Determination Time..........................................................-7
Distribution Date...........................................................-2
DTC.........................................................................-4
ERISA.......................................................................11
Escrow Amount ..............................................................14
Excess Interest.............................................................18
FHA.........................................................................-5
FHLMC.......................................................................-2
FHLMC Accrual Period........................................................18
FHLMC Assets................................................................-2
FHLMC Class FB Certificates.................................................-5
FHLMC Group 1 Assets........................................................-5
FHLMC Pooled Certificate Distribution Date..................................-6
FHLMC Mortgages.............................................................2
Fitch.......................................................................-1
FMV Opinion.................................................................31
FNMA........................................................................-2
FNMA Interest Accrual Period................................................17
FNMA Interest Distribution Amount...........................................17
FNMA Mortgages..............................................................-2
FNMA Pooled Certificate Distribution Date...................................-6
FNMA Principal Distribution Amount..........................................18
FNMA SMBS...................................................................-2
FNMA Residual Class.........................................................17
FNMA Trust..................................................................-2
GNMA........................................................................-5
GNMA Certificates...........................................................-2
Gold Giant PC's.............................................................-2
Gold PC's...................................................................-2
Interest Accrual Period.....................................................-7
Interest Deficiency.........................................................17
Interest Distribution Amount................................................15
LIBOR.......................................................................-2
IO SMBS.....................................................................-2
IRS.........................................................................33
Majority Certificateholders.................................................32
MBS.........................................................................-2
Moody's.....................................................................-1
Mortgage Loans..............................................................-2
Mortgage Pool...............................................................-2
OID.........................................................................34
Original Principal Balance..................................................-7
Permitted Investments.......................................................31
Plan........................................................................12
Plan Asset Regulations......................................................35
Pooled Certificate..........................................................-2
Pooled Certificate Class Percentage.........................................16
Pooled Certificate Distribution Date........................................-6
Pooled Certificate Principal Balance........................................-4
Pooled FHLMC Certificates...................................................-2
Pooled FNMA Certificates....................................................-2
Principal Distribution Amount...............................................15
Prospectus..................................................................-4
PTE 90-30...................................................................36
Rating Agencies.............................................................12
Record Date.................................................................-7
REMIC.......................................................................-3
Similar Law.................................................................36
SMMEA.......................................................................12
SPA.........................................................................23
Substitute Pooled Certificate...............................................31
Supplemental Distribution Date..............................................-7
Support Class...............................................................-5
Tax Counsel.................................................................33
Trust.......................................................................-2
Trust 180 SMBS .............................................................-2
Trust Assets................................................................12
Trustee.....................................................................-4
Trustee Fee.................................................................14
Trustee Fee Escrow Account..................................................14
Underlying FHLMC Agreement..................................................-5
Underlying FHLMC Offering Circular .........................................-6
Underlying FHLMC Series.....................................................-2
Underlying FNMA Agreement...................................................-4
Underlying FNMA Prospectus..................................................-6
Underlying FNMA REMIC Certificates..........................................-2
Underlying FNMA REMIC Trust.................................................-2
Underlying FNMA Series......................................................-2
Underlying Agreements.......................................................-5
Underlying Mortgage Loans...................................................-2
Underlying Prospectuses.....................................................-6
Underlying Series...........................................................-2
Underwriter.................................................................-1
United States person........................................................35
VA..........................................................................-5
1933 Act....................................................................-3
1934 Act....................................................................-3
Exhibit I
Prospectus Supplement
dated December 8, 1993
to
Prospectus dated December 29, 1992
relating to
Federal National Mortgage Association
Guaranteed REMIC Pass-Through Certificates
Fannie Mae REMIC Trust 1994-6
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 29, 1992)
- --------------------------------------------------------------------------------
$150,000,000
FEDERAL NATIONAL MORTGAGE ASSOCIATION
[FANNIE MAE LOGO]
GUARANTEED REMIC PASS-THROUGH CERTIFICATES
FANNIE MAE REMIC TRUST 1994-6
- --------------------------------------------------------------------------------
The Guaranteed REMIC Pass-Through Certificates offered hereby (the
"Certificates") will represent beneficial ownership interests in Fannie Mae
REMIC Trust 1994-6 (the "Trust"). The assets of the Trust will consist of (i) a
single "interest only" Fannie Mae Stripped Mortgage-Backed Security (the "58-IO
SMBS") evidencing the beneficial ownership interest in the interest
distributions made in respect of the Class 58-IO REMIC Certificates (the "Class
58-IO REMIC Certificates") evidencing beneficial ownership interests in Fannie
Mae REMIC Trust 1992-G58 ("Trust 1992-G58") and included in Fannie Mae Stripped
Mortgage-Backed Security Trust 000180-GN, (ii) "interest only" Fannie Mae
Stripped Mortgage-Backed Securities (together with the 58-IO SMBS, the "Trust
SMBS") evidencing the respective beneficial ownership interests in certain
interest distributions made in respect of certain "fully modified pass-through"
mortgage-backed securities ("GNMA Certificates") guaranteed as to timely payment
of principal and interest by the Government National Mortgage Association
("GNMA"), held in the form of the respective Fannie Mae Guaranteed MBS
Pass-Through Certificates (the "Mega Certificates") specified herein and
included in the respective Fannie Mae Stripped Mortgage-Backed Security Trusts
specified herein and (iii) all of the Class 5-C REMIC Certificates (the
"Underlying REMIC Certificates") evidencing beneficial ownership interests in
Fannie Mae REMIC Trust 1994-5 (the "Underlying REMIC Trust"). The assets of
Trust 1992-G58 consist of certain GNMA Certificates. The assets of Trust 1994-5
consist of a single "principal only" Fannie Mae Stripped Mortgage-Backed
Security (the "Underlying SMBS") evidencing the beneficial ownership interest in
certain principal distributions made in respect of certain Fannie Mae Guaranteed
Mortgage Pass-Through Certificates (the "MBS") held in the form of Fannie Mae
Guaranteed MBS Pass-Through Certificate CL-190250 and included in the Fannie Mae
Stripped Mortgage-Backed Security Trust 000250-CL. Each MBS will represent a
beneficial ownership interest in a pool (each, a "Pool") of first lien,
single-family, fixed-rate residential mortgage loans having the characteristics
described herein. Each GNMA Certificate is based on and backed by a Pool of
first lien, single-family, fixed-rate residential mortgage loans (together with
the mortgage loans underlying the MBS, the "Mortgage Loans") which are either
insured by the Federal Housing Administration ("FHA") or partially guaranteed by
the Department of Veterans Affairs ("VA").
THE CERTIFICATES WILL BE ISSUED AND GUARANTEED AS TO TIMELY DISTRIBUTION OF
PRINCIPAL AND, TO THE EXTENT SET FORTH HEREIN, INTEREST BY FANNIE MAE AND WILL
BE OFFERED BY FANNIE MAE PURSUANT TO ITS PROSPECTUS FOR GUARANTEED MORTGAGE
PASS-THROUGH CERTIFICATES (THE "MBS PROSPECTUS"), ITS PROSPECTUS FOR STRIPPED
MORTGAGE-BACKED SECURITIES (THE "SMBS PROSPECTUS") AND ITS PROSPECTUS FOR
GUARANTEED MBS PASS-THROUGH CERTIFICATES (THE "MEGA PROSPECTUS"), EACH AVAILABLE
AS DESCRIBED HEREIN, AND ITS PROSPECTUS FOR GUARANTEED REMIC PASS-THROUGH
CERTIFICATES (THE "REMIC PROSPECTUS") ACCOMPANYING THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES MAY NOT BE SUITABLE INVESTMENTS FOR ALL INVESTORS. NO INVESTOR
SHOULD PURCHASE CERTIFICATES UNLESS SUCH INVESTOR UNDERSTANDS AND IS ABLE TO
BEAR THE PREPAYMENT, YIELD, LIQUIDITY AND OTHER RISKS ASSOCIATED WITH SUCH
CERTIFICATES. SEE "DESCRIPTION OF THE CERTIFICATES--PREPAYMENT CONSIDERATIONS
AND RISKS" AND "--YIELD CONSIDERATIONS" HEREIN.
An election will be made to treat the Trust as a "real estate mortgage
investment conduit" ("REMIC") pursuant to the Internal Revenue Code of 1986, as
amended (the "Code"). The R Class will be subject to transfer restrictions. See
"Description of the Certificates--Characteristics of the R Class" and "Certain
Additional Federal Income Tax Consequences" herein, and "Description of the
Certificates--Additional Characteristics of Residual Certificates" and "Certain
Federal Income Tax Consequences" in the REMIC Prospectus.
(Cover continued on next page)
- --------------------------------------------------------------------------------
THE CERTIFICATES, TOGETHER WITH ANY INTEREST THEREON, ARE NOT GUARANTEED BY THE
UNITED STATES. THE OBLIGATIONS OF FANNIE MAE UNDER ITS GUARANTY OF THE
CERTIFICATES ARE OBLIGATIONS SOLELY OF FANNIE MAE AND DO NOT CONSTITUTE
AN OBLIGATION OF THE UNITED STATES OR ANY AGENCY OR
INSTRUMENTALITY THEREOF OTHER THAN FANNIE MAE. THE CERTIFICATES
ARE EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933 AND ARE "EXEMPTED SECURITIES" WITHIN THE MEANING
OF THE SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
ORIGINAL FINAL
PRINCIPAL PRINCIPAL INTEREST INTEREST DISTRIBUTION
CLASS BALANCE TYPE(1) RATE TYPE(1) DATE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F ............................................................ $150,000,000 (2) (3) FLT October 2023
R(4)............................................................ 0 NPR 0 EXE October 2023
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Description of the Certificates--Class Definitions and Abbreviations"
in the REMIC Prospectus and "Description of the Certificates--Distributions
of Interest" and "--Distributions of Principal" herein.
(2) The F Class will be entitled to receive the entire Principal Distribution
Amount (as defined herein) on each Distribution Date until the principal
balance thereof is reduced to zero. See "Description of the
Certificates--Distributions of Principal" herein.
(3) The F Class will bear interest based on "LIBOR," as described under
"Description of the Certificates--Distributions of Interest" herein and
"Description of the Certificates--Indices Applicable to Floating Rate and
Inverse Floating Rate Classes" in the REMIC Prospectus and will be entitled
to receive the entire Interest Distribution Amount (as defined herein) on
each Distribution Date.
(4) The R Class will be entitled to receive the monthly distributions from the
remaining assets of the Trust, if any, after the principal balance of the F
Class has been reduced to zero and any unpaid interest deficiency (together
with any accrued and unpaid interest thereon) has been paid in full. See
"Description of the Certificates--Characteristics of the R Class" herein.
- --------------------------------------------------------------------------------
The Certificates will be offered by Prudential Securities Incorporated (the
"Dealer") from time to time in negotiated transactions, at varying prices to be
determined at the time of sale.
The Certificates will be offered by the Dealer, subject to issuance by Fannie
Mae and to prior sale or to withdrawal or modification of the offer without
notice, when, as and if delivered to and accepted by the Dealer, and subject to
approval of certain legal matters by counsel. It is expected that the F Class
will be available through the book-entry system of the Federal Reserve Banks on
or about January 28, 1994 (the "Settlement Date"). It is expected that the R
Class in registered, certificated form will be available for delivery at the
offices of the Dealer at 100 Gold Street, New York, New York, on or about the
Settlement Date.
PRUDENTIAL SECURITIES INCORPORATED
December 8, 1993
<PAGE>
(Cover continued from previous page)
THE YIELD TO INVESTORS IN EACH CLASS WILL BE DIRECTLY RELATED TO THE LEVEL
OF LIBOR AND, AMONG OTHER THINGS, THE RATE OF DISTRIBUTIONS ON THE TRUST SMBS
AND THE UNDERLYING REMIC CERTIFICATES, WHICH IN TURN WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE OF PRINCIPAL PAYMENTS OF THE MORTGAGE LOANS, THE
CHARACTERISTICS OF THE MORTGAGE LOANS INCLUDED IN THE RELATED POOLS AND THE
PRIORITY SEQUENCES AFFECTING PRINCIPAL DISTRIBUTIONS ON THE UNDERLYING REMIC
CERTIFICATES. SUCH YIELDS WILL ALSO BE SENSITIVE TO THE AMOUNT OF EXCESS
INTEREST (AS DEFINED HEREIN) AVAILABLE FOR DISTRIBUTION AND THE PURCHASE PRICE
PAID FOR THE RELATED CLASS. ACCORDINGLY, INVESTORS SHOULD CONSIDER THE FOLLOWING
RISKS:
- THE MORTGAGE LOANS GENERALLY MAY BE PREPAID AT ANY TIME WITHOUT
PENALTY, AND, ACCORDINGLY, THE RATE OF PRINCIPAL PAYMENTS THEREON IS
LIKELY TO VARY CONSIDERABLY FROM TIME TO TIME.
- SLIGHT VARIATIONS IN MORTGAGE LOAN CHARACTERISTICS COULD SUBSTANTIALLY
AFFECT THE WEIGHTED AVERAGE LIVES AND YIELDS OF EITHER OF THE CLASSES.
- IN THE CASE OF ANY CERTIFICATES PURCHASED AT A DISCOUNT TO THEIR
PRINCIPAL AMOUNTS, A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS IS LIKELY TO RESULT IN A LOWER THAN ANTICIPATED YIELD.
- IN THE CASE OF ANY CERTIFICATES PURCHASED AT A PREMIUM TO THEIR
PRINCIPAL AMOUNTS, A FASTER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS IS LIKELY TO RESULT IN A LOWER THAN ANTICIPATED YIELD.
- THE YIELD ON THE F CLASS WILL BE SENSITIVE TO THE LEVEL OF LIBOR.
UNDER CERTAIN LIBOR AND PREPAYMENT SCENARIOS, THE INTEREST
DISTRIBUTION AMOUNT MAY NOT BE SUFFICIENT TO PAY THE FULL AMOUNT OF
INTEREST ACCRUED ON THE F CLASS AT THE LIBOR BASED FORMULA RATE. ANY
SUCH DEFICIENCY ON A PARTICULAR DISTRIBUTION DATE WILL BE CARRIED
FORWARD, WITH INTEREST, TO SUBSEQUENT DISTRIBUTION DATES. ONCE THE
NOTIONAL PRINCIPAL BALANCES OF THE RESPECTIVE TRUST SMBS AND THE
PRINCIPAL BALANCE OF THE UNDERLYING REMIC CERTIFICATES HAVE BEEN
REDUCED TO ZERO, HOLDERS OF THE F CLASS WILL HAVE NO FUTURE
ENTITLEMENT TO ANY UNPAID INTEREST DEFICIENCY OR INTEREST THEREON.
- THE DISTRIBUTIONS ON THE R CLASS WILL BE ESPECIALLY SENSITIVE TO THE
LEVEL OF LIBOR AND THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS,
SINCE NO DISTRIBUTIONS WILL BE MADE ON SUCH CLASS UNTIL THE PRINCIPAL
BALANCE OF THE F CLASS IS REDUCED TO ZERO AND ANY ACCRUED AND UNPAID
INTEREST THEREON (INCLUDING ANY UNPAID INTEREST DEFICIENCY AND ANY
ACCRUED AND UNPAID INTEREST THEREON) IS PAID IN FULL. UNDER CERTAIN
LIBOR AND PREPAYMENT SCENARIOS, LITTLE OR NO ASSETS WOULD REMAIN IN
THE TRUST AT SUCH TIME.
- THE RELATIONSHIP AMONG THE VARIOUS FACTORS THAT AFFECT THE
AVAILABILITY OF PRINCIPAL AND INTEREST DISTRIBUTIONS, AND
CORRESPONDINGLY, THE YIELD ON THE CERTIFICATES, IS COMPLEX, AND AN
INVESTMENT IN THE CERTIFICATES SHOULD ONLY BE MADE BY PERSONS FAMILIAR
WITH THE ANALYSIS OF MORTGAGE LOAN PREPAYMENT RATES AND
MORTGAGE-BACKED SECURITIES STRUCTURES.
SEE "DESCRIPTION OF THE CERTIFICATES--PREPAYMENT CONSIDERATIONS AND RISKS" AND
"--YIELD CONSIDERATIONS" HEREIN.
IN ADDITION, INVESTORS SHOULD PURCHASE CERTIFICATES ONLY AFTER CONSIDERING
THE FOLLOWING:
- THE RATE OF DISTRIBUTIONS OF THE CERTIFICATES IS UNCERTAIN AND
INVESTORS MAY BE UNABLE TO REINVEST THE DISTRIBUTIONS THEREON AT
YIELDS EQUALING THE YIELDS ON THE CERTIFICATES. SEE "DESCRIPTION OF
THE CERTIFICATES--REINVESTMENT RISK" IN THE REMIC PROSPECTUS.
- THE TRUST SMBS ARE "INTEREST ONLY" SECURITIES WITH NOTIONAL PRINCIPAL
BALANCES. IF SUCH NOTIONAL PRINCIPAL BALANCES ARE REDUCED
DISPROPORTIONATELY FASTER THAN THE PRINCIPAL BALANCE OF THE UNDERLYING
REMIC CERTIFICATES, ANY SUCH DISPROPORTIONATE REDUCTIONS COULD
SIGNIFICANTLY REDUCE THE AMOUNTS AVAILABLE TO PAY INTEREST ON THE
REMAINING PRINCIPAL BALANCE OF THE F CLASS.
- THE UNDERLYING REMIC CERTIFICATES WILL HAVE PRINCIPAL BALANCE
SCHEDULES AND WILL NOT BE SCHEDULED TO RECEIVE PRINCIPAL PAYMENTS FOR
EXTENDED PERIODS IN ACCORDANCE WITH THEIR PRINCIPAL BALANCE SCHEDULES.
- THE ACTUAL FINAL PAYMENT OF THE F CLASS WILL LIKELY OCCUR EARLIER, AND
COULD OCCUR MUCH EARLIER, THAN THE FINAL DISTRIBUTION DATE FOR SUCH
CLASS SPECIFIED ON THE COVER PAGE. IN PARTICULAR, EXERCISE OF THE
RIGHT OF OPTIONAL LIQUIDATION OF THE TRUST BY HOLDERS OF THE R CLASS
AS DESCRIBED HEREIN WILL EFFECT THE EARLY RETIREMENT OF THE F CLASS.
SEE "DESCRIPTION OF THE CERTIFICATES--WEIGHTED AVERAGE LIVES OF THE
CERTIFICATES" HEREIN AND "DESCRIPTION OF THE CERTIFICATES--WEIGHTED
AVERAGE LIFE AND FINAL DISTRIBUTION DATES" IN THE REMIC PROSPECTUS.
- INVESTORS WHOSE INVESTMENT ACTIVITIES ARE SUBJECT TO LEGAL INVESTMENT
LAWS AND REGULATIONS OR TO REVIEW BY REGULATORY AUTHORITIES MAY BE
SUBJECT TO RESTRICTIONS ON INVESTMENT IN CERTAIN CLASSES OF THE
CERTIFICATES. INVESTORS SHOULD CONSULT THEIR LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE CERTIFICATES CONSTITUTE LEGAL
INVESTMENTS OR ARE SUBJECT TO RESTRICTIONS ON INVESTMENT. SEE "LEGAL
INVESTMENT CONSIDERATIONS" IN THE REMIC PROSPECTUS.
The Dealer intends to make a market for the Certificates but is not
obligated to do so. There can be no assurance that such a secondary market will
develop or, if developed, that it will continue. Thus, investors may not be able
to sell their Certificates readily or at prices that will enable them to realize
their anticipated yield. No investor should purchase Certificates unless such
investor understands and is able to bear the risk that the value of the
Certificates will fluctuate over time and that the Certificates may not be
readily salable.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this Prospectus Supplement, the SMBS
Prospectus, the Mega Prospectus, the MBS Prospectus, the Prospectus Supplement
for the Underlying REMIC Trust dated December 21, 1993 (the "Underlying
Prospectus"), the Prospectus for Trust 1992-G58 dated September 10, 1992 (the
"1992-G58 Prospectus") or the REMIC Prospectus. Any representation to the
contrary is a criminal offense.
This Prospectus Supplement does not contain complete information about the
Certificates. Investors should purchase Certificates only after reading this
Prospectus Supplement, the REMIC Prospectus, the MBS Prospectus dated December
1, 1993, the SMBS Prospectus dated December 1, 1992, the Mega Prospectus dated
December 1, 1992, the Underlying Prospectus, the 1992-G58 Prospectus and the
Fannie Mae Information Statement dated February 16, 1993 and any supplements
thereto (the "Information Statement"). The MBS Prospectus, the SMBS Prospectus,
the Mega Prospectus and the Information Statement are incorporated herein by
reference and, together with the Underlying Prospectus and the 1992-G58
Prospectus, may be obtained from Fannie Mae by writing or calling its MBS
Helpline at 3900 Wisconsin Avenue, N.W., Area 2H-3S, Washington, D.C. 20016
(telephone 1-800-BEST-MBS or 202-752-6547). Such documents (other than the
1992-G58 Prospectus) may also be obtained from Prudential Securities
Incorporated by writing or calling its Prospectus Department at 315 Hudson
Street, 7th Floor, New York, New York 10013 (telephone 212-776-8906).
<PAGE>
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE CERTIFICATES....... S- 4
General............................. S- 4
Structure........................ S- 4
Distributions on Underlying
Securities..................... S- 4
Fannie Mae Guaranty.............. S- 4
Characteristics of
Certificates................... S- 5
Authorized Denominations......... S- 5
Distribution Dates............... S- 5
Calculation of Interest
Distributions.................. S- 5
Calculation of Principal
Distributions.................. S- 5
Record Date...................... S- 6
REMIC Trust Factors.............. S- 6
Voting the Trust SMBS and the
Underlying REMIC Trust......... S- 6
Optional Liquidation............. S- 6
The Trust SMBS...................... S- 6
The Underlying REMIC Certificates... S- 7
Final Data Statement................ S- 7
Prepayment Considerations
and Risks........................ S- 7
Distributions of Interest........... S- 8
Categories of Classes............ S- 8
General.......................... S- 8
Interest Accrual Period.......... S- 9
Floating Rate Class.............. S- 9
Calculation of LIBOR................ S- 9
Distributions of Principal.......... S-10
Categories of Classes............ S-10
Principal Distribution Amount.... S-10
Structuring Assumptions............. S-10
Pricing Assumptions.............. S-10
PSA Assumptions.................. S-10
Characteristics of the R Class...... S-11
Yield Considerations................ S-11
Weighted Average Lives of the
Certificates..................... S-13
Decrement Tables.................... S-14
CERTAIN ADDITIONAL FEDERAL INCOME TAX
CONSEQUENCES........................ S-16
REMIC Elections and Special Tax
Attributes....................... S-16
Taxation of Beneficial Owners of
Regular Certificates............. S-16
Taxation of Beneficial Owners of
Residual Certificates............ S-16
PLAN OF DISTRIBUTION.................. S-17
LEGAL MATTERS......................... S-17
EXHIBIT A............................. A-1
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the Certificates
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the REMIC Prospectus, the MBS Prospectus, the SMBS
Prospectus, the Mega Prospectus, the Underlying Prospectus and the provisions of
the Trust Agreement (defined below). Capitalized terms used and not otherwise
defined in this Prospectus Supplement have the respective meanings assigned to
such terms in the REMIC Prospectus (including the Glossary contained therein),
the MBS Prospectus, the SMBS Prospectus, the Mega Prospectus, the 1992-G58
Prospectus, the Underlying Prospectus or the Trust Agreement (as the context may
require).
GENERAL
Structure. The Trust will be created pursuant to a trust agreement dated as
of September 1, 1987, as supplemented by an issue supplement thereto dated as of
January 1, 1994 (together, the "Trust Agreement"), executed by the Federal
National Mortgage Association ("Fannie Mae") in its corporate capacity and in
its capacity as Trustee, and the Certificates in the Classes and aggregate
original principal balances set forth on the cover hereof will be issued by
Fannie Mae pursuant thereto. A description of Fannie Mae and its business,
together with certain financial statements and other financial information, is
contained in the Information Statement.
The F Class will be designated as the "regular interest" and the R Class
will be designated as the "residual interest" in the REMIC constituted by the
Trust.
The assets of the Trust will consist of the Trust SMBS and the Underlying
REMIC Certificates (which evidence beneficial ownership interests in the
Underlying REMIC Trust).
Distributions on Underlying Securities. The Trust SMBS and the Underlying
REMIC Certificates provide that payments thereon will be passed through monthly,
commencing on the 25th day of the month following the month of the initial
issuance thereof (or, if such 25th day is not a business day, on the first
business day next succeeding such 25th day).
Fannie Mae Guaranty. Fannie Mae guarantees to the Holders of Certificates
(i) distribution on each Distribution Date of the Principal Distribution Amount
and the Interest Distribution Amount, in each case calculated as provided
herein, and (ii) distribution in full of the principal balance of the F Class no
later than the Final Distribution Date, whether or not sufficient funds are
available. Fannie Mae's guaranty does not cover the receipt of any unpaid
interest deficiency (or any accrued and unpaid interest thereon) once the
notional principal balances of the respective Trust SMBS and the principal
balance of the Underlying REMIC Certificates have been reduced to zero. In such
event, Holders of the F Class will have no future entitlement to any such
payments. See "Distributions of Interest" herein. Fannie Mae guarantees to each
holder of an MBS the timely payment of scheduled installments of principal of
and interest on the underlying Mortgage Loans, whether or not received, together
with the full principal balance of any foreclosed Mortgage Loan, whether or not
received. The guaranty obligations of Fannie Mae with respect to the Trust SMBS
and the Mega Certificates are described in the SMBS Prospectus and the Mega
Prospectus, respectively. The guaranty obligations of Fannie Mae with respect to
the Class 58-IO REMIC Certificates are described in the 1992-G58 Prospectus. In
addition, Fannie Mae guarantees to each holder of the Underlying REMIC
Certificates payment of any required installments of principal and payment in
full of the principal balance thereof not later than the applicable final
distribution date, whether or not sufficient funds are otherwise available
therefor.
The guaranties of Fannie Mae are not backed by the full faith and credit of
the United States. See "Description of the Certificates--Fannie Mae's Guaranty"
in the REMIC Prospectus, "The SMBS Certificates--Fannie Mae Obligations" in the
SMBS Prospectus, "The Certificates--Fannie Mae's Guaranty" in the Mega
Prospectus, "Description of Certificates--The Corporation's Guaranty" in the MBS
Prospectus, "Description of the REMIC Certificates--General--Fannie Mae
Guaranty" in the 1992-G58 Prospectus and "Description of the
Certificates--General--Fannie Mae Guaranty" in the Underlying Prospectus.
Characteristics of Certificates. The F Certificates will be issued and
maintained and may be transferred by Holders only on the book-entry system of
the Federal Reserve Banks. Such entities whose names appear on the book-entry
records of a Federal Reserve Bank as the entities for whose accounts such
Certificates have been deposited are herein referred to as "Holders" or
"Certificateholders." A Holder is not necessarily the beneficial owner of a
book-entry Certificate. Beneficial owners will ordinarily hold book-entry
Certificates through one or more financial intermediaries, such as banks,
brokerage firms and securities clearing organizations. See "Descriptions of the
Certificates--Denominations, Book-Entry Form" in the REMIC Prospectus.
The R Class will not be issued in book-entry form but will be issued in
fully registered, certificated form. As to the R Class, "Holders" or
"Certificateholders" refers to the registered owners thereof. The R Class will
be transferable and, if applicable, exchangeable at the corporate trust office
of the Transfer Agent, or at the agency of the Transfer Agent in New York, New
York. The Transfer Agent initially will be State Street Bank and Trust Company
in Boston, Massachusetts ("State Street"). A service charge may be imposed for
any registration of transfer or, if applicable, exchange of the R Class and
Fannie Mae may require payment of a sum sufficient to cover any tax or other
governmental charge. See also "Characteristics of the R Class" herein.
Distributions, if any, on the R Class will be made by check mailed by the
Paying Agent to the address of each person entitled thereto as it appears on the
Certificate Register maintained by the Certificate Registrar (initially State
Street) not later than each Distribution Date; provided, however, that the final
distribution to the Holders of the R Class will be made only upon presentation
and surrender of the Certificates of such Class at the office of the Paying
Agent. The Paying Agent initially will be State Street.
Authorized Denominations. The F Certificates will be issued in minimum
denominations of $1,000 and integral multiples of $1 in excess thereof. The R
Certificates will be issued in minimum percentage interests of 10% and integral
multiples of 1% percentage interests in excess thereof.
Distribution Dates. Distributions on the Certificates will be made on the
25th day of each month (or, if such 25th day is not a business day, on the first
business day next succeeding such 25th day), commencing in the month following
the Settlement Date.
Calculation of Interest Distributions. Interest on the F Class is
calculated on the basis of a 360-day year consisting of twelve 30-day months and
is distributable monthly on each Distribution Date, commencing in the month
after the Settlement Date. Interest to be distributed on the F Class on a
Distribution Date will be in an amount (the "Interest Distribution Amount")
equal to the lesser of (a) the sum of (i) one month's interest on the
outstanding principal balance of the F Class immediately prior to such
Distribution Date, (ii) any unpaid interest deficiency (as defined herein) and
(iii) interest, if any, accrued on a compounded basis and unpaid on any such
unpaid interest deficiency and (b) the sum of (i) the aggregate distributions of
interest concurrently made on the Trust SMBS and (ii) the aggregate
distributions of principal concurrently made on the Underlying REMIC
Certificates following the reduction of the principal balance of the F Class to
zero. Interest will accrue on the F Class during the one month period set forth
herein under "Distributions of Interest--Interest Accrual Period." In the event
that the Interest Distribution Amount for any Distribution Date is less than the
interest accrued on the principal balance of the F Class during the preceding
Interest Accrual Period, such deficiency will accrue interest during each
Interest Accrual Period thereafter, at the per annum interest rate applicable to
the F Class from time to time, to the extent such deficiency remains unpaid on a
subsequent Distribution Date.
Calculation of Principal Distributions. Principal on the F Class will be
distributed on each Distribution Date in an amount (the "Principal Distribution
Amount") equal to the sum of (i) the distribution of principal concurrently made
on the Underlying REMIC Certificates and (ii) the amount ("Excess Interest") by
which the aggregate distributions of interest concurrently made on the Trust
SMBS exceeds the sum of (a) the interest accrued on the F Class during the
preceding Interest Accrual Period, (b) any unpaid interest deficiency and (c)
interest, if any, accrued on a compounded basis and unpaid on any such unpaid
interest deficiency. See "Distributions of Principal" herein.
Record Date. Each monthly distribution on the Certificates will be made to
Holders of record on the last day of the preceding month.
REMIC Trust Factors. As soon as practicable following the eleventh calendar
day of each month, Fannie Mae will publish or otherwise make available for the F
Class the factor (carried to eight decimal places) which, when multiplied by the
original principal balance of a Certificate of such Class, will equal the
remaining principal balance of such Certificate after giving effect to the
distribution of principal to be made on the following Distribution Date.
Voting the Trust SMBS and the Underlying REMIC Trust. In the event any
issue arises under the applicable trust agreement governing any of the Trust
SMBS or the Underlying REMIC Trust that requires the vote of holders of
certificates outstanding thereunder, the Trustee will vote the related Trust
SMBS or the Underlying REMIC Certificates in accordance with instructions
received from Holders of Certificates having principal denominations aggregating
not less than 51% of the aggregate principal denominations of the F Class and,
following the final distribution of the F Class, Holders of Certificates having
percentage interests aggregating not less than 51% of the aggregate percentage
interests of the R Class. In the absence of such instructions, the Trustee will
vote in a manner consistent, in its sole judgment, with the best interests of
Certificateholders.
Optional Liquidation. At the option of the Holders of the R Class
representing in the aggregate 100% of the ownership percentages thereof, the
REMIC may adopt a plan of complete liquidation pursuant to which the Holders of
the R Class, or their designees, will purchase the Trust SMBS and Underlying
REMIC Certificates remaining in the Trust at such time. The Holders of the R
Class, however, may not exercise this option unless (i) the outstanding
principal balance of the F Class is less than 10% of the original principal
balance thereof, (ii) the proceeds of such liquidation are at least equal to the
sum of (x) the outstanding principal balance of the F Class and (y) any accrued
and unpaid interest thereon (including any unpaid interest deficiency and
interest accrued thereon) and (iii) Fannie Mae has received an opinion of
counsel, satisfactory to it, that such purchase will be part of a "qualified
liquidation" of the Trust within the meaning of Section 860F(a)(4)(A) of the
Code. Upon such liquidation (i) the F Class will then be redeemed for an amount
equal to the sum of (x) the outstanding principal balance thereof at the time of
such redemption and (y) any accrued and unpaid interest thereon (including any
unpaid interest deficiency and interest accrued thereon) and (ii) the R Class
will be redeemed for an amount equal to the excess of (x) the aggregate
liquidation proceeds over (y) the amount distributable to the F Class in
redemption thereof. Such liquidation will effect an early retirement of both the
F Class and the R Class.
THE TRUST SMBS
The Trust SMBS represent the respective beneficial ownership interests in
certain interest distributions made in respect of certain GNMA Certificates
having the general characteristics described in the SMBS Prospectus. The GNMA
Certificates underlying the Trust SMBS (other than the 58-IO SMBS) are held in
the form of the respective Mega Certificates specified in Exhibit A, the general
characteristics of which are described in the Mega Prospectus. The GNMA
Certificates underlying the 58-IO SMBS are held in the form of the Fannie Mae
Guaranteed REMIC Pass-Through Certificates that represent the beneficial
ownership interests in Trust 1992-G58, the general characteristics of which are
described in the 1992-G58 Prospectus. The GNMA Certificates underlying the Trust
SMBS have a Pass-Through Rate of 9.00%. Each GNMA Certificate is based on and
backed by a Pool of first lien, single-family, fixed-rate residential Mortgage
Loans that are either insured by the FHA or partially guaranteed by the VA.
The table contained in Exhibit A hereto sets forth certain information with
respect to each Trust SMBS, including the numerical designation of the related
Mega Certificate, the numerical designation of the related Fannie Mae Stripped
Mortgage-Backed Security Trust, the class, the CUSIP number, the issue date, the
interest rate, the final distribution date, the original notional principal
balance of the class, the percentage of such class in the Trust, the current
principal factor for such class and the
current notional principal balance of such class contained in the Trust as of
January 1, 1994 (the "Issue Date"). The table also sets forth the approximate
weighted average WAC, the approximate weighted average WARM and the approximate
weighted average WALA of the Mortgage Loans underlying the related GNMA
Certificates as of the Issue Date, the minimum percentage of the GNMA
Certificates which are GNMA I Certificates and the designation of the underlying
security. "WARM" is the weighted average remaining maturity (in months) of the
Mortgage Loans in each Pool underlying the GNMA Certificates. "WALA" is the
weighted average loan age (in months) of the Mortgage Loans in each Pool
underlying the GNMA Certificates.
THE UNDERLYING REMIC CERTIFICATES
The Underlying REMIC Certificates represent beneficial ownership interests
in the Underlying REMIC Trust, the assets of which consist of the Underlying
SMBS. See the Underlying Prospectus for a discussion of the general
characteristics of the Underlying REMIC Certificates. The Underlying SMBS
represents the beneficial ownership interest in certain principal distributions
made in respect of certain MBS having the general characteristics described in
the MBS Prospectus. The MBS are held in the form of Mega Certificate CL-190250,
the general characteristics of which are described in the Mega Prospectus. Each
MBS evidences beneficial ownership interests in a Pool of conventional Level
Payment Mortgage Loans secured by a first mortgage or deed of trust on a one- to
four-family residential property, as described under "The Mortgage Pools" and
"Yield Considerations" in the MBS Prospectus.
The table contained in Exhibit A hereto sets forth certain information with
respect to the Underlying REMIC Certificates, including the numerical
designation of the Underlying REMIC Trust, the class designation of the
Underlying REMIC Certificates, the CUSIP number, the issue date, the interest
rate, the interest type, the final distribution date, the principal type, the
original principal balance of the class, the percentage of such class in the
Trust, the current principal factor for such class and the current principal
balance of such class contained in the Trust as of the Issue Date. The table
also sets forth the approximate weighted average WAC, the approximate weighted
average WAM and the approximate weighted average CAGE of the Mortgage Loans
underlying the MBS as of the Issue Date and the designation of the underlying
security.
FINAL DATA STATEMENT
Following the issuance of the Certificates, Fannie Mae will prepare a Final
Data Statement setting forth, among other things, the current notional principal
balance of each of the Trust SMBS as of the Settlement Date and the current
principal balance of the Underlying REMIC Certificates as of the Settlement
Date. The Final Data Statement will not accompany this Prospectus Supplement but
will be made available by Fannie Mae. To request the Final Data Statement or
further information regarding the Trust SMBS and the Underlying REMIC
Certificates, telephone Fannie Mae at 1-800-BEST-MBS or 202-752-6547. The
contents of the Final Data Statement and other data specific to the Certificates
are available in electronic form by calling Fannie Mae at 1-800-752-6440 or
202-752-6000. It should be noted that there may have been material changes in
facts and circumstances since the dates the SMBS Prospectus, the Mega Prospectus
and the 1992-G58 Prospectus were prepared, including, but not limited to,
changes in prepayment speeds and prevailing interest rates and other economic
factors, which may limit the usefulness of the information set forth in such
documents.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of distributions of principal of the F Class will be directly
related to the rate of principal distributions on the Underlying REMIC
Certificates and to Excess Interest, which in turn will be sensitive in varying
degrees to the rate of payments of principal of the underlying Mortgage Loans.
The Underlying REMIC Certificates are subordinate in priority of principal
distributions to certain other classes of certificates evidencing beneficial
ownership interests in the Underlying REMIC Trust and, accordingly,
distributions of principal of the related Mortgage Loans may for extended
periods be
applied to the distribution of principal of those classes of certificates having
priority over the Underlying REMIC Certificates. In addition, the Underlying
REMIC Certificates will have Principal Balance Schedules and will not be
scheduled to receive principal payments for extended periods in accordance with
their Principal Balance Schedules. As a result of the foregoing characteristics,
distributions of principal in respect of the F Class during certain periods may
occur at a slower rate than would otherwise be the case. However, prepayments on
the related Mortgage Loans may occur at a rate faster or slower than that
assumed.
The amount available for distributions of interest on the F Class will be
directly related to the amount of interest distributed on the Trust SMBS, which
in turn will be sensitive in varying degrees to the rate of payments of
principal of the related underlying Mortgage Loans. The Trust SMBS are "Interest
Only" securities with notional principal balances. It is possible that the
notional principal balances of the respective Trust SMBS may be reduced to zero
prior to (and possibly substantially prior to) the reduction of the principal
balance of the Underlying REMIC Certificates to zero. In such event, the F Class
would receive no distributions of interest until the date on which the principal
balance thereof is reduced to zero. At such time any remaining distributions of
principal on the Underlying REMIC Certificates will be applied to any unpaid
interest deficiency (and any accrued and unpaid interest thereon). However, as
described above under "General--Fannie Mae Guaranty," Fannie Mae's guaranty does
not cover the receipt of any unpaid interest deficiency (or any accrued and
unpaid interest thereon) once the notional principal balances of the respective
Trust SMBS and the principal balance of the Underlying REMIC Certificates have
been reduced to zero. In such event, Holders of the F Class will have no future
entitlement to any such payments. See "Distributions of Interest" herein.
DISTRIBUTIONS OF INTEREST
Categories of Classes
For the purpose of payments of interest, the Classes will be categorized as
follows:
INTEREST TYPE* CLASSES
- -------------------- ------------------------------
Floating Rate F
Excess R
- -----------------------
* See "Description of the Certificates--Class Definitions and
Abbreviations" in the REMIC Prospectus.
General. The F Class will bear interest at the per annum interest rate
described herein. Interest on the F Class is calculated on the basis of a
360-day year consisting of twelve 30-day months and is distributable monthly on
each Distribution Date, commencing in the month after the Settlement Date.
Interest to be distributed on the F Class on a Distribution Date will be in an
amount (the "Interest Distribution Amount") equal to the lesser of (a) the sum
of (i) one month's interest on the outstanding principal balance of the F Class
immediately prior to such Distribution Date, (ii) any unpaid interest deficiency
(as defined below) and (iii) interest, if any, accrued on a compounded basis and
unpaid on any such unpaid interest deficiency and (b) the sum of (i) the
aggregate distributions of interest concurrently made on the Trust SMBS and (ii)
the distribution of principal concurrently made on the Underlying REMIC
Certificates following the reduction of the principal balance of the F Class to
zero.
On each Distribution Date, the Interest Distribution Amount will be applied
to the distribution of interest on the F Class in the following order:
(i) an amount equal to the interest accrued on the principal balance
of the F Class during the immediately preceding Interest Accrual Period;
(ii) an amount equal to the interest, if any, accrued and unpaid on
the principal balance of the F Class prior to the immediately preceding
Interest Accrual Period that has not been previously paid (an "interest
deficiency"); and
(iii) an amount equal to the interest, if any, accrued on a
compounded basis and unpaid on any unpaid interest deficiency during each
Interest Accrual Period as to which such interest deficiency remained
unpaid to the
Distribution Date on which such interest deficiency is paid, at the per
annum rate in effect from time to time with respect to the F Class.
On each Distribution Date following the reduction of the principal balance
of the F Class to zero and the payment in full of all accrued and unpaid
interest thereon (including any unpaid interest deficiency together with
interest thereon), all distributions from any remaining assets of the Trust will
be distributed monthly to Holders of the R Class.
Interest Accrual Period. Interest to be distributed on a Distribution Date
will accrue on the F Class during the one-month period set forth below (an
"Interest Accrual Period").
CLASS INTEREST ACCRUAL PERIOD
- ------------------------ ------------------------------------------
F One month period beginning on the 25th
day of the month preceding the month of
the Distribution Date and ending on the
24th day of the month of the Distribution
Date
Floating Rate Class. The F Class will bear interest during its initial
Interest Accrual Period at the Initial Interest Rate set forth below, and will
bear interest during each Interest Accrual Period thereafter, subject to the
applicable Maximum and Minimum Interest Rates, at the rate determined as
described below:
<TABLE>
<CAPTION>
INITIAL MAXIMUM MINIMUM FORMULA FOR
INTEREST INTEREST INTEREST CALCULATION OF
CLASS RATE RATE RATE INTEREST RATE
-------------------------- -------- ------- ------- -------------------------
<S> <C> <C> <C> <C>
F......................... 5.125% 10.00% 2.00% LIBOR + 200 basis points
</TABLE>
The yield with respect to such Class will be affected by changes in LIBOR,
which changes may not correlate with changes in mortgage interest rates. It is
possible that lower mortgage interest rates could occur concurrently with an
increase in the level of LIBOR. Conversely, higher mortgage interest rates could
occur concurrently with a decrease in the level of LIBOR. Under certain
circumstances of increased LIBOR levels, the Interest Distribution Amount may
not be sufficient to pay the full amount of interest accrued on the F Class at
the LIBOR based formula rate. Any such unpaid interest deficiency on a
particular Distribution Date will be carried forward, with interest, to
subsequent Distribution Dates. If an unpaid interest deficiency remains on the
Distribution Date upon which the principal balance of the F Class is reduced to
zero, all distributions on any Trust SMBS and Underlying REMIC Certificates
remaining in the Trust will be applied to the payment of any such unpaid
interest deficiency (together with any accrued and unpaid interest thereon) on
such date and each Distribution Date thereafter before any distributions are
made to the R Class. Once the notional principal balances of the respective
Trust SMBS and the principal balance of the Underlying REMIC Certificates have
been reduced to zero, Holders of the F Class will have no future entitlement to
any unpaid interest deficiency (or any accrued and unpaid interest thereon).
Each LIBOR value will be established as described herein by Fannie Mae two
business days prior to the commencement of the related Interest Accrual Period.
The establishment of each LIBOR value by Fannie Mae and Fannie Mae's
determination of the rate of interest for the F Class for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Each such rate of interest may be obtained by telephoning Fannie Mae at
1-800-BEST-MBS or 202-752-6547.
CALCULATION OF LIBOR
On each LIBOR Determination Date, Fannie Mae will establish LIBOR for the
related Interest Accrual Period in the manner described in the REMIC Prospectus
under "Description of the Certificates--Indices Applicable to Floating Rate and
Inverse Floating Rate Classes--LIBOR."
If on the initial LIBOR Determination Date, Fannie Mae is unable to
determine LIBOR in the manner specified in the REMIC Prospectus, LIBOR for the
next succeeding Interest Accrual Period will be 3.125%.
DISTRIBUTIONS OF PRINCIPAL
Categories of Classes
For the purpose of payments of principal, the Classes will be categorized
as follows:
PRINCIPAL TYPE CLASSES
- ----------------------- ----
(1) F
No Payment Residual(2) R
- -------------------------------
(1) The F Class will be entitled to receive the entire Principal
Distribution Amount on each Distribution Date until the principal
balance thereof is reduced to zero.
(2) See "Description of the Certificates--Class Definitions and
Abbreviations" in the REMIC Prospectus.
Principal Distribution Amount
Principal will be distributed monthly on the F Class in an amount (the
"Principal Distribution Amount") equal to the sum of (i) the distribution of
principal concurrently made on the Underlying REMIC Certificates and (ii) the
amount ("Excess Interest") by which the aggregate distributions of interest
concurrently made on the Trust SMBS exceeds the sum of (a) the interest accrued
on the F Class during the preceding Interest Accrual Period, (b) any unpaid
interest deficiency and (c) interest, if any, accrued on a compounded basis and
unpaid on any such unpaid interest deficiency.
On each Distribution Date, the Principal Distribution Amount will be
distributed as principal of the F Class until the principal balance thereof is
reduced to zero.
STRUCTURING ASSUMPTIONS
Pricing Assumptions. Unless otherwise specified, the information in the
tables in this Prospectus Supplement has been prepared on the basis of the
actual characteristics of the Pools underlying the Trust SMBS and the Underlying
REMIC Certificates and the priority sequences affecting the principal
distributions on the Underlying REMIC Certificates and the following assumptions
(the "Pricing Assumptions"):
- all payments (including prepayments) on the Mortgage Loans underlying
the GNMA Certificates are distributed in the month in which such
payments are received;
- the Mortgage Loans prepay at the constant percentages of PSA specified
in the related tables;
- the closing date for the sale of the Certificates is the Settlement
Date;
- the first Distribution Date for the Certificates occurs in the month
following the Settlement Date; and
- the right to cause the optional liquidation of the Trust described
herein is not exercised by the Holders of the R Class.
PSA Assumptions. Prepayments of mortgage loans commonly are measured
relative to a prepayment standard or model. The model used in this Prospectus
Supplement is the Public Securities Association's standard prepayment model
("PSA"). To assume a specified rate of PSA (for example, 250% PSA and 350% PSA)
is to assume a specified rate of prepayment each month of the then outstanding
principal balance of a pool of new mortgage loans computed as described under
"Description of the Certificates--Prepayment Considerations and Risks" in the
REMIC Prospectus. There is no assurance that prepayments will occur at any PSA
rate or at any other constant rate.
CHARACTERISTICS OF THE R CLASS
The R Certificates will not have principal balances and will not bear
interest. The Holders of the R Class will be entitled to receive the monthly
distributions from the remaining assets of the Trust, if any, after (i) the
principal balance of the F Class has been reduced to zero and (ii) any unpaid
interest deficiency and accrued and unpaid interest thereon have been paid in
full.
The R Class will be subject to certain transfer restrictions. No transfer
of record or beneficial ownership of an R Certificate will be allowed to a
"disqualified organization." In addition, no transfer of record or beneficial
ownership of an R Certificate will be allowed to any person that is not a "U.S.
Person" without the written consent of Fannie Mae. Under regulations issued by
the Treasury Department on December 23, 1992 (the "Regulations"), a transfer of
a "noneconomic residual interest" to a U.S. Person will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. Any transferee of an R Certificate must
execute and deliver an affidavit and an Internal Revenue Service Form W-9 on
which the transferee provides its taxpayer identification number. See
"Description of the Certificates-- Additional Characteristics of Residual
Certificates" and "Certain Federal Income Tax Consequences--Taxation of
Beneficial Owners of Residual Certificates" in the REMIC Prospectus. Transferors
of an R Certificate should consult with their own tax advisors for further
information regarding such transfers.
The Holders of the R Class will be considered to be the holders of the
"residual interest" in the REMIC constituted by the Trust. See "Certain Federal
Income Tax Consequences" in the REMIC Prospectus. Pursuant to the Trust
Agreement, Fannie Mae will be obligated to provide to such Holders (i) such
information as is necessary to enable them to prepare their federal income tax
returns and (ii) any reports regarding the Certificates that may be required
under the Code.
YIELD CONSIDERATIONS
There can be no assurance that the Mortgage Loans will prepay at any of the
rates assumed herein or at any other particular rate, that the pre-tax yields on
the F Class will correspond to any of the pre-tax yields shown herein or that
the aggregate purchase price of the F Class will be as assumed. In addition,
there can be no assurance that LIBOR will correspond to the levels shown herein.
The rate of distributions of principal of the F Class will be directly related
to the rate of principal distributions on the Underlying REMIC Certificates and
the amount of Excess Interest, which in turn will be related to the amortization
(including prepayments) of the related Mortgage Loans and the priority sequences
affecting principal distributions on the Underlying REMIC Certificates. The
Underlying REMIC Certificates are subordinate in priority of principal
distributions to certain other classes of certificates evidencing beneficial
ownership interests in the Underlying REMIC Trust, and, accordingly,
distributions of principal of the related Mortgage Loans may for extended
periods be applied to the distribution of principal of those classes of
certificates having priority over the Underlying REMIC Certificates. In
addition, the Underlying REMIC Certificates will have Principal Balance
Schedules and will not be scheduled to receive principal payments for extended
periods in accordance with their Principal Balance Schedules. As a result of the
foregoing characteristics, distributions of principal in respect of the F Class
during certain periods may occur at a slower rate than would otherwise have been
the case. Further, it is not likely that the Mortgage Loans will prepay at a
constant PSA rate until maturity, that all of such Mortgage Loans will prepay at
the same rate or that the level of LIBOR will remain constant.
The amount available for distributions of interest on the F Class will
be directly related to the amount of interest distributed on the Trust SMBS,
which in turn will be sensitive in varying degrees to the rate of payments of
principal of the related underlying Mortgage Loans. The Trust SMBS are "Interest
Only" securities with notional principal balances. It is possible that the
notional principal balances of the respective Trust SMBS may be reduced to zero
prior to (and possibly substantially prior to) the reduction of the principal
balance of the Underlying REMIC Certificates to zero. In such event, the F Class
would receive no distributions of interest until the date on which the principal
balance thereof is reduced to zero. Further, Fannie Mae's guaranty does not
cover the receipt of any unpaid interest deficiency (or any accrued and unpaid
interest thereon) once the notional principal balances of the respective Trust
SMBS and the principal balance of the Underlying REMIC Certificates have been
reduced to zero. In such event, Holders of the F Class will have no future
entitlement to any such payments. See "Distributions of Interest" herein.
The yield on the F Class will also be sensitive to the level of LIBOR.
Under certain LIBOR and prepayment scenarios, the Interest Distribution Amount
may not be sufficient to pay the full amount of interest accrued on the F Class
at the LIBOR based formula rate. Although any such deficiency will be carried
forward, with interest, to subsequent Distribution Dates, the effective yield on
the F Class may be reduced below the yield otherwise produced because interest
payable on a Distribution Date will not be distributed until and unless funds
become available.
The distributions on the R Class will be especially sensitive to the level
of LIBOR and the rate of prepayments on the Mortgage Loans, since no
distributions will be made on such Class until the principal balance of the F
Class is reduced to zero and any accrued and unpaid interest thereon (including
any unpaid interest deficiency and any accrued and unpaid interest thereon) is
paid in full. Under certain LIBOR and prepayment scenarios, little or no assets
would remain in the Trust at such time.
The timing of changes in the rate of prepayments or the level of LIBOR may
significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments or the average level of LIBOR is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans or change in the level of LIBOR, the
greater the effect on an investor's yield to maturity. As a result, the effect
on an investor's yield of principal prepayments or the level of LIBOR occurring
at a rate or level higher (or lower) than the rate or level anticipated by the
investor during the period immediately following the issuance of the
Certificates may not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments or level of LIBOR.
The table below indicates the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of the F Class to various constant percentages of
PSA and specified levels of LIBOR. The yields set forth in the table were
calculated by determining the monthly discount rates that, when applied to the
assumed streams of cash flows to be paid on the F Class, would cause the
discounted present value of such assumed streams of cash flows to equal the
assumed aggregate purchase price of such Class and converting such monthly rates
to corporate bond equivalent rates. Such calculations do not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as distributions on the Certificates and
consequently do not purport to reflect the return on any investment in the
Certificates when such reinvestment rates are considered.
THE YIELD TO INVESTORS IN THE F CLASS WILL BE SENSITIVE TO THE LEVEL OF
LIBOR AND TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE
MORTGAGE LOANS, WHICH GENERALLY CAN BE PREPAID AT ANY TIME. IN ADDITION, THE
RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS IS
LIKELY TO VARY, AND MAY VARY CONSIDERABLY, FROM POOL TO POOL.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased level of LIBOR.
The information in the following table was prepared on the basis of the
Pricing Assumptions and the assumptions that (i) the interest rates applicable
to the F Class for each Interest Accrual Period subsequent to the initial
Interest Accrual Period will be based on the indicated level of LIBOR and
(ii) the aggregate purchase price of the F Class (expressed as a percentage of
original principal balance) is as follows:
CLASS PRICE*
- ----------------------------------------------------------------- -----
F............................................................... 100%
- ---------------
* The price does not include accrued interest. Accrued interest has
been added to such price in calculating the yields set forth in the
table below.
SENSITIVITY OF THE F CLASS TO PREPAYMENTS AND LIBOR
(PRE-TAX YIELDS TO MATURITY)
PSA PREPAYMENT ASSUMPTION**
----------------------------------------
I: 50% 100% 250% 500% 800%
LIBOR II: 150% 200% 350% 600% 900%
- ------------------------- --- ---- ---- ---- ---- ----
1.125%................... 3.2% 3.2% 3.2% 3.2% 3.2%
3.125%................... 5.2% 5.2% 5.2% 5.2% 5.2%
5.125%................... 7.2% 7.2% 7.2% 6.7% 6.2%
7.125%................... 8.3% 8.5% 9.2% 6.7% 6.2%
8.000%................... 8.3% 8.5% 9.4% 6.7% 6.2%
- ---------------
** The PSA percentages shown represent constant PSA percentages for the
Mortgage Loans underlying the Underlying REMIC Certificates (Row I) and
for the Mortgage Loans underlying the Trust SMBS (Row II).
WEIGHTED AVERAGE LIVES OF THE CERTIFICATES
The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the Settlement Date to the second such Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate amount of the
reductions in principal balance of such Certificate referred to in clause (a).
The weighted average life of a Certificate will be influenced by the level of
LIBOR, the rate and distributions among Pools of prepayments of principal of the
underlying Mortgage Loans, whether the Holders of the R Class exercise their
option to liquidate the Trust when the principal balance of the F Class is less
than 10% of its original principal balance and other factors. See "Description
of the Certificates--Weighted Average Life and Final Distribution Dates" in the
REMIC Prospectus.
In general, the weighted average lives of the Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives will depend upon a variety of
other factors, including the level of LIBOR, the timing of changes in the rate
of principal payments, the amount of Excess Interest available for distribution
on each Distribution Date and the priority sequences of principal distributions
on the Underlying REMIC Certificates. See "Distributions of Principal" herein.
The interaction of the foregoing factors may have varying effects at
different times during the life of the F Class. Accordingly, no assurance can be
given as to the weighted average life of the F Class. Further, to the extent the
prices of the Certificates represent discounts or premiums to their respective
original principal balances, variability in the weighted average lives of such
Certificates could result in variability in the related yields to maturity. For
an example of how the weighted average life of the F Class may be affected at
various constant prepayment rates and levels of LIBOR, see the Decrement Tables
below.
DECREMENT TABLES
The following decrement tables indicate the percentages of original
principal balance of the F Class that would be outstanding after each of the
dates shown at various constant PSA levels and LIBOR levels and the
corresponding weighted average life of such Class. Such tables have been
prepared on the basis of (i) the Pricing Assumptions and (ii) the assumption
that the interest rates applicable to the F Class for each Interest Accrual
Period subsequent to the initial Interest Accrual Period will be calculated
based on the indicated level of LIBOR. It is not likely that (i) all of the
underlying Mortgage Loans will have the interest rates, CAGEs or WALAs or
remaining terms to maturity assumed, (ii) the underlying Mortgage Loans will
prepay at a constant PSA level or (iii) LIBOR will correspond to the levels
shown herein. In addition, a portion of the payments (including prepayments) on
the Mortgage Loans underlying the GNMA Certificates will be distributed in the
month following the month in which such payment is received. Moreover, the
diverse remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the table at the specified
PSA levels, even if the weighted average remaining term to maturity and weighted
average CAGE of the Mortgage Loans underlying the Underlying REMIC Certificates
are identical to the remaining term to maturity and CAGE assumed and even if the
distributions of the weighted average remaining terms to maturity and WALAs of
the Mortgage Loans underlying the Trust SMBS are identical to the distributions
of the remaining terms to maturity and WALAs assumed.
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL PRINCIPAL BALANCE OF F CLASS OUTSTANDING
LIBOR = 1.125%
-----------------------------
PSA PREPAYMENT ASSUMPTION***
-----------------------------
I: 50% 100% 250% 500% 800%
DATE II: 150% 200% 350% 600% 900%
- ------------------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percent............... 100 100 100 100 100
January 1995.................. 90 90 91 92 94
January 1996.................. 81 82 76 79 54
January 1997.................. 73 75 59 52 34
January 1998.................. 66 69 46 36 14
January 1999.................. 60 57 30 22 2
January 2000.................. 54 43 13 9 0
January 2001.................. 44 31 0 * 0
January 2002.................. 33 21 0 0 0
January 2003.................. 23 13 0 0 0
January 2004.................. 12 3 0 0 0
January 2005.................. 2 0 0 0 0
January 2006.................. 0 0 0 0 0
January 2007.................. 0 0 0 0 0
January 2008.................. 0 0 0 0 0
January 2009.................. 0 0 0 0 0
January 2010.................. 0 0 0 0 0
January 2011.................. 0 0 0 0 0
January 2012.................. 0 0 0 0 0
January 2013.................. 0 0 0 0 0
January 2014.................. 0 0 0 0 0
January 2015.................. 0 0 0 0 0
January 2016.................. 0 0 0 0 0
January 2017.................. 0 0 0 0 0
January 2018
and thereafter.............. 0 0 0 0 0
Weighted Average
Life (years)**.............. 5.9 5.4 3.7 3.4 2.5
LIBOR = 3.125%
-----------------------------
PSA PREPAYMENT ASSUMPTION***
-----------------------------
I: 50% 100% 250% 500% 800%
DATE II: 150% 200% 350% 600% 900%
- ------------------------------ ----- ----- ----- ----- -----
Initial Percent............... 100 100 100 100 100
January 1995.................. 92 92 93 94 95
January 1996.................. 85 86 80 83 57
January 1997.................. 79 80 64 57 38
January 1998.................. 73 76 52 43 18
January 1999.................. 69 66 37 29 7
January 2000.................. 64 54 22 17 1
January 2001.................. 56 42 8 9 0
January 2002.................. 47 34 0 3 0
January 2003.................. 37 27 0 0 0
January 2004.................. 28 18 0 0 0
January 2005.................. 19 9 0 0 0
January 2006.................. 10 0 0 0 0
January 2007.................. 1 0 0 0 0
January 2008.................. 0 0 0 0 0
January 2009.................. 0 0 0 0 0
January 2010.................. 0 0 0 0 0
January 2011.................. 0 0 0 0 0
January 2012.................. 0 0 0 0 0
January 2013.................. 0 0 0 0 0
January 2014.................. 0 0 0 0 0
January 2015.................. 0 0 0 0 0
January 2016.................. 0 0 0 0 0
January 2017.................. 0 0 0 0 0
January 2018
and thereafter.............. 0 0 0 0 0
Weighted Average
Life (years)**.............. 7.1 6.4 4.1 3.9 2.7
LIBOR = 5.125%
-----------------------------
PSA PREPAYMENT ASSUMPTION***
-----------------------------
I: 50% 100% 250% 500% 800%
DATE II: 150% 200% 350% 600% 900%
- ------------------------------ ----- ----- ----- ----- -----
Initial Percent............... 100 100 100 100 100
January 1995.................. 94 94 95 96 97
January 1996.................. 89 90 83 87 59
January 1997.................. 85 86 70 62 40
January 1998.................. 81 84 59 47 20
January 1999.................. 78 76 46 34 9
January 2000.................. 76 66 31 22 3
January 2001.................. 70 56 19 13 *
January 2002.................. 63 49 8 8 0
January 2003.................. 56 44 0 4 0
January 2004.................. 48 37 0 1 0
January 2005.................. 41 30 0 0 0
January 2006.................. 34 22 0 0 0
January 2007.................. 28 15 0 0 0
January 2008.................. 26 8 0 0 0
January 2009.................. 24 2 0 0 0
January 2010.................. 19 0 0 0 0
January 2011.................. 12 0 0 0 0
January 2012.................. 5 0 0 0 0
January 2013.................. 0 0 0 0 0
January 2014.................. 0 0 0 0 0
January 2015.................. 0 0 0 0 0
January 2016.................. 0 0 0 0 0
January 2017.................. 0 0 0 0 0
January 2018
and thereafter.............. 0 0 0 0 0
Weighted Average
Life (years)**.............. 9.8 8.1 4.6 4.2 2.8
LIBOR = 7.125%
-----------------------------
PSA PREPAYMENT ASSUMPTION***
-----------------------------
I: 50% 100% 250% 500% 800%
DATE II: 150% 200% 350% 600% 900%
- ------------------------ ----- ----- ----- ----- -----
Initial Percent......... 100 100 100 100 100
January 1995............ 96 96 97 98 98
January 1996............ 93 93 87 89 61
January 1997............ 91 92 75 64 42
January 1998............ 89 92 66 50 21
January 1999............ 89 86 53 36 10
January 2000............ 89 77 40 24 4
January 2001............ 85 68 28 16 1
January 2002............ 78 62 18 10 0
January 2003............ 72 58 10 6 0
January 2004............ 66 51 3 3 0
January 2005............ 60 44 0 2 0
January 2006............ 54 38 0 * 0
January 2007............ 48 32 0 0 0
January 2008............ 47 26 0 0 0
January 2009............ 47 20 0 0 0
January 2010............ 42 15 0 0 0
January 2011............ 36 10 0 0 0
January 2012............ 30 5 0 0 0
January 2013............ 24 1 0 0 0
January 2014............ 19 0 0 0 0
January 2015............ 13 0 0 0 0
January 2016............ 7 0 0 0 0
January 2017............ 1 0 0 0 0
January 2018
and thereafter........ 0 0 0 0 0
Weighted Average
Life (years)**........ 13.3 10.2 5.3 4.5 2.9
LIBOR = 8.000%
-----------------------------
PSA PREPAYMENT ASSUMPTION***
-----------------------------
I: 50% 100% 250% 500% 800%
DATE II: 150% 200% 350% 600% 900%
- ------------------------ ----- ----- ----- ----- -----
Initial Percent......... 100 100 100 100 100
January 1995............ 97 97 97 98 99
January 1996............ 94 95 89 90 61
January 1997............ 93 95 77 65 42
January 1998............ 93 95 68 50 22
January 1999............ 93 89 55 37 11
January 2000............ 93 79 41 25 5
January 2001............ 89 71 30 16 2
January 2002............ 83 65 20 11 *
January 2003............ 76 61 12 7 0
January 2004............ 70 54 5 4 0
January 2005............ 64 47 1 2 0
January 2006............ 58 41 * 1 0
January 2007............ 52 34 0 * 0
January 2008............ 51 28 0 0 0
January 2009............ 51 23 0 0 0
January 2010............ 46 18 0 0 0
January 2011............ 40 13 0 0 0
January 2012............ 34 8 0 0 0
January 2013............ 28 3 0 0 0
January 2014............ 23 0 0 0 0
January 2015............ 17 0 0 0 0
January 2016............ 11 0 0 0 0
January 2017............ 5 0 0 0 0
January 2018
and thereafter........ 0 0 0 0 0
Weighted Average
Life (years)**........ 14.2 10.7 5.5 4.6 2.9
</TABLE>
- ---------------
* Indicates an outstanding balance greater than 0% and less than 0.5% of the
original principal balance.
** Determined as specified under "Weighted Average Lives of the Certificates"
herein.
*** The PSA percentages shown represent constant PSA percentages for the
Mortgage Loans underlying the Underlying REMIC Certificates (Row I) and the
Mortgage Loans underlying the Trust SMBS (Row II).
CERTAIN ADDITIONAL FEDERAL INCOME TAX CONSEQUENCES
The following tax discussion, when read in conjunction with the discussion
of "Certain Federal Income Tax Consequences" in the REMIC Prospectus, describes
the current federal income tax treatment of investors in the Certificates. These
two tax discussions do not purport to deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors should consult their own tax advisors in determining
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Certificates.
REMIC ELECTIONS AND SPECIAL TAX ATTRIBUTES
An election will be made to treat the Trust as a REMIC for federal income
tax purposes. The F Class will be designated as the "regular interest," and the
R Class will be designated as the "residual interest," in the REMIC constituted
by the Trust.
As a consequence of the qualification of the Trust as a REMIC, the
Certificates generally will be treated as "qualifying real property loans" for
mutual savings banks and domestic building and loan associations, "regular or
residual interests in a REMIC" for domestic building and loan associations,
"real estate assets" for real estate investment trusts, and, except for the R
Class, as "qualified mortgages" for other REMICs. See "Certain Federal Income
Tax Consequences--Special Tax Attributes" in the REMIC Prospectus.
TAXATION OF BENEFICIAL OWNERS OF REGULAR CERTIFICATES
The F Class will be issued with original issue discount for federal income
tax purposes, which generally will result in recognition of some taxable income
in advance of the receipt of the cash attributable to such income. The
Prepayment Assumption that will be used in determining the rate of accrual of
original issue discount will be 250% PSA with respect to the Mortgage Loans
underlying the Underlying REMIC Certificates and 350% PSA with respect to the
Mortgage Loans underlying the Trust SMBS. See "Certain Federal Income Tax
Consequences--Taxation of Beneficial Owners of Regular Certificates--Original
Issue Discount" in the REMIC Prospectus. No representation is made as to whether
the Mortgage Loans underlying the Trust SMBS or the Underlying REMIC
Certificates will prepay at either such rate or any other rate. See "Description
of the Certificates--Weighted Average Lives of the Certificates" herein and
"Description of the Certificates--Weighted Average Life and Final Distribution
Dates" in the REMIC Prospectus.
The F Class will qualify as a regular interest under the Regulations
because it will receive interest at a variable rate subject to a
"funds-available cap." The funds-available cap will limit the amount of interest
to be paid on the F Class to the sum of (i) the aggregate distributions of
interest concurrently made on the Trust SMBS and (ii) the aggregate
distributions of principal concurrently made on the Underlying REMIC
Certificates following the reduction of the principal balance of the F Class to
zero. The F Class, however, will be issued with original issue discount because
under certain circumstances all or a portion of the interest that has accrued at
the variable rate may not be paid currently.
TAXATION OF BENEFICIAL OWNERS OF RESIDUAL CERTIFICATES
Under the Regulations, the R Class will not have significant value. As a
result, an organization to which section 593 of the Code applies and which is
the beneficial owner of an R Certificate may not use its allowable deductions to
offset any "excess inclusions" with respect to such Certificate. See "Certain
Federal Income Tax Consequences--Taxation of Beneficial Owners of Residual
Certificates--Excess Inclusions" in the REMIC Prospectus.
For purposes of determining the portion of the taxable income of the
Trust that generally will not be treated as excess inclusions, the rate to be
used is 120% of the "federal long-term rate." The rate will be published on or
about December 20, 1993. See "Certain Federal Income Tax Consequences-- Taxation
of Beneficial Owners of Residual Certificates--Excess Inclusions" and "--Foreign
Investors--Residual Certificates" in the REMIC Prospectus. The federal income
tax consequences of any consideration paid to a transferee on the transfer of an
R Certificate are unclear; any transferee receiving such consideration should
consult its own tax advisors.
PLAN OF DISTRIBUTION
The Dealer will receive the Certificates in exchange for the Trust SMBS and
the Underlying REMIC Certificates pursuant to a Fannie Mae commitment. The
Dealer proposes to offer the Certificates directly to the public from time to
time in negotiated transactions at varying prices to be determined at the time
of sale. The Dealer may effect such transactions to or through dealers.
LEGAL MATTERS
Certain legal matters will be passed upon for the Dealer by Cleary,
Gottlieb, Steen & Hamilton.
<TABLE>
<CAPTION>
EXHIBIT A
TRUST SMBS
ORIGINAL
FANNIE MAE NOTIONAL
STRIPPED DATE FINAL PRINCIPAL
MEGA MORTGAGE-BACKED CUSIP OF INTEREST DISTRIBUTION BALANCE
CERTIFICATE SECURITY TRUST CLASS(1) NUMBER ISSUE RATE DATE OF CLASS
- ----------- --------------- -------- --------- --------------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
GN-100011 000109-GN 2 31364HLB1 November 1991 0.5% November 2021 $500,003,237
GN-100001 000071-GN 2 31364HGX9 February 1990 9.0 February 2020 398,872,152
GN-100014 000114-GN 2 31364HLM7 November 1991 9.0 December 2021 100,000,551
GN-100016 000119-GN 2 31364HLX3 January 1992 9.0 December 2021 140,000,000
GN-100020 000131-GN 2 31364HMX2 April 1992 9.0 April 2022 80,026,660
GN-100019 000132-GN 2 31364HMZ7 April 1992 9.0 April 2022 347,250,000
GN-100031 000194-GN 2 31364HTN7 December 1992 9.0 December 2022 284,555,000
(3) 000180-GN 2 31364HSJ7 October 1992 9.0 October 2022 200,100,000
</TABLE>
<TABLE>
<CAPTION>
CURRENT APPROXIMATE APPROXIMATE
JANUARY NOTIONAL APPROXIMATE WEIGHTED WEIGHTED MINIMUM
CLASS% 1994 PRINCIPAL WEIGHTED AVERAGE AVERAGE % OF
MEGA IN THE CLASS BALANCE IN AVERAGE WARM WALA GNMA I
CERTIFICATE TRUST FACTOR THE TRUST WAC (IN MONTHS) (IN MONTHS) CERTIFICATES(2)
- ----------- -------------- ----------- ------------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
GN-100011 100.0000000000% 0.48067999 $240,341,548 9.5% 323 31 99%
GN-100001 23.2311021302 0.42101084 39,011,873 9.5 304 50 100
GN-100014 67.6996269751 0.45087716 30,524,383 9.5 302 52 99
GN-100016 7.1428571429 0.47741159 4,774,115 9.5 319 35 99
GN-100020 68.7270966950 0.46567663 25,612,214 9.5 308 45 99
GN-100019 29.3102951764 0.47030371 47,867,511 9.5 320 34 99
GN-100031 26.3569432974 0.51847313 38,885,484 9.5 304 50 90
(3) 25.8520629685 0.48273958 24,972,108 9.5 299 54 99
</TABLE>
<TABLE>
<CAPTION>
UNDERLYING
MEGA SECURITY
CERTIFICATE TYPE
- ----------- ----------
<S> <C>
GN-100011 GNMA
GN-100001 GNMA
GN-100014 GNMA
GN-100016 GNMA
GN-100020 GNMA
GN-100019 GNMA
GN-100031 GNMA
(3) GNMA
</TABLE>
- ---------------
(1) See the SMBS Prospectus for a description of the related class designation.
(2) See "The GNMA CERTIFICATES--GNMA" and "The GNMA CERTIFICATES--GNMA
Certificates" in the SMBS Prospectus and "GNMA and the GNMA Programs" in the
1992-G58 Prospectus for a description of the GNMA I and GNMA II programs.
(3) The assets of Fannie Mae Stripped Mortgage-Backed Security Trust 000180-GN
consist of the Class 58-IO REMIC Certificates, which are not held in the
form of a Mega Certificate.
<TABLE>
<CAPTION>
UNDERLYING REMIC CERTIFICATES
ORIGINAL
DATE FINAL PRINCIPAL
UNDERLYING CUSIP OF INTEREST INTEREST DISTRIBUTION PRINCIPAL BALANCE
REMIC TRUST CLASS NUMBER ISSUE RATE TYPE(1) DATE TYPE(1) OF CLASS
- ----------- ------ ---------- ------------- -------- --------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994-5 C CM6471030 January 1994 (2) PO October 2023 CPT $ 150,000,000
</TABLE>
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
JANUARY CURRENT APPROXIMATE WEIGHTED WEIGHTED
CLASS% 1994 PRINCIPAL WEIGHTED AVERAGE AVERAGE UNDERLYING
UNDERLYING IN THE CLASS BALANCE IN AVERAGE WAM CAGE SECURITY
REMIC TRUST TRUST FACTOR THE TRUST WAC (IN MONTHS) (IN MONTHS) TYPE
- ----------- -------------- --------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994-5 100.0000000000% 1.00000000 $150,000,000 7.486% 354 5 MBS
</TABLE>
- ---------------
(1) See "Description of the Certificates--Class Definitions and Abbreviations"
in the REMIC Prospectus. The Underlying REMIC Certificates will have
Principal Balance Schedules and will not be scheduled to receive principal
payments for extended periods in accordance with their Principal Balance
Schedules.
(2) This Class is a Principal Only Class and bears no interest.
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS SUPPLEMENT, THE REMIC PROSPECTUS, THE MBS
PROSPECTUS, THE SMBS PROSPECTUS, THE MEGA PROSPECTUS, THE UNDERLYING PROSPECTUS,
THE 1992-G58 PROSPECTUS AND THE INFORMATION STATEMENT AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE AFOREMENTIONED DOCUMENTS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
CERTIFICATES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE AFOREMENTIONED DOCUMENTS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THEREOF.
------------------------
TABLE OF CONTENTS
PAGE
-----
PROSPECTUS SUPPLEMENT
Table of Contents.................... S- 3
Description of the Certificates...... S- 4
Certain Additional Federal Income Tax
Consequences....................... S-16
Plan of Distribution................. S-17
Legal Matters........................ S-17
Exhibit A............................ A-1
REMIC PROSPECTUS
Prospectus Supplement................ 2
Summary of Prospectus................ 3
Description of the Certificates...... 7
The Trust Agreement.................. 20
Certain Federal Income Tax
Consequences....................... 22
Legal Investment Considerations...... 32
Legal Opinion........................ 33
ERISA Considerations................. 33
Glossary............................. 34
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$150,000,000
FEDERAL NATIONAL
MORTGAGE ASSOCIATION
[FANNIE MAE LOGO]
GUARANTEED
REMIC PASS-THROUGH
CERTIFICATES
FANNIE MAE REMIC TRUST
1994-6
------------------------
PROSPECTUS SUPPLEMENT
------------------------
PRUDENTIAL SECURITIES INCORPORATED
December 8, 1993
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PROSPECTUS
FEDERAL NATIONAL MORTGAGE ASSOCIATION
[FANNIE MAE LOGO]
GUARANTEED REMIC PASS-THROUGH CERTIFICATES
(RESIDENTIAL MORTGAGE LOANS)
------------------------
THE CERTIFICATES, TOGETHER WITH ANY INTEREST THEREON, ARE NOT GUARANTEED BY THE
UNITED STATES. THE OBLIGATIONS OF FANNIE MAE UNDER ITS GUARANTY OF THE
CERTIFICATES ARE OBLIGATIONS SOLELY OF FANNIE MAE AND DO NOT CONSTITUTE AN
OBLIGATION OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY
THEREOF OTHER THAN FANNIE MAE. THE CERTIFICATES ARE EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE
"EXEMPTED SECURITIES" WITHIN THE MEANING OF THE SECURITIES
EXCHANGE ACT OF 1934.
------------------------
The Guaranteed REMIC Pass-Through Certificates ("Certificates") are issued
and guaranteed by the Federal National Mortgage Association ("Fannie Mae"), a
corporation organized and existing under the laws of the United States, under
the authority contained in Section 304(d) of the Federal National Mortgage
Association Charter Act (12 U.S.C. 1716 et seq.). The Certificates of each
Series will evidence the direct or indirect beneficial ownership interest in one
or more Fannie Mae Guaranteed Mortgage Pass-Through Certificates (the "MBS") and
the MBS Account (as hereinafter defined) and all cash and investments held
therein (collectively, as to any Series of Certificates, the "Series Trust"),
subject to the limits and the order of distribution described herein and in the
related Prospectus Supplement.
Each MBS will represent all or part of the beneficial interest in a pool
("Pool") of first lien, single-family, fixed-rate residential mortgage loans
(the "Mortgage Loans"). The general characteristics of the MBS are described in
the Prospectus for Fannie Mae Guaranteed Mortgage Pass-Through Certificates (the
"MBS Prospectus"), and certain information relating to the Pool or Pools
underlying the MBS included in a Series Trust will be set forth in the related
Prospectus Supplement. The MBS will be held for the Holders (as hereinafter
defined) of Certificates by Fannie Mae in its capacity as Trustee of the related
Series Trust. All Certificates relating to a particular Series Trust are
referred to as a "Series."
Pursuant to its guaranty of the MBS, Fannie Mae will guaranty the timely
payment of principal of and interest on the underlying Mortgage Loans, and,
pursuant to its guaranty of the Certificates, Fannie Mae will be obligated to
distribute on a timely basis to Holders of Certificates required installments of
principal and interest and to distribute the principal balance of each Class of
Certificates in full no later than the applicable Final Distribution Date,
whether or not sufficient funds are available in the MBS Account.
Each Series will consist of two or more Classes of Certificates, which may
include one or more Accrual Classes (as hereinafter defined). Interest on each
interest bearing Class other than an Accrual Class will be distributable on each
Distribution Date specified in the related Prospectus Supplement. Interest
accrued on each Accrual Class will be distributable to the extent provided in
the related Prospectus Supplement, the amount of any interest accrued and
undistributed as of any Distribution Date being added to the principal balance
of each Certificate of such Class. Any accrued interest so added will accrue
interest from such Distribution Date or from such other date as may be specified
in the related Prospectus Supplement. Unless otherwise provided in the
Prospectus Supplement, principal distributions on each Class of Certificates of
a Series will be made pro rata among all Certificates of such Class.
Scheduled distributions on the MBS backing a Series will be sufficient to
make timely distributions of principal and interest on the Certificates of such
Series and to retire each such Class of Certificates not later than its Final
Distribution Date without the necessity of any call on Fannie Mae under its
guaranty of the Certificates. Because the rate of distribution of principal of
each Class of Certificates will depend on the rate of payment (including
prepayments) of the MBS underlying the Certificates, the actual final
distribution with respect to any Class of Certificates could occur significantly
earlier than its Final Distribution Date.
One or more elections will be made to treat the Series Trust as one or more
"real estate mortgage investment conduits" (each, a "REMIC Trust") for federal
income tax purposes. The Certificates of each Class will be designated as
"regular interests" in a REMIC Trust, except that a separate Class will be
designated as the "residual interest" with respect to each REMIC Trust.
------------------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 29, 1992.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of Certificates unless accompanied by a Prospectus Supplement.
<PAGE>
NO SALESMAN, DEALER, BANK OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, THE MBS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FANNIE MAE. THIS PROSPECTUS, THE MBS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE CERTIFICATES OFFERED HEREBY AND BY THE RELATED
PROSPECTUS SUPPLEMENT NOR AN OFFER OF THE CERTIFICATES TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL.
TABLE OF CONTENTS
CAPTION PAGE
----
Prospectus Supplement............................... 2
Summary of Prospectus............................... 3
Description of the Certificates..................... 7
The Trust Agreement................................. 20
Certain Federal Income Tax Consequences............. 22
Legal Investment Considerations..................... 32
Legal Opinion....................................... 33
ERISA Considerations................................ 33
Glossary............................................ 34
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to any Series of Certificates to be
offered hereunder will, among other things, set forth with respect to such
Series of Certificates: (i) the aggregate principal amount, the interest rate or
method of determining the interest rate of each Class of such Series and whether
any such Class constitutes an Accrual Class; (ii) the characteristics of the MBS
backing the Certificates of such Series, including the pass-through rates of
such MBS and ranges of weighted average coupons and weighted average maturities
of the Mortgage Loans underlying such MBS; (iii) the designation of each Class
of the Certificates as either a "regular interest" or "residual interest"; (iv)
the Final Distribution Date of each Class of such Series; (v) the method used to
calculate the aggregate amount of principal required to be applied to the
Certificates of such Series on each Distribution Date; (vi) the principal
balance, expressed as a percentage, of each Class of such Series that would be
outstanding on specified Distribution Dates if the Mortgage Loans underlying the
MBS backing the Certificates of such Series were prepaid at various assumed
rates; and (vii) the Distribution Dates for such Series.
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus and in the accompanying MBS Prospectus and by reference to the
information contained in the Prospectus Supplement to be prepared and delivered
in connection with the offering of each Series of Certificates. Capitalized
terms used and not otherwise defined in this Prospectus (including the Glossary
contained herein) have the respective meanings assigned to such terms in the MBS
Prospectus, unless otherwise indicated.
TITLE OF SECURITY............ Guaranteed REMIC Pass-Through Certificates (the
"Certificates").
ISSUER AND GUARANTOR........... Federal National Mortgage
Association ("Fannie Mae"), a corporation
organized and existing under the laws of the
United States.
THE MBS........................ The Certificates will be backed by
Fannie Mae Guaranteed Mortgage Pass-Through
Certificates (Residential Mortgage Loans) having
the characteristics described in the MBS
Prospectus under "Description of Certificates"
and, as to a particular Series of Certificates, in
the related Prospectus Supplement.
THE CERTIFICATES............... The Certificates of
each Series will be issued and guaranteed and each
Series Trust will be maintained pursuant to the
terms of a trust agreement and, if applicable, an
issue supplement for such Series, each executed by
Fannie Mae in its corporate capacity and in its
capacity as Trustee (together, the "Trust
Agreement"). The Certificates of each Series will
represent the direct or indirect beneficial
ownership interest in one or more MBS and the MBS
Account and all cash and investments held therein
(collectively, as to any Series of Certificates,
the "Series Trust"), subject to the limits and
order of distribution described herein and in the
Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the
Certificates representing "regular interests" in a
REMIC Trust and offered hereby and by the related
Prospectus Supplement will be issued in minimum
denominations of $1,000 and integral multiples of
$1 in excess thereof, will be available in
book-entry form only and will not be convertible
to definitive form.
INTEREST DISTRIBUTIONS ON
CERTIFICATES................. Each interest
bearing Class of a Series will bear interest at
the rate per annum set forth in (or determined in
the manner set forth in) the related Prospectus
Supplement. Interest on all interest bearing
Classes other than an Accrual Class will be
distributed on the 25th day (or, if such 25th day
is not a business day, on the first business day
next succeeding such 25th day) of each month
specified in the related Prospectus Supplement
(each, a "Distribution Date"), in amounts accrued
for the periods (each, an "Interest Accrual
Period") specified in the related Prospectus
Supplement. Interest accrued on an Accrual Class
will be distributable to the extent provided in
the related Prospectus Supplement, the amount of
any interest accrued and undistributed as of any
Distribution Date being added to the principal
balance of each Certificate of such Class. Any
accrued interest so added will accrue interest
from such Distribution Date or from such other
date as may be specified in the related Prospectus
Supplement. See "Description of the
Certificates--Distributions of Interest."
PRINCIPAL DISTRIBUTIONS ON
CERTIFICATES................. Unless the related Prospectus
Supplement provides otherwise, principal
distributions on each Series of Certificates will
be made on each Distribution Date in an aggregate
amount equal to the sum of (i) the amount of
interest, if any, accrued on the Accrual Classes
of such Series during the preceding Interest
Accrual Period but not then payable; and (ii) an
amount equal to all distributions of principal of
the MBS backing such Series in the period (a
"Deposit Period") subsequent to the previous
Distribution Date (or subsequent to the first day
of the month in which the related Series of
Certificates is issued (each, an "Issue Date") in
the case of the initial Distribution Date). The
Prospectus Supplement for each Series of
Certificates will specify the manner in which the
amount of each such aggregate principal
distribution will be determined. Unless the
related Prospectus Supplement provides otherwise,
all distributions of principal on the Certificates
of a particular Class will be applied pro rata
among all Certificates of such Class. See
"Description of the Certificates--Distributions of
Principal." The "Final Distribution Date" for
Certificates of a particular Class is the date by
which the principal balance thereof is required to
be fully paid and will be specified in the related
Prospectus Supplement. The Final Distribution
Dates of the respective Classes of Certificates of
a Series will be determined so that distributions
on the underlying MBS will be sufficient to retire
each such Class on or before its Final
Distribution Date without the necessity of any
call on Fannie Mae under its guaranty of the
Certificates. Because the rate of distribution of
principal of each Class of Certificates will
depend upon the rate of payment (including
prepayments) of the MBS underlying the
Certificates, the actual final distribution with
respect to any Class of Certificates could occur
significantly earlier than its Final Distribution
Date. The rate of prepayments on the MBS backing
any Series of Certificates will depend on the
characteristics of the underlying Mortgage Loans,
as well as on the prevailing level of interest
rates and other economic factors, and no assurance
can be given as to the actual prepayment
experience of the MBS in any Series Trust. See
"Description of the Certificates--Prepayment
Considerations and Risks" and "--Weighted Average
Life and Final Distribution Dates."
FANNIE MAE GUARANTY............ Pursuant to its guaranty of
the MBS, Fannie Mae will guaranty the timely
payment of scheduled installments of principal of
and interest on the underlying Mortgage Loans,
whether or not received, together with the full
principal balance of any foreclosed Mortgage Loan,
whether or not such balance is actually recovered.
In addition, Fannie Mae will be obligated to
distribute on a timely basis to Holders (as
defined below) of Certificates required
installments of principal and interest and to
distribute the principal balance of each Class of
Certificates in full no later than the applicable
Final Distribution Date, whether or not sufficient
funds are available in the MBS Account. If Fannie
Mae were unable to perform these guaranty
obligations, distributions to Certificateholders
would consist solely of payments and other
recoveries on the Mortgage Loans and, accordingly,
delinquencies and defaults on the Mortgage Loans
would affect distributions to Certificateholders.
The guaranties of Fannie Mae are not backed by the
full faith and credit of the United States. See
"Description of the Certifi- cates--Fannie Mae's
Guaranty."
BOOK-ENTRY FORM................
Unless otherwise specified in the related
Prospectus Supplement, the Certificates, other
than a Residual Certificate (as defined herein
under "Description of the Certificates--Additional
Characteristics of Residual Certificates"), will
be issued, maintained and may be transferred by
Holders only on the book-entry system of the
Federal Reserve Banks. The Certificates may be
held of record only by entities eligible to
maintain book-entry accounts with the Federal
Reserve Banks. Such entities whose names appear on
the book-entry records of the Federal Reserve
Banks as the entities for whose accounts
Certificates have been deposited are herein
referred to as "Holders" or "Certificateholders."
A Holder is not necessarily the beneficial owner
of a Certificate. Beneficial owners ordinarily
will hold Certificates through one or more
financial intermediaries, such as banks, brokerage
firms and securities clearing organizations. See
"Description of the Certificates--Denominations,
Book-Entry Form."
MBS ACCOUNT.................... All distributions on the MBS
underlying a Series of Certificates will be
remitted directly to one or more accounts
(collectively, the "MBS Account") to be maintained
by Fannie Mae, as Trustee, and will be available
for application to the distribution of principal
of, and interest on, such Series of Certificates
on the next Distribution Date. See "Description of
the Certificates-- Distributions on MBS, Deposits
in the MBS Account."
REMIC TRUST FACTORS........... As soon as practicable
following the eleventh calendar day of each month,
Fannie Mae will publish or otherwise make
available for each Class of Certificates, the
factor (carried to eight decimal places) which,
when multiplied by the aggregate original
principal balance of each Certificate of such
Class, will equal the amount of principal
remaining to be distributed with respect to such
Certificate after giving effect to the
distribution of principal to be made on the
following Distribution Date (and the accretion of
principal of any Accrual Classes).
TERMINATION.................... Each Series Trust
will terminate upon the distribution to
Certificateholders of all required installments of
the principal of and interest on the Certificates.
In addition, the Prospectus Supplement will
describe the terms and conditions of Fannie Mae's
right, if any, to terminate the Series Trust by
purchasing the MBS included therein. Fannie Mae
has agreed not to effect indirectly an early
termination of any Series Trust through the
exercise of its right, as described in
"Description of Certifi- cates--Termination" in
the MBS Prospectus, to repurchase the Mortgage
Loans underlying any MBS in the Series Trust
unless only one Mortgage Loan remains in the Pool
or the principal balance of such Pool at the time
of repurchase is less than one percent of the
original principal balance thereof.
TAX STATUS OF
THE CERTIFICATES............... One or more elections will be made
to treat the Series Trust as one or more "real
estate mortgage investment conduits" ("REMICs")
for federal income tax purposes. Each of these
REMICs will be referred to herein as a "REMIC
Trust." The Certificates of each Class will be
designated as the "regular interests" in a REMIC
Trust, except that a separate Class will be
designated as the "residual interest" with respect
to each REMIC Trust. See "Certain Federal Income
Tax Consequences--REMIC Election." As a
consequence of the qualification of the Series
Trust as one or more REMICs, the Certificates
generally will be treated as "qualifying real
property loans" for mutual savings banks and
domestic building and loan associations, "regular
or residual interests in a REMIC," as the case may
be, for domestic building and loan associations,
"real estate assets" for real estate investment
trusts, and, except for any Class designated as a
residual interest, as "qualified mortgages" for
other REMICs. See "Certain Federal Income Tax
Consequences--Special Tax Attributes."
LEGALITY OF INVESTMENT......... Under the Secondary Mortgage Market Enhancement
Act of 1984, the Certificates, like Fannie Mae's
Guaranteed Mortgage Pass-Through Certificates,
will be considered to be "securities issued or
guaranteed by . . . the Federal National Mortgage
Association." Accordingly, subject to applicable
limitations gov erning investment practices,
investors whose investments are governed by state
law may purchase, hold or invest in the
Certificates to the same extent that they are
authorized to invest in obligations issued by or
guaranteed as to principal and interest by the
United States or any agency or instrumentality
thereof. In addition, many entities whose
investments are governed by federal law (including
national banks, federal savings and loan
associations, federal savings banks and federal
credit unions) are specifically authorized to
purchase, hold and invest in Fannie Mae's
Guaranteed Mortgage Pass-Through Certificates.
Subject to general considerations governing
investment practices, the Certificates will be
treated identically for such purposes for such
entities.
LEGAL INVESTMENT
CONSIDERATIONS............... Institutions whose investment
activities are subject to legal investment laws
and regulations or to review by certain regulatory
authorities may be subject to restrictions on
investment in certain Classes of the Certificates
of a Series. Investors should consult their own
legal advisors in determining whether and to what
extent the Certificates of a Series constitute
legal investments or are subject to restrictions
on investment. See "Legal Investment
Considerations." MARGINABILITY; REPURCHASE
AGREEMENTS................... The Certificates are
"exempted securities" for purposes of the margin
rules of the Board of Governors of the Federal
Reserve System and the New York Stock Exchange and
transactions in the Certificates, including
repurchase agreements, are treated under such
rules in the same manner as transactions in Fannie
Mae's Guaranteed Mortgage Pass-Through
Certificates. Such rules do not, however, specify
the collateral value which participants in
particular transactions will accord the
Certificates of any Class. SECURITIES LAW
EXEMPTION....... The Certificates are exempt from
the registration requirements of the Securities
Act of 1933, as amended, and are "exempted
securities" within the meaning of the Securities
Exchange Act of 1934, as amended.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Guaranteed REMIC Pass-Through Certificates ("Certificates") are issued
and guaranteed by the Federal National Mortgage Association ("Fannie Mae"), a
corporation organized and existing under the laws of the United States, under
the authority contained in Section 304(d) of the Federal National Mortgage
Association Charter Act (12 U.S.C. 1716 et seq.). The Certificates of each
Series will be issued and guaranteed and each Series Trust will be maintained
pursuant to the terms of a trust agreement and, if applicable, an issue
supplement for such Series, each executed by Fannie Mae in its corporate
capacity and in its capacity as Trustee (together, the "Trust Agreement").
The Certificates of each Series will represent the beneficial ownership
interest in the Series Trust created pursuant to the Trust Agreement related to
such Series, subject to the limits and the order of distribution described
herein and in the related Prospectus Supplement. Each Series Trust will consist
of (i) MBS, held directly or indirectly therein, representing all or part of the
beneficial interests in pools of first lien, single-family, fixed-rate
residential mortgage loans (the "Pools") and (ii) the MBS Account (as
hereinafter defined) and all cash and investments held therein.
Each Series of Certificates will consist of two or more Classes, which may
include one or more Classes upon which for any Distribution Date all or a
portion of the interest then due may accrue but be undistributed (each, an
"Accrual Class"). Interest accrued on each Accrual Class will be distributable
to the extent provided in the related Prospectus Supplement, the amount of any
interest accrued and undistributed as of any Distribution Date being added to
the principal balance of each Certificate of such Class. Any accrued interest so
added will accrue interest from such Distribution Date or from such other date
as may be specified in the related Prospectus Supplement.
The following summaries describe certain provisions common to each Series
of Certificates. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the Prospectus Supplement
and the provisions of the Trust Agreement relating to each Series of
Certificates. When particular provisions or terms used in the Trust Agreement
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of such summaries.
DENOMINATIONS, BOOK-ENTRY FORM
Unless otherwise specified in the related Prospectus Supplement, the
Certificates, other than any Residual Certificate, offered hereby and by the
related Prospectus Supplement will be issued in minimum denominations of $1,000
and integral multiples of $1 in excess thereof. The book-entry Certificates will
be maintained on the book-entry system of the Federal Reserve Banks in a manner
that permits separate trading and ownership. Each Class of Certificates will be
assigned a CUSIP number and will be tradable separately under such CUSIP number.
Fannie Mae's fiscal agent for the book-entry Certificates is the Federal
Reserve Bank of New York. The Federal Reserve Banks will issue such Certificates
in book-entry form and will maintain book-entry accounts with respect to such
Certificates and make distributions on such Certificates on behalf of Fannie Mae
on the applicable Distribution Dates by crediting Holders' accounts at the
Federal Reserve Banks.
Book-entry Certificates may be held of record only by entities
eligible to maintain book-entry accounts with the Federal Reserve Banks. Such
entities whose names appear on the book-entry records of the Federal Reserve
Banks as the entities for whose accounts the Certificates have been deposited
are herein referred to as "Holders" or "Certificateholders." A Holder is not
necessarily the beneficial owner of a book-entry Certificate. Beneficial owners
will ordinarily hold book-entry Certificates through one or more financial
intermediaries, such as banks, brokerage firms and securities clearing
organizations. A Holder that is not the beneficial owner of a Certificate, and
each other financial intermediary in the chain to the beneficial owner, will
have the responsibility of establishing and maintaining accounts for their
respective customers. The rights of the beneficial owner of a book-entry
Certificate with respect to Fannie Mae and the Federal Reserve Banks may be
exercised only through the Holder of such Certificate. Fannie Mae and the
Federal Reserve Banks will have no direct obligation to a beneficial owner of a
book-entry Certificate that is not also the Holder of the Certificate. The
Federal Reserve Banks will act only upon the instructions of the Holder in
recording transfers of a book-entry Certificate.
A Fiscal Agency Agreement between Fannie Mae and the Federal Reserve Bank
of New York makes generally applicable to the book-entry Certificates (i)
regulations governing Fannie Mae's use of the book-entry system, contained in 24
C.F.R. Part 81, Subpart E, and (ii) such procedures, insofar as applicable, as
may from time to time be established by regulations of the United States
Department of the Treasury governing United States securities, as now set forth
in Treasury Department Circular Number 300, 31 C.F.R. Part 306 (other than
Subpart O). The book-entry Certificates are also governed by applicable
operating circulars and letters of the Federal Reserve Bank.
The Residual Certificates offered hereby and by the related Prospectus
Supplement will not be issued in book-entry form but will be issued in fully
registered, certificated form. As to a Residual Certificate, "Holder" or
"Certificateholder" refers to the registered owner thereof. The Residual
Certificates will be transferable and exchangeable at the corporate trust office
of the Transfer Agent as specified in the related Prospectus Supplement. A
service charge may be imposed for any exchange or registration of transfer of a
Residual Certificate and Fannie Mae may require payment of a sum sufficient to
cover any tax or other governmental charge. Distributions on the Residual
Certificates of any Series will be made in the manner set forth in the related
Prospectus Supplement.
CLASS DEFINITIONS AND ABBREVIATIONS
Classes of Certificates fall into different categories. The following chart
identifies and generally defines most categories. The first column of the chart
shows Fannie Mae's abbreviation for each category. The cover page of each
Prospectus Supplement will identify the categories of Classes of the related
Series of Certificates by means of one or more of these abbreviations.
<TABLE>
<CAPTION>
CATEGORY
ABBREVIATION OF CLASS DEFINITION
- ------------ ---------------- -------------------------------------------------------------
<C> <S> <C>
PRINCIPAL TYPES
AD Accretion A Class that receives principal payments from the accreted
Directed interest from specified Accrual Classes. An Accretion
Directed Class also may receive principal payments from
principal paid on the underlying MBS or other assets of the
Series Trust.
CPT Component A Class consisting of "Components." The Components of a Com-
ponent Class may have different principal and/or interest
payment characteristics but together constitute a single
Class. Each Component of a Component Class may be identified
as falling into one or more of the categories in this chart.
NPR No Payment A Residual Class that receives no payments of principal.
Residual
NSJ Non-Sticky A Class whose principal payment priorities change temporarily
Jump upon the occurrence of one or more "trigger events." A
Non-Sticky Jump Class "jumps" to its new priority on each
Distribution Date when the trigger condition is met and
reverts to its original priority (does not
"stick" to the new priority) on each
Distribution Date when the trigger condition
is not met.
NTL Notional A Class having no principal balance and bearing interest on
the related notional principal balance. The notional
principal balance is used for purposes of the determination
of interest distributions on an Interest Only Class that is
not entitled to principal.
PAC PAC (or A Class that is designed to receive principal payments
using Planned a predetermined principal balance schedule derived
by Principal Class) assuming two constant prepayment rates for
the underlying Mortgage Loans. These two rates are the endpoints for the
"structuring range" for the PAC Classes. The PAC Classes in
any Series of Certificates may be subdivided into different
categories (e.g., Type I PAC Classes, Type II PAC Classes and
so forth (standard abbreviations: PAC I, PAC II and so
forth)) having different effective structuring ranges and
different principal payment priorities. The structuring range
for the PAC II Class of a Series of Certificates is narrower than that
for the PAC I Class of such Series.
SCH Scheduled A Class that is designed to receive principal payments using
a predetermined principal balance schedule but is not
designated as a PAC or TAC Class. In many cases, the schedule
is derived by assuming two constant prepayment rates for the
underlying Mortgage Loans. These two rates are the endpoints
for the "structuring range" for the Scheduled Class.
SEQ Sequential Pay Classes that receive principal payments in a prescribed
sequence, that do not have predetermined schedules and that
under all circumstances receive payments of principal
continuously from the first Distribution Date on which they
receive principal until they are retired. A single Class that
receives principal payments before or after all other Classes
in the same Series of Certificates may be identified as a
Sequential Pay Class.
SJ Sticky Jump A Class whose principal payment priorities change permanently
upon the occurrence of one or more "trigger events." A Sticky
Jump Class "jumps" to its new priority on the first
Distribution Date when the trigger condition is met and
retains ("sticks" to) that priority until retired.
STP Strip A Class that receives a constant
proportion, or "strip," of the principal
payments on the underlying MBS or other assets
of the Series Trust.
SUP Support (or A Class that receives principal payments on any Distribution
Companion) Date only if scheduled payments have been made on specified
PAC, TAC and/or Scheduled Classes.
TAC TAC (or A Class that is designed to receive principal payments
using Targeted a predetermined principal balance schedule derived
by Principal Class) assuming a single constant prepayment rate
for the underlying Mortgage Loans.
XAC Index A Class whose principal payment allocation is based on the
Allocation value of an index.
Class
INTEREST TYPES
EXE Excess A Residual Class that receives any principal and interest
paid on the underlying MBS or other assets of a REMIC Trust
in excess of the amount of the prescribed principal and
interest required to be paid on all Classes of Certificates
in the Series. Excess Classes
interest rate.
FIX Fixed Rate A Class whose interest rate is fixed throughout the life of
the Class.
FLT Floating Rate A Class with an interest rate
that resets periodically based upon a
designated index and that varies directly with
changes in such index.
INV Inverse Floating A Class with an interest rate that resets
periodically based Rate upon a designated index and that varies
inversely with changes in such index.
IO Interest Only A Class that receives some or all of the interest payments
made on the underlying MBS or other assets of the Series
Trust and little or no principal. Interest Only Classes have
either a nominal or a notional principal balance. A nominal
principal balance represents actual principal that will be
paid on the Class. It is referred to as nominal since it is
extremely small compared to other Classes. A notional
principal balance is the amount used as a reference to
calculate the amount of interest due on an Interest Only
Class that is not entitled to any principal.
PO Residual NPR No Payment A Residual Class that receives no payments of interest.
PO Principal Only A Class that does not bear
interest and is entitled to receive only
payments of principal.
PZ Partial A Class that accretes a portion of the amount of accrued
Accrual interest thereon, which amount will be added to the principal
balance of such Class on each applicable Distribution Date,
with the remainder of such accrued interest to be distributed
currently as interest on such Class. Such accretion may
continue until a specified event has occurred
or until such Partial Accrual Class is retired.
Z Accrual A Class that accretes the amount of accrued interest
otherwise distributable on such Class, which amount will be
added as principal to the principal balance of such Class on
each applicable Distribution Date. Such accretion may
continue until some specified event has occurred or until
such Accrual Class is retired.
OTHER TYPES
LIQ Liquid A Class that is intended to qualify as "liquid assets" for
Asset purposes of the liquidity requirements applicable to certain
depository institutions. Any Class designated as a Liquid
Asset Class will have a Final Distribution
Date not later than five years from its date
of issuance.
RTL Retail A Class that is designated for sale to retail investors.
Retail Classes frequently are sold in small "units" or other
increments and issued in book-entry form through the
facilities of the Depository Trust Company. Retail Classes
may be entitled to receive distributions of principal in
accordance with special priorities and allocation proce-
dures.
</TABLE>
DISTRIBUTIONS OF INTEREST
The Certificates of each interest bearing Class will bear interest on their
unpaid principal balances from the date and at the rate per annum specified in
(or determined as specified in) the related Prospectus Supplement (calculated on
the basis of a 360-day year of twelve 30-day months) until the principal amount
of the Certificates of such Class is paid in full. Interest accrued on the
interest bearing Classes other than an Accrual Class during any Interest Accrual
Period will be distributable on the Distribution Dates and at the applicable
interest rates specified in the related Prospectus Supplement. Interest accrued
on each Accrual Class will be distributable to the extent provided in the
related Prospectus Supplement, the amount of any interest accrued and
undistributed as of any Distribution Date being added to the principal balance
of each Certificate of such Class. Any accrued interest so added will accrue
interest from such Distribution Date or from such other date as may be specified
in the related Prospectus Supplement.
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
LIBOR
Unless otherwise specified in the related Prospectus Supplement, on the
LIBOR Determination Date for each Class as to which the applicable interest rate
is determined by reference to an index denominated as LIBOR, Fannie Mae or its
agent will rely on the quotations, as set forth on the Reuters Screen LIBO Page
(as defined in the International Swap Dealers Association, Inc. Code of Standard
Wording, Assumptions and Provisions for Swaps, 1986 Edition), offered by the
principal London office of each of the designated reference banks meeting the
criteria set forth herein (the "Reference Banks") for making one-month United
States dollar deposits in leading banks in the London interbank market, as of
11:00 a.m. (London time) on such LIBOR Determination Date. In lieu of relying on
the quotations for those Reference Banks that appear at such time on the Reuters
Screen LIBO Page, Fannie Mae or its agent will request each of the Reference
Banks to provide such offered quotations at such time.
LIBOR will be established by Fannie Mae or its agent on each LIBOR
Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period shall be whichever is the higher of (i) LIBOR as
determined on the previous LIBOR Determination Date or (ii) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum
which Fannie Mae or its agent determines to be either (i) the arithmetic
mean (rounded upwards if necessary to the nearest whole multiple of 1/32%)
of the one-month United States dollar lending rates that New York City
banks selected by Fannie Mae or its agent are quoting, on the relevant
LIBOR Determination Date, to the principal London offices of at least two
of the Reference Banks to which such quotations are, in the opinion of
Fannie Mae or its agent, being so made, or (ii) in the event that Fannie
Mae or its agent can determine no such arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks
selected by Fannie Mae or its agent are quoting on such LIBOR Determination
Date to leading European banks.
(c) If on the initial LIBOR Determination Date for a Class specified
in the related Prospectus Supplement, Fannie Mae or its agent is required
but is unable to determine the Reserve Interest Rate in the manner provided
in paragraph (b) above, LIBOR shall be deemed to be the per annum rate
specified as such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with Fannie Mae; and (iii)
shall have an established place of business in London. If any such
Reference Bank should be unwilling or unable to act as such or if Fannie Mae
should terminate the appointment of any such Reference Bank, Fannie Mae will
promptly appoint or cause to be appointed another leading bank meeting the
criteria specified above.
The establishment of LIBOR on each LIBOR Determination Date by Fannie Mae
or its agent and its calculation of the rate of interest for the applicable
Classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California, and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: (i) savings deposits, (ii)
time deposits, (iii) FHLBSF advances, (iv) repurchase agreements and (v) all
other borrowings. Because the component funds represent a variety of maturities
whose costs may react in different ways to changing conditions, the Eleventh
District Cost of Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury Bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it is
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
12
<PAGE>
Listed below are historical values of the Eleventh District Cost of Funds
Index since January 1984 as reported by the FHLBSF:
<TABLE>
<CAPTION>
YEAR
--------------------------------------------------------------------------------
MONTH(1) 1992 1991 1990 1989 1988 1987 1986 1985 1984
- ------------ ------- ------- ------ ------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January..... 6.002% 7.858% 8.369% 8.125% 7.615% 7.396% 8.770% 10.217% 10.032%
February.... 5.800 7.848 8.403 8.346 7.647 7.448 8.964 10.160 10.172
March....... 5.611 7.654 8.258 8.423 7.509 7.314 8.744 9.976 9.982
April....... 5.427 7.501 8.211 8.648 7.519 7.245 8.587 9.872 10.135
May......... 5.290 7.329 8.171 8.797 7.497 7.223 8.441 9.704 10.260
June........ 5.258 7.155 8.086 8.923 7.618 7.274 8.374 9.565 10.434
July........ 5.069 6.998 8.109 8.844 7.593 7.275 8.196 9.365 10.712
August...... 4.874 6.845 8.075 8.763 7.659 7.277 8.018 9.273 10.857
September... 4.805 6.714 8.091 8.807 7.847 7.394 7.901 9.129 11.039
October..... 4.597 6.566 8.050 8.643 7.828 7.444 7.717 9.027 10.994
November.... 4.508 6.414 8.044 8.595 7.914 7.562 7.602 9.036 10.891
December.... 6.245 7.963 8.476 8.022 7.645 7.509 8.867 10.520
</TABLE>
- ---------------
(1) The Eleventh District Cost of Funds Index reflects the weighted average cost
of funds of the members of the Eleventh District for the month indicated. It
is usually announced by the FHLBSF on the last working day of the month
following the month in which the cost of funds was incurred.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month "will be announced on or near the last
working day" of the following month and also has stated that it "cannot
guarantee the announcement" of such index on an exact date. So long as such
index for a month is announced on or before the tenth day of the second
following month, the interest rate for each Class of Certificates as to which
the applicable interest rate is determined by reference to an index denominated
as COFI (each, a "COFI Class") for the Interest Accrual Period commencing in
such second following month will be based on the Eleventh District Cost of Funds
Index for the second preceding month. If publication is delayed beyond such
tenth day, such interest rate will be based on the Eleventh District Cost of
Funds Index for the third preceding month.
If on the tenth day of the month in which any Interest Accrual Period
commences for a COFI Class the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, the index for
such current Interest Accrual Period and for each succeeding Interest Accrual
Period will, except as described in the next to last sentence of this paragraph,
be based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the "National Cost of Funds Index") published by the Office of
Thrift Supervision (the "OTS") for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on such tenth day of an Interest Accrual Period).
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on any such tenth day of the month in which an Interest Accrual
Period commences the most recently published National Cost of Funds Index
relates to a month prior to the fourth preceding month, the applicable index for
such Interest Accrual Period and each succeeding Interest Accrual Period will be
based on LIBOR, as determined by Fannie Mae or its agent in accordance with the
Trust Agreement relating to such Series of Certificates. A change of index from
the Eleventh District Cost of Funds Index to an alternative index will result in
a change in the index level, and, particularly if LIBOR is the alternative
index, could increase its volatility.
The establishment of LIBOR by Fannie Mae or its agent and its calculation
of the rates of interest applicable to any COFI Class for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Treasury Index
Unless otherwise specified in the related Prospectus Supplement, on the
Treasury Index Determination Date for each Class as to which the applicable
interest rate is determined by reference to an index denominated as a Treasury
Index, Fannie Mae or its agent will ascertain the Treasury Index for Treasury
securities of the maturity and for the period (or, if applicable, date)
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Treasury Index for any period means the
average of the yield for each business day during the period specified therein
(and for any date means the yield for such date), expressed as a per annum
percentage rate, on (i) U.S. Treasury securities adjusted to the "constant
maturity" (as further described below) specified in such Prospectus Supplement
or (ii) if no "constant maturity" is so specified, U.S. Treasury securities
trading on the secondary market having the maturity specified in such Prospectus
Supplement, in each case as published by the Federal Reserve Board in its
Statistical Release No. H.15 (519). Statistical Release No. H.15 (519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551 (202) 452-3244. If
Fannie Mae or its agent has not yet received Statistical Release No. H.15 (519)
for such week, then it will use such Statistical Release from the immediately
preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, Fannie Mae will designate a new index based upon comparable data and
methodology. Fannie Mae's or its agent's determination of the Treasury Index, in
the absence of manifest error, will be final and binding.
Prime Rate
Unless otherwise specified in the related Prospectus Supplement, on the
Prime Rate Determination Date for each Class as to which the applicable interest
rate is determined by reference to an index denominated as the Prime Rate,
Fannie Mae or its agent will ascertain the Prime Rate for the related Interest
Accrual Period. Unless otherwise specified in the related Prospectus Supplement,
the Prime Rate for an Interest Accrual Period will be the "Prime Rate" as
published in the "Money Rates" section of The Wall Street Journal (or if not so
published, the "Prime Rate" as published in a newspaper of general circulation
selected by Fannie Mae in its sole discretion) on the related Prime Rate
Determination Date. If a prime rate range is given, then the average of such
range will be used. In the event that the Prime Rate is no longer published,
Fannie Mae will designate a new index based upon comparable data and
methodology. Fannie Mae's or its agent's determination of the Prime Rate, in the
absence of manifest error, will be final and binding.
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date for a Series of Certificates, Fannie Mae will be
obligated to make principal distributions in the manner described in the related
Prospectus Supplement to the Holders of the Certificates of such Series as to
which principal is then due, and each such Class of Certificates will be fully
paid no later than the Final Distribution Date for such Class specified in such
Prospectus Supplement.
Unless the related Prospectus Supplement provides otherwise, the total
amount of each principal distribution required to be made on the Certificates of
a Series on a Distribution Date will be equal to the sum of (i) the interest, if
any, that has accrued on the Accrual Classes of such Series during the preceding
Interest Accrual Period but is not yet payable; and (ii) an amount equal to all
distributions of principal of the MBS in the period (a "Deposit Period")
subsequent to the preceding Distribution Date (or subsequent to the Issue Date
in the case of the initial Distribution Date). The Prospectus
Supplement for each Series of Certificates will specify the manner in which the
amount of such aggregate principal distribution will be determined.
FANNIE MAE'S GUARANTY
Pursuant to its guaranty of the MBS, Fannie Mae will guaranty the timely
payment of scheduled installments of principal of and interest on the underlying
Mortgage Loans, whether or not received, together with the full principal
balance of any foreclosed Mortgage Loan, whether or not such balance is actually
recovered. In addition, pursuant to its guaranty of the Certificates, Fannie Mae
will be obligated to distribute on a timely basis to Holders of Certificates
required installments of principal and interest and to distribute the principal
balance of each Class of Certificates in full no later than the applicable Final
Distribution Date, whether or not sufficient funds are available in the MBS
Account. The obligations of Fannie Mae under its guaranties are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith and
credit of the United States. If Fannie Mae were unable to perform these guaranty
obligations, distributions to Certificateholders would consist solely of
payments and other recoveries on the underlying Mortgage Loans and, accordingly,
delinquencies and defaults on the Mortgage Loans would affect distributions to
Certificateholders.
DISTRIBUTIONS ON MBS, DEPOSITS IN THE MBS ACCOUNT
On the 25th day (or, if such 25th day is not a business day, on the first
business day next succeeding such 25th day) of each month, commencing in the
month of the initial Distribution Date, Fannie Mae will deposit or credit to one
or more accounts (collectively, the "MBS Account") an amount equal to the sum of
the distributions of the principal and interest on the MBS in the Series Trust.
Amounts credited to the MBS Account on a Distribution Date will be
available to be distributed to Holders on such date. Unless otherwise specified
in the Prospectus Supplement, certain amounts remaining in the MBS Account on
each Distribution Date following the required distribution of principal and
interest on the Certificates will be used to pay administrative expenses of the
Series Trust. Any amount remaining will be distributed to the Holders of
Certificates of the Class which constitutes the "residual interest" in the
applicable REMIC Trust.
The Trust Agreement permits Fannie Mae as Trustee to maintain the MBS
Account either (i) as a trust account with an eligible depository institution
(which account may contain other funds held by Fannie Mae in a trust capacity)
or (ii) as part of Fannie Mae's general assets, with appropriate entries being
made on its books and records designating the funds and investments credited to
the applicable REMIC Trust.
As noted above, Fannie Mae, as Trustee, has the option to maintain the MBS
Account as part of its general assets, by making appropriate entries on its
books and records designating the funds and investments credited to a REMIC
Trust. Although Fannie Mae is required to hold all such funds (and, upon deposit
in the MBS Account, the investment of such funds) for the account of
Certificateholders in the related REMIC Trust, the law applicable to a
liquidation, reorganization or similar proceeding involving the assets of Fannie
Mae is unclear and as a result no opinion can be rendered as to the status of
Certificateholders' interest in such funds and investments in the event of any
such proceeding.
REPORTS TO CERTIFICATEHOLDERS
As soon as practicable following the eleventh calendar day of each
month, Fannie Mae will publish or otherwise make available the REMIC Trust
Factor (carried to eight decimal places) for each Class of Certificates after
giving effect to the distribution of principal to be made on the following
Distribution Date (and the accretion of principal of any Accrual Classes). The
principal balance of a Certificate of any Class after giving effect to such
principal distribution (and accretion) will be the product of the applicable
REMIC Trust Factor and the applicable denomination or initial principal balance
of such Certificate. With respect to each distribution on Certificates of each
Class, Fannie Mae will cause to be forwarded to each Holder thereof a statement
setting forth the total principal and, interest distributions on such
Distribution Date with respect to the Certificates in each Class held by such
Holder. Fannie Mae also will furnish to each person who was a Certificateholder
at any time during a calendar year such statements and information as shall be
required to be furnished pursuant to the Internal Revenue Code of 1986, as
amended (the "Code").
Calculations with respect to amounts due to Certificateholders will be made
by Fannie Mae or on its behalf by another entity retained specifically for that
purpose.
THE MBS
Unless the related Prospectus Supplement provides otherwise, each MBS will
be backed by a Pool of Mortgage Loans that may consist of FHA/VA Mortgage Loans
or Conventional Mortgage Loans. In addition, up to 10% of the MBS by principal
balance may have pool numbers or legends denoting that the underlying Mortgage
Loans include any one of the following: relocation mortgage loans, cooperative
share mortgage loans, substantial buydown mortgage loans, biweekly mortgage
loans or mortgage loans that are assumable by a creditworthy transferee upon
transfer of the mortgaged property; however, such MBS, in the aggregate, may not
constitute more than 15% of the MBS underlying a Series of Certificates. The
general characteristics of the MBS are described in the MBS Prospectus, and
specific information regarding the pass-through rates of the MBS and the WACs
and WAMs of the Mortgage Loans underlying the MBS included in a Series Trust
will be contained in the Prospectus Supplement for the related Series of
Certificates.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments of the MBS underlying a Series of
Certificates, and therefore of distributions on such Certificates, is related
directly to the rate of payments of principal of the underlying Mortgage Loans,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments and liquidations resulting
from default, casualty or condemnation and payments made pursuant to any
guaranty of payment by, or option to repurchase of, Fannie Mae). In general,
when the level of prevailing interest rates declines sufficiently relative to
the interest rates on fixed-rate mortgage loans, the rate of prepayment is
likely to increase, although the prepayment rate is influenced by a number of
other factors, including general economic conditions and homeowner mobility. See
"Maturity and Prepayment Assumptions" in the MBS Prospectus.
Acceleration of mortgage payments as a result of transfers of the mortgaged
property is another factor affecting prepayment rates. The Mortgage Loans
underlying the MBS will generally provide by their terms that, in the event of
the transfer or prospective transfer of title to the underlying mortgaged
property, the full unpaid principal balance of the Mortgage Loan is due and
payable at the option of the holder. As set forth under "Description of
Certificates--Collection and Other Servicing Procedures" in the MBS Prospectus,
Fannie Mae is required to exercise its right to accelerate the maturity of
Mortgage Loans containing enforceable "due-on-sale" provisions upon certain
transfers of the mortgaged property.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. Unless otherwise specified in the related
Prospectus Supplement, the model used to measure prepayments will be the Public
Securities Association's standard prepayment model ("PSA"), which represents an
assumed rate of prepayment each month of the then outstanding principal balance
of a pool of new mortgage loans. PSA does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans underlying the MBS backing the Certificates of any
Series. 100% PSA assumes prepayment rates of 0.2% per annum of the then unpaid
principal balance of such pool of mortgage loans in the first month of the life
of such mortgage loans and an additional 0.2% per annum in each month thereafter
(for example, 0.4% per annum in the second month) until the 30th month.
Beginning in the 30th month and in each month thereafter during the life of such
mortgage loans, 100% PSA assumes a constant prepayment rate of 6% per annum.
Multiples may be calculated from this prepayment rate sequence. For example,
150% PSA assumes prepayment rates will be 0.3% per annum in month one, 0.6% per
annum in month two, and increasing by 0.3% in each succeeding month until
reaching a rate of 9% per annum in month 30 and remaining constant at 9% per
annum thereafter. Similarly, 200% PSA assumes prepayment rates will be 0.4% per
annum in month one, 0.8% per annum in month two, and increasing by 0.4% in each
succeeding month until reaching a rate of 12% per annum in month 30 and
remaining constant at 12% per annum thereafter. 0% PSA assumes no prepayments.
WEIGHTED AVERAGE LIFE AND FINAL DISTRIBUTION DATES
The weighted average life of a security refers to the average length of
time, weighted by principal, that will elapse from the date of issuance to the
date each dollar of principal is repaid to the investor. The weighted average
life of a Certificate is determined by (a) multiplying the amount of the
reduction, if any, of the principal balance of such Certificate from one
Distribution Date to the next Distribution Date by the number of years from the
date of issuance to the second such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in principal
balance of such Certificate referred to in clause (a). The weighted average life
of the Certificates will be influenced by, among other factors, the rate at
which principal payments (including scheduled payments, principal prepayments,
liquidations due to default, casualty and condemnation and payments made
pursuant to any guaranty of payment by, or option to repurchase of, Fannie Mae)
are made on the underlying Mortgage Loans. Prepayments on the Mortgage Loans
underlying the MBS will be applied to principal distributions on the
Certificates.
The Final Distribution Date for Certificates of a particular Class is the
date by which the principal balance is required to be fully paid and will be
specified in the related Prospectus Supplement. The Final Distribution Dates of
the respective Classes of Certificates of a Series will be determined so that
distributions on the underlying MBS will be sufficient to retire each such Class
on or before its Final Distribution Date without the necessity of any call on
Fannie Mae under its guaranty of the Certificates.
The Prospectus Supplement for each Series of Certificates will contain a
table setting forth the weighted average life of each Class of Certificates of
such Series, and the percentage of original principal amount of each Class of
Certificates of such Series that would be outstanding on specified Distribution
Dates for such Series, on the assumption that prepayments on the Mortgage Loans
underlying the related MBS are made at such rates and on such other assumptions
as may be specified in such Prospectus Supplement. The actual final distribution
of each Class of Certificates is likely to occur earlier, and could occur
significantly earlier, than its Final Distribution Date because (i) the rate of
distribution on the Certificates will be affected by the actual rate of payment
(including prepayments) of principal on the Mortgage Loans underlying the MBS
and (ii) some Mortgage Loans have stated maturities prior to the dates assumed
and will have interest rates lower than that assumed. However, there can be no
assurance that the final distribution of principal of any Class of Certificates
will be earlier than the Final Distribution Date specified for such Class in the
related Prospectus Supplement.
In general, when the level of prevailing interest rates declines
sufficiently relative to the interest rates on fixed-rate mortgage loans, the
rate of prepayments is likely to increase, although the prepayment rate is
influenced by a number of other factors, including general economic conditions
and homeowner mobility. See "Maturity and Prepayment Assumptions" in the MBS
Prospectus. Based upon published information and Fannie Mae's own experience,
the rate of prepayments on 30-year single-family loans has fluctuated
significantly in recent years. Accordingly, Fannie Mae cannot estimate what the
prepayment experience of the Mortgage Loans underlying the MBS in any Series
Trust will be.
Fannie Mae has agreed not to effect indirectly an early termination of
any Series Trust through the exercise of its right, as described in "Description
of Certificates--Termination" in the MBS Prospectus, to repurchase the Mortgage
Loans underlying any MBS in the Series Trust unless only one Mortgage Loan
remains in the Pool or the principal balance of such Pool at the time of
repurchase is less than one percent of the original principal balance of such
Pool. In addition, the Prospectus Supplement will describe the terms and
conditions of Fannie Mae's right, if any, to terminate the Series Trust by
purchasing the MBS included therein.
Acceleration of mortgage payments as a result of transfers of the mortgaged
property is another factor affecting prepayment rates. Conventional Mortgage
Loans may provide by their terms that in the event of the transfer or
prospective transfer of title to the underlying mortgaged property the full
unpaid principal balance of the Mortgage Loan is due and payable at the option
of the holder. FHA/VA Mortgage Loans contain no such "due-on-sale" provisions.
As set forth under "Description of Certificates--Collection and Other Servicing
Procedures" in the MBS Prospectus, Fannie Mae is required to exercise its right
to accelerate the maturity of Conventional Mortgage Loans containing enforceable
"due-on-sale" provisions upon certain transfers of the mortgaged property.
Consequently, transfers of the underlying mortgaged property may not affect
prepayments on FHA/VA Mortgage Loans to the same extent as on Conventional
Mortgage Loans with comparable interest rates.
REINVESTMENT RISK
Because the Mortgage Loans underlying the MBS may be prepaid at any time,
it is not possible to predict the rate at which distributions of principal of
the Certificates of any Series will be received. Accordingly, since prevailing
interest rates are subject to fluctuation, there can be no assurance that
investors in the Certificates of any Series will be able to reinvest the
distributions thereon at yields equaling or exceeding the yields on such
Certificates. It is possible that yields on any such reinvestments will be
lower, and may be significantly lower, than the yields on such Certificates.
Prospective investors in the Certificates should carefully consider the related
reinvestment risks in light of other investments that may be available to such
investors.
ADDITIONAL CHARACTERISTICS OF RESIDUAL CERTIFICATES
A Certificate of any Class that is designated in the Prospectus Supplement
as a residual interest in a REMIC Trust (a "Residual Certificate") may not be
transferred to a "disqualified organization" or any person who would hold a
Residual Certificate on behalf of a disqualified organization. For purposes of
the preceding sentence, a transfer includes any transfer of record or beneficial
ownership, whether pursuant to a purchase, a default under a secured lending
agreement or otherwise. The term "disqualified organization" includes the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Each transferee of a Residual Certificate will be
required to execute an affidavit, in a form acceptable to Fannie Mae, that: (i)
it is not a disqualified organization, (ii) it is not acquiring the Residual
Certificate for the account of a disqualified organization, (iii) it consents to
any amendment of the Trust Agreement (or the applicable Issue Supplement) that
shall be deemed necessary by Fannie Mae (upon advice of counsel) to constitute a
reasonable arrangement to ensure that the Residual Certificates will not be
owned directly or indirectly by a disqualified organization, (iv) no purpose of
the acquisition of the Residual Certificate is to avoid or impede the assessment
or collection of tax, (v) it understands that it may incur tax liabilities in
excess of any cash flows generated by the Residual Certificate, (vi) it intends
to pay taxes associated with holding the Residual Certificate as they become
due, and (vii) it will not transfer such Residual Certificate unless (a) it has
received from the transferee an affidavit containing these same seven
representations and (b) as of the time of the transfer, it does not have actual
knowledge that such affidavit is false. See "Certain Federal Income Tax
Consequences--Sales of Certificates--Residual Certificates Transferred to or
Held by Disqualified Organizations" below. Such transferee also must deliver a
properly executed Internal Revenue Service ("IRS") Form W-9 on which such
transferee provides its taxpayer identification number. In addition, a
pass-through entity (including a nominee) that holds a Residual Certificate may
be subject to additional taxes if a disqualified organization is a record holder
therein.
In addition, no transfer of record or beneficial ownership in a Residual
Certificate (whether pursuant to a purchase, a default under a secured lending
agreement or otherwise) will be allowed to any person that is not a "U.S.
Person" without the written consent of Fannie Mae. The term "U.S. Person" means
a citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income.
Under regulations issued by the Treasury Department on December 23, 1992
(the "Regulations"), a transfer of a "noneconomic residual interest" to a U.S.
Person will be disregarded for all federal tax purposes unless no significant
purpose of the transfer is to impede the assessment or collection of tax. A
Residual Certificate would be treated as constituting a noneconomic residual
interest unless, at the time of the transfer, (i) the present value of the
expected future distributions on the Residual Certificate is no less than the
product of the present value of the "anticipated excess inclusions" with respect
to such Certificate and the highest corporate rate of tax for the year in which
the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the applicable REMIC Trust, in an
amount sufficient to satisfy the liability for income tax on any "excess
inclusions" at or after the time when such liability accrues. Anticipated excess
inclusions are the excess inclusions that are anticipated to be allocated to
each calendar quarter (or portion thereof) following the transfer of a Residual
Certificate, determined as of the date such Certificate is transferred and based
on events that have occurred as of that date and on the Prepayment Assumption.
See "Certain Federal Income Tax Consequences--Taxation of Beneficial Owners of
Regular Certificates--Original Issue Discount" and "--Taxation of Beneficial
Owners of Residual Certificates--Excess Inclusions."
The Regulations provide that a significant purpose to impede the assessment
or collection of tax exists if, at the time of the transfer, a transferor of a
Residual Certificate has "improper knowledge" (i.e., either knew, or should have
known, that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC Trust). A transferor is presumed not to
have improper knowledge if (i) the transferor conducts, at the time of a
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor finds that the
transferee has historically paid its debts as they come due and finds no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the transferee makes certain
representations to the transferor in the affidavit relating to disqualified
organizations discussed above. Transferors of a Residual Certificate should
consult with their own tax advisors for further information regarding such
transfers.
Fannie Mae will provide to Holders of Residual Certificates of each Series
of Certificates (i) such information as is necessary to enable them to prepare
their federal income tax returns and (ii) any reports regarding the Certificates
of such Series that may be required under the Code.
THE TRUST AGREEMENT
The following summaries describe certain provisions of the Trust Agreement
not otherwise summarized in this Prospectus. Certain capitalized terms in these
summaries are used as defined in the Trust Agreement. These summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the more complete provisions of the Trust Agreement.
TRANSFER OF MBS TO A SERIES TRUST
The MBS transferred to a Series Trust will be identified in a Fannie Mae
Security Schedule appearing as an exhibit to the Trust Agreement for such Series
Trust. The MBS will be registered in Fannie Mae's name on the books of the
Federal Reserve Bank of New York and held for the Holders of Certificates by
Fannie Mae in its capacity as Trustee of such Series Trust.
CERTAIN MATTERS REGARDING FANNIE MAE
The Trust Agreement provides that Fannie Mae may not resign from its
obligations and duties thereunder, except upon determination that those duties
are no longer permissible under applicable law. No such resignation will become
effective until a successor has assumed Fannie Mae's obligations and duties
under the Trust Agreement; provided, however, that no successor will succeed to
Fannie Mae's guaranty obligations described above. Fannie Mae will continue to
be responsible under its guaranty notwithstanding any termination of its other
duties and responsibilities under the Trust Agreement. See "Rights Upon Event of
Default" below.
The Trust Agreement also provides that neither Fannie Mae nor any director,
officer, employee, or agent of Fannie Mae will be under any liability to the
Series Trust or to Certificateholders for any action taken, or for refraining
from the taking of any action, in good faith pursuant to the Trust Agreement or
for errors in judgment; provided, however, that neither Fannie Mae nor any such
person will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or gross negligence or by reason of
willful disregard of obligations and duties.
In addition, the Trust Agreement provides that Fannie Mae is not under any
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its responsibilities under the Trust Agreement and that in its
opinion may involve it in any expense or liability. Fannie Mae may, however, in
its discretion undertake any such legal action that it may deem necessary or
desirable in the interests of the Certificateholders. In such event, the legal
expenses and costs of such action will be expenses and costs of Fannie Mae.
Any corporation into which Fannie Mae may be merged or consolidated, or any
corporation resulting from any merger, conversion, or consolidation to which
Fannie Mae is a party, or any corporation succeeding to the business of Fannie
Mae, will be the successor of Fannie Mae under the terms of the Trust Agreement.
VOTING UNDER ANY MBS TRUST INDENTURE
As set forth under "Description of Certificates--Rights Upon Event of
Default" in the MBS Prospectus, the Holders of MBS evidencing Fractional
Undivided Interests aggregating not less than 25 percent of the related MBS
Trust Fund may terminate certain obligations and duties of Fannie Mae with
respect thereto if an Event of Default under the MBS Trust Indenture has
occurred and is continuing. The Trust Agreement provides that Holders of
Certificates may, upon the occurrence of an Event of Default with respect to an
MBS in the related Series Trust, take, or join in, any such action to the extent
of the product of the Fractional Undivided Interest represented by such MBS and
the percentage obtained by dividing the aggregate of the principal balances of
all Certificates of the related Series the Holders of which have taken or joined
in such action by the aggregate of the principal balances of all Certificates of
such Series.
As set forth under "Description of Certificates--Amendment" in the MBS
Prospectus, the Holders of MBS evidencing Fractional Undivided Interests
aggregating not less than 66 percent of the related MBS Trust Fund may consent
to certain amendments to the related Trust Indenture or waivers thereunder. The
Trust Agreement provides that the Trustee may not vote any MBS held in a Series
Trust in favor of such an amendment or modification except upon the direction of
the Holders of Certificates of the related Series having principal balances
aggregating not less than 66 percent of the aggregate of the principal balances
of all Certificates of such Series.
EVENTS OF DEFAULT
Events of Default under the Trust Agreement will consist of (i) any
failure by Fannie Mae to distribute to Holders of Certificates of any Class any
required distribution that continues unremedied for 15 days after the giving of
written notice of such failure to Fannie Mae by the Holders of Certificates
representing principal balances aggregating not less than five percent of the
aggregate principal balances of all Certificates of such Class; (ii) any failure
by Fannie Mae duly to observe or perform in any material respect any other of
its covenants or agreements in the Trust Agreement, which failure continues
unremedied for 60 days after the giving of written notice of such failure to
Fannie Mae by the Holders of Certificates of any Class representing principal
balances aggregating not less than 25 percent of the aggregate principal
balances of all of the Certificates of such Class; and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by or against Fannie Mae indicating its
insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Trust Agreement for any Series
Trust remains unremedied, the Holders of Certificates of any Class representing
principal balances aggregating not less than 25 percent of the aggregate of the
principal balances of all Certificates of such Class may, in writing, terminate
all of the obligations and duties of Fannie Mae as Trustee and in its corporate
capacity under the Trust Agreement in respect of such Series Trust (other than
its guaranty obligations described above, which continue notwithstanding any
such termination) and name and appoint, in writing, a successor to succeed to
all such responsibilities, duties and obligations of Fannie Mae thereunder
(other than Fannie Mae's guaranty obligations) and to the legal title to the MBS
and other assets held in the Series Trust.
AMENDMENT
The Trust Agreement as it relates to any REMIC Trust may be amended by
Fannie Mae and the Trustee without the consent of or notice to any of the
Certificateholders, for one or more of the following purposes: (i) to add to the
covenants of Fannie Mae; (ii) to evidence the succession of another party or
parties to Fannie Mae and the assumption by such successor or successors of the
obligations of Fannie Mae thereunder in its corporate capacity or in its
capacity as Trustee or in both such capacities; (iii) to eliminate any right
reserved to or conferred upon Fannie Mae in its corporate capacity; (iv) to make
provisions for the purpose of curing any ambiguity or correcting or
supplementing any provision in the Trust Agreement, provided such provisions do
not adversely affect the interest of any Certificateholder; or (v) to modify the
Trust Agreement to maintain the qualification of each REMIC Trust as a REMIC.
The Trust Agreement as it relates to a REMIC Trust also may be amended by
Fannie Mae with the consent of the Holders of Certificates of each Class
representing principal balances aggregating not less than 66 percent of the
aggregate principal balances of all Certificates of such Class so as to waive
compliance by Fannie Mae with any terms of the Trust Agreement, or to allow
Fannie Mae to eliminate, change, add to or modify the terms of the Trust
Agreement. However, no such waiver or amendment may, without the consent of all
Certificateholders, terminate or modify the guaranty obligations of Fannie Mae
or reduce the percentages of the Certificates the Holders of which are required
to consent to any waiver or amendments. In addition, no waiver or amendment
shall, without the consent of each Certificateholder affected thereby, reduce in
any manner the amount of, or delay the timing of, payments received on MBS or
other assets in the Series Trust that are required to be distributed on any
Certificate, or, without the consent of all Holders of any residual interest in
a REMIC Trust, adversely affect the rights of the Holders of such residual
interest.
TERMINATION
Each Series Trust will terminate upon the distribution to
Certificateholders of all required distributions of the principal of and
interest on the Certificates. In addition, the Prospectus Supplement will
describe the terms and conditions of Fannie Mae's right, if any, to terminate
the Series Trust by purchasing the MBS included therein. Fannie Mae has agreed
not to effect indirectly an early termination of any Series Trust through the
exercise of its right, as described in "Description of
Certificates--Termination" in the MBS Prospectus, to repurchase the Mortgage
Loans underlying any MBS in the Series Trust unless only one Mortgage Loan
remains in the Pool or the principal balance of such Pool at the time of
repurchase is less than one percent of the original principal balance of such
Pool.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated federal
income tax consequences to beneficial owners of the purchase, ownership and
disposition of the Certificates offered hereby. The discussion is based upon
laws, regulations, rulings and decisions now in effect, all of which are subject
to change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Certificates.
The Regulations provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of the
Certificates. Generally, the Regulations apply to any REMIC the "settlement
date" of which is on or after November 12, 1991. While certain material
provisions of the Regulations are discussed below, investors should consult
their own tax advisors regarding the possible application of the Regulations in
their specific circumstances.
REMIC ELECTION
An election will be made to treat each REMIC Trust as a REMIC under the
Code. Qualification as a REMIC requires ongoing compliance with certain
conditions. With respect to each Series of Certificates, Dewey Ballantine,
special tax counsel to Fannie Mae, will deliver its opinion to Fannie Mae that
(unless otherwise limited in the applicable Prospectus Supplement), assuming
compliance with the Trust Agreement, each REMIC Trust will be treated as a REMIC
for federal income tax purposes. The Certificates of each Class will be
designated as "regular interests" in a REMIC Trust, except that a separate Class
will be designated as the "residual interest" in each REMIC Trust. The
Prospectus Supplement for each Series of Certificates will state whether
Certificates of each Class will constitute a regular interest (a "Regular
Certificate") or a residual interest (a "Residual Certificate").
A REMIC Trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See "Taxes on a REMIC Trust" below. Generally, the total income of the
MBS in a Series Trust will be taxable to the beneficial owners of the
Certificates of that Series, as described below.
TAXATION OF BENEFICIAL OWNERS OF REGULAR CERTIFICATES
Except as indicated below in this federal income tax discussion, the
Regular Certificates will be treated for federal income tax purposes as debt
instruments issued by a REMIC on the date such Certificates are first sold to
the public (the "Settlement Date") and not as ownership interests in a REMIC or
its assets. Beneficial owners of Regular Certificates ("Regular Owners") that
otherwise report income under a cash method of accounting will be required to
report income with respect to such Certificates under an accrual method.
Original Issue Discount
All the Accrual Classes will be, and certain other Regular Certificates may
be, issued with "original issue discount" within the meaning of section 1273(a)
of the Code. Regular Owners should be aware that for federal income tax purposes
they must include in gross income original issue discount as it accrues under a
method that takes account of the compounding of interest, generally in advance
of receipt of the cash attributable to such income. Fannie Mae will supply, at
the time and in the manner required by the Internal Revenue Service (the "IRS"),
to Holders of Regular Certificates, brokers and middlemen information with
respect to the original issue discount accruing on the Regular Certificates.
In general, a Regular Certificate will be considered to be issued with
original issue discount equal to the excess, if any, of its "stated redemption
price at maturity" over its "issue price." The issue price of a Regular
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a substantial amount of the Regular Certificates was sold.
The issue price also includes any accrued interest attributable to the period
between the beginning of the first Interest Accrual Period and the Settlement
Date. The stated redemption price at maturity of a Regular Certificate that is a
Notional or Principal Only Certificate or that is or may be an Accrual
Certificate is equal to the sum of all distributions to be made under such
Regular Certificate. The stated redemption price at maturity of any other
Regular Certificate is its stated principal amount, plus an amount equal to the
excess (if any) of the interest payable on the first Distribution Date over the
interest that accrues for the period from the Settlement Date to the first
Distribution Date.
Notwithstanding the general definition, original issue discount will be
treated as zero in the case of a Regular Certificate if such discount is less
than 0.25 percent of the stated redemption price at maturity of such Certificate
multiplied by its weighted average life. The weighted average life of a Regular
Certificate is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the
Certificate, of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Settlement Date until the date
on which each such distribution is expected to be made under the assumption that
the Mortgage Loans underlying the MBS prepay at the rate specified in the
applicable Prospectus Supplement (the "Prepayment Assumption") by (ii) a
fraction, the numerator of which is the amount of such distribution and the
denominator of which is the Regular Certificate's stated redemption price at
maturity. If original issue discount is treated as zero under this rule, the
actual amount of original issue discount must be allocated to the principal
distributions on the Regular Certificate and, when each such distribution is
received, gain equal to the discount allocated to such distribution will be
recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules applicable to the Regular Certificates. Under these rules, (i) it is
anticipated that the amount and rate of accrual of original issue discount on
each Series of Regular Certificates will be based on (x) the Prepayment
Assumption, and (y) in the case of a Regular Certificate calling for a variable
rate of interest, an assumption that the value of the index upon which such
variable rate is based remains the same over the entire life of such
Certificate, and (ii) adjustments will be made in the amount of discount
accruing in each taxable year in which the actual prepayment rate differs from
the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
regulations will provide that the assumed prepayment rate must be the rate used
by the parties in pricing the particular transaction. Fannie Mae anticipates
that the Prepayment Assumption for each Series of Regular Certificates will be
consistent with this standard. Fannie Mae makes no representation, however, that
the Mortgage Loans underlying the MBS for a given Series will prepay at the rate
reflected in the Prepayment Assumption for that Series 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
Certificates.
Each Regular Owner must include in gross income the sum of the "daily
portions" of original issue discount on its Regular Certificate for each day
during its taxable year on which it held such Certificate. For this purpose, in
the case of an original Regular Owner, 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." In general, an accrual period for tax purposes is not the same as an
Interest Accrual Period but is a period that ends on a Distribution Date and
begins on the day immediately following the preceding accrual period or, in the
case of the first accrual period, on the day immediately following the
Settlement Date.
The portion of original issue discount treated as accruing for any
accrual period will equal the excess, if any, of (i) the sum of (A) the present
values of all the distributions remaining to be made on the Regular Certificate,
if any, as of the end of the accrual period and (B) the distribution made on
such Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (ii) the adjusted issue price of such
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
based on (i) the yield to maturity of the 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, (iii) the Prepayment Assumption, and (iv) in the case of a
Regular Certificate calling for a variable rate of interest, an assumption that
the value of the index upon which such variable rate is based remains the same
as its value on the Settlement Date over the entire life of such Certificate.
The adjusted issue price of a Regular Certificate at any time will equal the
issue price of such Certificate, increased by the aggregate amount of previously
accrued original issue discount with respect to such Certificate, and reduced by
the amount of any distributions made on such Certificate as of that time of
amounts included in the stated redemption price at maturity. The original issue
discount accruing during any accrual period will then be allocated ratably to
each day during the period to determine the daily portion of original issue
discount.
A subsequent purchaser of a Regular Certificate that purchases such
Certificate at a cost less than its remaining stated redemption price at
maturity also will be required to include in gross income for each day on which
it holds such Certificate, the daily portion of original issue discount with
respect to such Certificate (but reduced, if the cost of such Certificate to
such purchaser exceeds its adjusted issue price, by an amount equal to the
product of (i) such daily portion and (ii) a constant fraction, the numerator of
which is such excess and the denominator of which is the sum of the daily
portions of original issue discount on such Certificate for all days on or after
the day of purchase).
Certificates Purchased at a Premium
A purchaser of a Regular Certificate that purchases such Certificate at a
cost greater than its remaining stated redemption price at maturity will be
considered to have purchased such Certificate (a "Premium Certificate") at a
premium. Such a purchaser need not include in income any remaining original
issue discount and may elect, under section 171(c)(2) of the Code, to treat such
premium as "amortizable bond premium." If a Regular Owner makes such an
election, the amount of any interest payment that must be included in such
Regular Owner's income for each period ending on a Distribution Date will be
reduced by the portion of the premium allocable to such period based on the
Premium Certificate's yield to maturity. The legislative history of the Tax
Reform Act of 1986 states that such premium amortization should be made under
principles analogous to those governing the accrual of market discount (as
discussed below under "Market Discount"). If such election is made by the
Regular Owner, the election will also apply to all bonds (as well as all REMIC
regular interests) the interest on which is not excludible from gross income
("fully taxable bonds") held by the Regular Owner at the beginning of the first
taxable year to which the election applies and to all such fully taxable bonds
thereafter acquired by it, and is irrevocable without the consent of the IRS. If
such an election is not made, (i) such a Regular Owner must include the full
amount of each interest payment in income as it accrues, and (ii) the premium
must be allocated to the principal distributions on the Premium Certificate and,
when each such distribution is received, a loss equal to the premium allocated
to such distribution will be recognized. Any tax benefit from the premium not
previously recognized will be taken into account in computing gain or loss upon
the sale or disposition of the Premium Certificate.
Some Regular Certificates may provide for only nominal distributions of
principal in comparison to the distributions of interest thereon. It is possible
that the IRS or the Treasury Department may issue guidance excluding such
Certificates from the rules generally applicable to debt instruments issued at a
premium. In particular, it is possible that such a REMIC interest will be
treated as having original issue discount equal to the excess of the total
payments to be received thereon over its issue price. In such event, section
1272(a)(6) of the Code would govern the accrual of such original issue discount,
but a Regular Owner would recognize substantially the same income in any given
period as would be recognized if an election were made under section 171(c)(2)
of the Code. Unless and until the Treasury Department or the IRS publishes
specific guidance relating to the tax treatment of such
Certificates, Fannie Mae intends to furnish tax information to Holders of such
Certificates in accordance with the rules described in the preceding paragraph.
Market Discount
A Regular Owner that purchases a Regular Certificate at a market discount,
that is, at a purchase price less than the remaining stated redemption price at
maturity of such Certificate, or in the case of a Regular Certificate issued
with original issue discount, less than the adjusted issue price of such
Certificate, will be required to allocate each principal distribution first to
accrued market discount on the Regular Certificate, and recognize ordinary
income to the extent such distribution does not exceed the aggregate amount of
accrued market discount on such Certificate that was not previously included in
income. With respect to Regular Certificates that have unaccrued original issue
discount, such market discount must be included in income in addition to
original issue discount includible under the rules described above under
"Original Issue Discount." A Regular Owner that incurs or continues indebtedness
to acquire a Regular Certificate at a market discount may also be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income. In
general terms, market discount on a Regular Certificate may be treated as
accruing either (i) under a constant yield method, taking into account the
Prepayment Assumption, or (ii) in proportion to remaining accruals of original
issue discount, if any, or if none, in proportion to remaining distributions of
interest on the Regular Certificate. Fannie Mae will make available, as required
by the IRS, to Holders of Regular Certificates information necessary to compute
the accrual of market discount.
Notwithstanding the above rules, market discount on a Regular Certificate
will be considered to be zero if such discount is less than 0.25 percent of the
remaining stated redemption price at maturity of such Certificate multiplied by
its weighted average remaining life. Weighted average remaining life presumably
would be calculated in a manner similar to weighted average life, taking into
account payments (including prepayments) prior to the date of acquisition of the
Regular Certificate by the subsequent purchaser. If market discount on a Regular
Certificate is treated as zero under this rule, the actual amount of market
discount must be allocated to the remaining principal distributions on the
Regular Certificate and, when each such distribution is received, gain equal to
the discount allocated to such distribution will be recognized.
TAXATION OF BENEFICIAL OWNERS OF RESIDUAL CERTIFICATES
Daily Portions
Except as indicated below, a beneficial owner of a Residual Certificate
("Residual Owner") for a given REMIC Trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC Trust for each
day during a calendar quarter that the Residual Owner owned such Residual
Certificate. For this purpose, the daily portion shall be determined by
allocating to each day in the calendar quarter its ratable portion of the
taxable income or net loss of the REMIC Trust for such quarter and by allocating
the amount so allocated among the Residual Owners (on such day) in accordance
with their percentage 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.
The requirement that each Residual Owner report its daily portion of the
taxable income or net loss of the REMIC Trust will continue until there are no
Certificates of any Class outstanding, even though the Residual Owner may have
received full payment of the stated interest and principal on its Residual
Certificate.
Taxable Income or Net Loss of a REMIC Trust
The taxable income or net loss of a REMIC Trust will be the income from the
"qualified mortgages" it holds and any reinvestment earnings less deductions
allowed to the REMIC Trust. 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 the 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 any original issue
discount, but without regard to the investment interest limitation in section
163(d) of the Code) on the Regular Certificates (but not the Residual
Certificates), even though Regular Certificates are for non-tax purposes
certificates of beneficial ownership rather than indebtedness of a REMIC Trust.
Second, market discount or premium equal to the difference between the total
Stated Principal Balances of the qualified mortgages and the basis to the REMIC
Trust therein generally will be included in income (in the case of discount) or
deductible (in the case of premium) by the REMIC Trust as it accrues under a
constant yield method, taking into account the Prepayment Assumption. The basis
to a REMIC Trust in qualified mortgages is the aggregate of the issue prices of
all the Regular and Residual Certificates in the REMIC Trust on the Settlement
Date. If, however, a substantial amount of a Class of Regular or Residual
Certificates has not been sold to the public, then the fair market value of all
the Regular or Residual Certificates in that Class as of the date of the
Prospectus Supplement should be substituted for the issue price. Third, no item
of income, gain, loss or deduction allocable to a prohibited transaction (see
"Taxes on a REMIC Trust--Prohibited Transactions" below) will be taken into
account. Fourth, a REMIC Trust generally may not deduct any item that would not
be allowed in calculating the taxable income of a partnership by virtue of
section 703(a)(2) of the Code. Finally, the limitation on miscellaneous itemized
deductions imposed on individuals by section 67 of the Code will not be applied
at the REMIC Trust level to Fannie Mae's servicing and guaranty fees. (See,
however, "Pass-Through of Servicing and Guaranty Fees to Individuals" below.) In
addition, under the Regulations, any expenses that are incurred in connection
with the formation of a REMIC Trust and the issuance of the Regular and Residual
Certificates are not treated as expenses of the REMIC Trust for which a
deduction is allowed. If the deductions allowed to a REMIC Trust exceed its
gross income for a calendar quarter, such excess will be a net loss for the
REMIC Trust for that calendar quarter. The Regulations also provide that any
gain or loss to a REMIC Trust from the disposition of any asset, including a
qualified mortgage or "permitted investment" (as defined in section 860G(a)(5)
of the Code) will be treated as ordinary gain or loss.
A Residual Owner may be required to recognize taxable income without being
entitled to receive a corresponding amount of cash. This could occur, for
example, if the qualified mortgages are considered to be purchased by the REMIC
Trust at a discount, some or all of the Regular Certificates are issued at a
discount, and the discount included as a result of a prepayment on a Mortgage
Loan that is used to pay principal on the Regular Certificates exceeds the REMIC
Trust's deduction for unaccrued original issue discount relating to such Regular
Certificates. Taxable income may also be greater in earlier years because
interest expense deductions, expressed as a percentage of the outstanding
principal amount of the Regular Certificates, may increase over time as the
earlier Classes of Regular Certificates are paid, whereas interest income with
respect to any given Mortgage Loan underlying an MBS, expressed as a percentage
of the outstanding principal amount of that Mortgage Loan, will remain constant
over time.
Basis Rules and Distributions
A Residual Owner has an initial basis in its Residual Certificate equal to
the amount paid for such Residual Certificate. Such basis is increased by
amounts included in the income of the Residual Owner and decreased by
distributions and by any net loss taken into account with respect to such
Residual Certificate. A distribution on a Residual Certificate to a Residual
Owner is not included in gross income to the extent it does not exceed such
Residual Owner's basis in the Residual Certificate (adjusted as described above)
and, to the extent it exceeds the adjusted basis of the Residual Certificate,
shall be treated as gain from the sale of the Residual Certificate.
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 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 Residual Certificate.
Excess Inclusions
Any excess inclusions with respect to a 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 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 Residual Certificate at the beginning of the calendar quarter and
120 percent of the "Federal long-term rate" in effect on the Settlement Date,
based on quarterly compounding, and properly adjusted for the length of such
quarter. For this purpose, the adjusted issue price of a Residual Certificate as
of the beginning of any calendar quarter is equal to the issue price of the
Residual Certificate, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such Residual
Certificate before the beginning of such quarter. The issue price of a Residual
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a substantial amount of the Residual Certificates was
sold. The Federal long-term rate is a blend of current yields on Treasury
securities having a maturity of more than nine years, computed and published
monthly by the IRS. With respect to each Series of Certificates, if the Federal
long-term rate based on quarterly compounding that will be in effect on the
Settlement Date is available as of the date of the related Prospectus
Supplement, 120 percent of such rate will be set forth therein.
For Residual Owners that are thrift institutions described in section 593
of the Code, income from a Residual Certificate generally may be offset by
losses from other activities. Under the Regulations, such an organization is
treated as having applied its allowable deductions for the year first to offset
income that is not an excess inclusion and then to offset that portion of its
income that is an excess inclusion. For other Residual Owners, any excess
inclusions cannot be offset by losses from other activities. For Residual Owners
that are subject to tax only on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion of such Residual Owner is treated
as unrelated business taxable income. With respect to variable contracts (within
the meaning of section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The Regulations indicate that if a Residual Owner is a member of an
affiliated group filing a consolidated income tax return, the taxable income of
the affiliated group cannot be less than the sum of the excess inclusions
attributable to all residual interests in REMICs held by members of the
affiliated group. For a discussion of the effect of excess inclusions on certain
foreign investors that own Residual Certificates, see "Foreign
Investors--Residual Certificates" below.
The Regulations provide that an organization to which section 593 of the
Code applies and which is the beneficial owner of a Residual Certificate may not
use its allowable deductions to offset any excess inclusions with respect to
such Certificate if such Certificate does not have "significant value." For this
purpose, a Residual Certificate has significant value under the Regulations if
(i) its issue price is at least 2% of the aggregate of the issue prices of all
the Regular and Residual Certificates in that REMIC Trust and (ii) its
"anticipated weighted average life" is at least 20% of the "anticipated weighted
average life" of such REMIC Trust.
In determining whether a Residual Certificate has significant value,
the anticipated weighted average life of such Certificate is based on the
Prepayment Assumption and is determined as described in "Description of the
Certificates--Weighted Average Life and Final Distribution Dates" herein, except
that all anticipated payments on such Certificate are taken into account,
regardless of their designation as principal or interest. The anticipated
weighted average life of a REMIC Trust is the weighted average of the
anticipated weighted average lives of the Certificates. Such weighted average is
determined under the formula described in "Description of the
Certificates--Weighted Average Life and Final Distribution Dates" herein, with
two distinctions. First, the formula is applied by treating all payments taken
into account in computing the anticipated weighted average lives of the Regular
and Residual Certificates in the REMIC Trust as principal payments on a single
Regular Certificate. Second, for any Residual Certificate or for a Regular
Certificate that is an Interest Only Class or for which the issue price of the
Regular Certificate is greater than 125% of its specified principal amount, all
anticipated payments on that Residual or Regular Certificate, regardless of
their designation as principal or interest, are taken into account in computing
the anticipated weighted average life of the Certificate.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
Residual Certificate does not have "significant value." Although the Treasury
Department did not exercise this authority in the Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the Regulations and
discussed in the two preceding paragraphs would be applicable. If no such rule
is applicable, excess inclusions should be calculated as discussed above.
In the case of any Residual Certificates that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such Residual
Certificates reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, 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
Residual Certificate as if held directly by such shareholder. Similar rules will
apply in the case of regulated investment companies, common trust funds and
certain cooperatives that hold a Residual Certificate.
Pass-Through of Servicing and Guaranty Fees to Individuals
A Residual Owner who is an individual will be required to include in income
a share of Fannie Mae's servicing and guaranty fees. Such fees would include any
servicing and guaranty fees imposed at the MBS level. See "Description of
Certificates--Servicing Through Lenders" and "Certain Federal Income Tax
Consequences" in the MBS Prospectus. A deduction for such fees will be allowed
to such Owner only to the extent that such fees, along with certain of such
Owner's other miscellaneous itemized deductions exceed 2 percent of such Owner's
adjusted gross income. In addition, a Residual Owner may not be able to deduct
any portion of such fees in computing such Residual Owner's alternative minimum
tax liability. A Residual Owner's share of such fees will generally be
determined by (i) allocating the amount of such expenses for each calendar
quarter on a pro rata basis to each day in the calendar quarter, and (ii)
allocating the daily amount among the Owners in proportion to their respective
holdings on such day.
SPECIAL TAX ATTRIBUTES
Regular and Residual Certificates will be "regular or residual interests in
a REMIC" within the meaning of section 7701(a)(19)(C)(xi) of the Code,
"qualifying real property loans" within the meaning of section 593(d) of the
Code and "real estate assets" within the meaning of section 856(c)(5)(A) of the
Code. If at any time during a calendar year less than 95 percent of the assets
of a REMIC Trust consist of qualified mortgages, then the portion of the Regular
and Residual Certificates that are qualifying assets under those sections during
such calendar year may be limited to the portion of the assets of such REMIC
Trust that are qualified mortgages. Similarly, income on the Regular and
Residual Certificates will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of section 856(c)(3)(B) of the
Code, subject to the same limitation as set forth in the preceding sentence. For
purposes of applying this limitation, a REMIC Trust should be treated as owning
the assets represented by the qualified mortgages. The assets of the Series
Trust will include, in addition to MBS representing Mortgage Loans, payments on
MBS held pending distribution on the Regular and Residual Certificates and any
reinvestment income thereon. Regular and Residual Certificates held by a
financial institution to which section 585, 586 or 593 of the Code applies will
be treated as evidences of indebtedness for purposes of section 582(c)(1) of the
Code. Regular Certificates will also be "qualified mortgages" within the meaning
of section 860G(a)(3) of the Code with respect to other REMICs.
TAXES ON A REMIC TRUST
Prohibited Transactions
The Code imposes a tax on a REMIC equal to 100 percent of the net income
derived from "prohibited transactions." In general, a prohibited transaction
means the disposition of a qualified mortgage other than pursuant to certain
specified exceptions, the receipt of investment income from a source other than
a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or the disposition of an asset purchased with the
payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day
The Code imposes a tax on a REMIC equal to 100 percent of the value of any
property contributed to the REMIC after the "startup day" (generally the same as
the Settlement Date). Exceptions are provided for cash contributions to a REMIC
(i) during the three month period beginning on the startup day, (ii) made to a
qualified reserve fund by a Holder of a residual interest, (iii) in the nature
of a guarantee, (iv) made to facilitate a qualified liquidation or clean-up
call, and (v) as otherwise permitted by Treasury regulations.
Net Income from Foreclosure Property
The Code imposes a tax on a REMIC equal to the highest corporate rate on
"net income from foreclosure property." The terms "foreclosure property" (which
includes property acquired by deed in lieu of foreclosure) and "net income from
foreclosure property" are defined by reference to the rules applicable to real
estate investment trusts. Generally, foreclosure property would be treated as
such for a period of two years, with possible extensions. Net income from
foreclosure property generally means gain from the sale of foreclosure property
that is inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Application to a REMIC Trust
It is not anticipated that a REMIC Trust will engage in any transactions
that will give rise to a tax on the REMIC Trust. In any event, pursuant to its
guaranty obligations, Fannie Mae will make distributions on the Regular
Certificates and Residual Certificates without offset or deduction for any tax
imposed on the REMIC Trust.
SALES OF CERTIFICATES
In General
Except as provided below, if a Regular or Residual Certificate is sold, the
seller will recognize gain or loss equal to the difference between the amount
realized in the sale and its adjusted basis in the Certificate. The adjusted
basis of a Regular Certificate generally will equal the cost of such Certificate
to the seller, increased by any original issue discount or market discount
included in the seller's gross income with respect to such Certificate and
reduced by distributions on such Certificate previously received by the seller
of amounts included in the stated redemption price at maturity and by any
premium that has reduced the seller's interest income with respect to such
Certificate. The adjusted basis of a Residual Certificate is determined as
described above under "Taxation of Beneficial Owners of Residual
Certificates--Basis Rules and Distributions." Except as provided in the
following paragraph or under section 582(c) of the Code, any such gain or loss
will be capital gain or loss, provided such Certificate is held as a "capital
asset" (generally, property held for investment) within the meaning of section
1221 of the Code.
Gain from the sale of a Regular Certificate that might otherwise be
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 the income of the Regular Owner had income accrued at a rate equal
to 110 percent of the "applicable Federal rate" (generally, an average of
current yields on Treasury securities) as of the date of purchase over (ii) the
amount actually includible in such Regular Owner's income. In addition, gain
recognized on such a sale by a Regular Owner who purchased a Regular Certificate
at a market discount would also be taxable as ordinary income in an amount not
exceeding the portion of such discount that accrued during the period such
Certificate was held by such Regular Owner, reduced by any market discount
includible in income under the rules described above under "Taxation of
Beneficial Owners of Regular Certificates--Market Discount."
If a Residual Owner sells its Residual Certificate at a loss, the loss will
not be recognized if, within six months before or after the sale of the Residual
Certificate, such Residual Owner purchases another residual interest in any
REMIC or any interest in a taxable mortgage pool (as defined in section 7701(i)
of the Code) comparable to a residual interest in a REMIC. Such disallowed loss
would 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 this rule may be modified by Treasury regulations, no such
regulations have yet been published.
Residual Certificates Transferred to or Held by Disqualified Organizations
Section 860E(e) of the Code imposes a substantial tax, payable by the
transferor (or, if a transfer is through a broker, nominee, or other middleman
as the transferee's agent, payable by that agent) upon any transfer of a
Residual Certificate to a disqualified organization and upon a pass-through
entity (including regulated investment companies, real estate investment trusts,
common trust funds, partnerships, trusts, estates, certain cooperatives, and
nominees) that owns a Residual Certificate if such pass-through entity has a
disqualified organization as a record holder. For purposes of the preceding
sentence, a transfer includes any transfer of record or beneficial ownership,
whether pursuant to a purchase, a default under a secured lending agreement or
otherwise. The term "disqualified organization" is defined above under
"Description of the Certificates--Additional Characteristics of Residual
Certificates."
A transferor of a Residual Certificate (or an agent of a transferee of a
Residual Certificate, as the case may be) will be relieved of such tax liability
if (i) the transferee furnishes to the transferor (or the transferee's agent) an
affidavit that the transferee is not a disqualified organization, and (ii) the
transferor (or the transferee's agent) does not have actual knowledge that the
affidavit is false at the time of the transfer. Similarly, no such tax will be
imposed on a pass-through entity for a period with respect to an interest
therein owned by a disqualified organization if (i) the record holder of such
interest furnishes to the pass-through entity an affidavit that it is not a
disqualified organization, and (ii) during such period, the pass-through entity
has no actual knowledge that the affidavit is false.
TERMINATION
In general, no special tax consequences will apply to a Regular Owner upon
the termination of a REMIC Trust by virtue of the final payment or liquidation
of the last Mortgage Loan underlying an MBS remaining in the Series Trust. If a
Residual Owner's adjusted basis in its 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 would appear that the Residual Owner is entitled to a loss equal
to the amount of such excess.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
For purposes of the administrative provisions of the Code, each REMIC
Trust will be treated as a partnership and the Residual Owners will be treated
as partners. Fannie Mae will prepare, sign and file federal income tax returns
for each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, Fannie Mae will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of Residual
Certificates in a REMIC Trust, information necessary to compute the daily
portions of the taxable income (or net loss) of such REMIC Trust for each day
during such year. Fannie Mae will also act as the tax matters partner for each
REMIC Trust, either in its capacity as an Owner of a Residual Certificate or in
a fiduciary capacity. Each Residual Owner, by the acceptance of its Residual
Certificate, agrees that Fannie Mae will act as its fiduciary in the performance
of any duties required of it in the event that it is the tax matters partner.
Each Residual Owner is required to treat items on its return consistently
with the treatment on the return of the REMIC Trust, unless the Residual Owner
either files a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC Trust.
The IRS may assert a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at the
REMIC Trust level. Unless otherwise specified in the Prospectus Supplement,
Fannie Mae does not intend to register any REMIC Trust as a tax shelter pursuant
to section 6111 of the Code.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Regular and Residual 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 distributions 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 distributions that is required to supply information
but that does not do so in the proper manner.
FOREIGN INVESTORS
Regular Certificates
Distributions made on a Regular Certificate to, or on behalf of, a Regular
Owner that is not a U.S. Person (a "Non-U.S. Person") generally will be exempt
from U.S. federal income and withholding taxes, provided (a) the Regular Owner
is not subject to U.S. tax as a result of a connection to the United States
other than ownership of the Certificate, (b) the Regular Owner signs a statement
under penalties of perjury that certifies that such Regular Owner is a Non-U.S.
Person, and provides the name and address of such Regular Owner, and (c) the
last U.S. Person in the chain of payment to the Regular Owner receives such
statement from such Regular Owner or a financial institution holding on its
behalf and does not have actual knowledge that such statement is false. Regular
Owners should be aware that the IRS might take the position that this exemption
does not apply to a Regular Owner that also owns 10 percent or more of the
Residual Certificates or of the voting stock of Fannie Mae, or to a Regular
Owner that is a "controlled foreign corporation" described in section
881(c)(3)(C) of the Code.
Residual Certificates
Amounts distributed to a Residual Owner that is a Non-U.S. Person generally
will be treated as interest for purposes of applying the 30 percent (or lower
treaty rate) withholding tax on income that is not effectively connected with a
U.S. trade or business. Temporary Treasury Regulations clarify that amounts not
constituting excess inclusions that are distributed on a Residual Certificate to
a Non-U.S. Person generally will be exempt from U.S. federal income and
withholding taxes, subject to the same conditions applicable to distributions on
Regular Certificates, as described above, but only to the extent that the
obligations directly underlying the REMIC Trust that issued the Residual
Certificate (e.g., Mortgage Loans or regular interests in another REMIC) were
issued after July 18, 1984. In no case will any portion of REMIC income that
constitutes an excess inclusion be entitled to any exemption from the
withholding tax or a reduced treaty rate for withholding. See "Taxation of
Beneficial Owners of Residual Certificates--Excess Inclusions.
LEGAL INVESTMENT CONSIDERATIONS
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may be
subject to restrictions on investment in certain Classes of the Certificates of
a Series. Any financial institution that is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or other federal or state
agencies with similar authority should review any applicable rules, guidelines
and regulations prior to purchasing the Certificates of a Series. Financial
institutions should review and consider the applicability of the Federal
Financial Institutions Examination Council Supervisory Policy Statement on
Securities Activities (to the extent adopted by their respective federal
regulators), which, among other things, sets forth guidelines for investing in
certain types of mortgage related securities, including securities such as the
Certificates. In addition, financial institutions should consult their
regulators concerning the risk-based capital treatment of any Certificate.
Investors should consult their own legal advisors in determining whether and to
what extent the Certificates of a Series constitute legal investments or are
subject to restrictions on investment.
LEGAL OPINION
Any purchaser of Certificates will be furnished upon request an opinion by
the General Counsel or Deputy General Counsel of Fannie Mae as to the validity
of the Certificates and the Trust Agreement.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements, as well as on collective investment
funds and separate accounts in which such plans or arrangements are invested
(all of which are hereinafter referred to as a "Plan") and on persons who are
fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause a Plan to acquire any Certificates of a Series would be required to
determine whether such an investment is permitted under the governing Plan
instruments and is prudent and appropriate for the Plan in view of its overall
investment policy and the composition and diversification of its portfolio. In
addition, ERISA and the Code prohibit certain transactions involving the assets
of a Plan and "disqualified persons" (within the meaning of the Code) and
"parties in interest" (within the meaning of ERISA) who have certain specified
relationships to the Plan. Therefore, a Plan fiduciary considering an investment
in Certificates of a Series should also consider whether such an investment
might constitute or give rise to a prohibited transaction under ERISA or the
Code.
The United States Department of Labor ("Labor") issued a final
regulation on November 13, 1986, which provides that in the case where a Plan
acquires a "guaranteed governmental mortgage pool certificate" then, for
purposes of the fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of the Code, the Plan's assets include the certificate
and all of its rights with respect to such certificate under applicable law, but
do not, solely by reason of the Plan's holding of such certificate, include any
of the mortgages underlying such certificate. Under the Regulation, the term
"guaranteed governmental mortgage pool certificate" is specifically defined to
include a certificate "backed by, or evidencing an interest in specified
mortgages or participation interests therein" and with respect to which interest
and principal payable pursuant to the certificate are guaranteed by Fannie Mae.
The effect of the Regulation is to make clear that the sponsor (that is, the
entity that organizes and services the trust, in this case Fannie Mae), the
trustee, and other persons, in providing services with respect to the assets in
the trust, would not be subject to the fiduciary responsibility provisions of
Title I of ERISA, nor be subject to the prohibited transaction provisions of
section 4975 of the Code, merely by reason of the Plan's investment in a
certificate. At the time the Regulation was originally issued, certificates
similar to the Certificates were not in existence. However, Fannie Mae has been
advised by its counsel, Brown & Wood, that the Certificates qualify as
"guaranteed governmental mortgage pool certificates," and thus the acquisition
and holding of the Certificates by Plans should not be prohibited either by
ERISA or related provisions of the Code.
<PAGE>
GLOSSARY
ACCRETION DIRECTED CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 8.
ACCRUAL CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
ADJUSTED WAM: The WAM of the Mortgage Loans in each Pool underlying a
Series of Certificates at the issue date of the related MBS, less the number of
months elapsed from such issue date through the Issue Date for such Series of
Certificates.
CAGE: The weighted average calculated loan age of the Mortgage Loans in
each Pool underlying a Series of Certificates. The CAGE of such Mortgage Loans
will be determined by subtracting the original WAM for such Pool from the
original term to maturity (in months) of such Mortgage Loans, and adding thereto
the number of months elapsed since the issue date of the related MBS.
FIXED RATE CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
FLOATING RATE CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
INDEX ALLOCATION CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 9.
INTEREST ONLY CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
INVERSE FLOATING RATE CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
LIBOR DETERMINATION DATE: Unless otherwise specified in the related
Prospectus Supplement, the second business day preceding the first day of each
Interest Accrual Period (other than the initial Interest Accrual Period) for the
related Class or Classes of Certificates. Unless otherwise specified in the
related Prospectus Supplement, for purposes of calculating LIBOR, "business day"
means a day on which banks are open for dealing in foreign currency and exchange
in London, Boston and New York City.
LIQUID ASSET CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
NON-STICKY JUMP CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 8.
NOTIONAL CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 9.
PAC CLASS: As defined herein under "Description of the Certificates--Class
Definitions and Abbreviations" on page 9.
PARTIAL ACCRUAL CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
PRIME RATE DETERMINATION DATE: Unless otherwise specified in the related
Prospectus Supplement, the second business day preceding the first day of each
Interest Accrual Period (other than the initial Interest Accrual Period) for the
related Class or Classes of Certificates.
PRINCIPAL ONLY CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 10.
RETAIL CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 11.
SCHEDULED CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 9.
SEQUENTIAL PAY CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 9.
STICKY JUMP CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 9.
STRIP CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 9.
SUPPORT CLASS: As defined herein under "Description of the
Certificates--Class Definitions and Abbreviations" on page 9.
TAC CLASS: As defined herein under "Description of the Certificates--Class
Definitions and Abbreviations" on page 9.
TREASURY INDEX DETERMINATION DATE: Unless otherwise specified in the
related Prospectus Supplement, the second business day preceding the first day
of each Interest Accrual Period (other than the initial Interest Accrual Period)
for the related Class or Classes of Certificates.
WAC: The weighted average coupon of the Mortgage Loans in each Pool
underlying a Series of Certificates.
WAM: The weighted average remaining term to maturity (in months) of the
Mortgage Loans in each Pool underlying a Series of Certificates.
Exhibit II
Offering Circular Supplement
dated October 15, 1996
to
Offering Circular
dated October 1, 1995
relating to
Federal Home Loan Mortgage Corporation
Multiple Mortgage Participation Certificates
Callable Pass-Through Certificates and Modifiable
and Combinable REMIC Certificates, Series 1910
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
OFFERING CIRCULAR SUPPLEMENT
(TO OFFERING CIRCULAR DATED OCTOBER 1, 1995)
$824,480,845 [FREDDIE MAC LOGO]
FEDERAL HOME LOAN MORTGAGE CORPORATION
MULTICLASS MORTGAGE PARTICIPATION CERTIFICATES, CALLABLE PASS-THROUGH
CERTIFICATES
AND MODIFIABLE AND COMBINABLE REMIC CERTIFICATES, SERIES 1910
The Federal Home Loan Mortgage Corporation ("Freddie Mac") is offering its
Multiclass Mortgage Participation Certificates of the above Series (the
"Multiclass PCs"). The Multiclass PCs will consist of "Classes" that will
receive payments from the cash flows provided by the four groups (each, an
"Asset Group") of Freddie Mac Multiclass Mortgage Participation Certificates and
"PCs" (collectively, the "Assets") shown under "Terms Sheet -- The Assets" in
this Supplement.
The Assets are, or are backed by, Freddie Mac Gold PCs and/or Gold Giant PCs
(the "PCs") with the per annum interest rates shown under "Terms
Sheet -- Mortgage Characteristics" in this Supplement. Underlying the PCs are
pools of fixed-rate, first lien, residential mortgages and mortgage
participations (the "Mortgages"). See "General Information -- Structure of
Transaction" and "-- The Mortgages" in this Supplement.
Freddie Mac is also offering certain Classes of "Callable Pass-Through
Certificates" ("CPCs"). A related pair of CPCs, consisting of a "Callable Class"
and a "Call Class," will represent the entire beneficial interest in a related
Class of Multiclass PCs as described in this Supplement. The "Holders" of each
Callable Class will be entitled to all of the payments on the related Class of
Multiclass PCs. As described in this Supplement, the Holder of each Call Class
(i) will not receive payments of principal or interest, (ii) will have the right
to direct Freddie Mac to redeem, on any "Payment Date" beginning in March 1997,
all and not less than all of the related Callable Class at a "Redemption Price"
equal to 100% of its unpaid principal amount, plus interest to the date of
redemption, calculated as described in this Supplement, and (iii) after payment
to Freddie Mac of the "Redemption Amount" for redemption of the related Callable
Class and an exchange fee, will be entitled to receive from Freddie Mac, in
exchange for the Holder's Call Class, the related Class of Multiclass PCs. See
"Redemption and Exchange" in this Supplement.
Certain of the Classes of Multiclass PCs of this Series may, upon notice and
payment of an exchange fee, be exchanged for Classes (each, a "MACR Class") of
Modifiable and Combinable REMIC Certificates ("MACR Certificates") as provided
in this Supplement. Each MACR Certificate issued in such an exchange will
represent a proportionate beneficial ownership interest in, and will be entitled
to receive a proportionate amount of the cash flow from, the related Classes of
Multiclass PCs. The characteristics of the MACR Classes are set forth in
Appendix 1 to this Supplement. As used in this Supplement, unless the context
requires otherwise, the term "Securities" includes Multiclass PCs, CPCs and MACR
Certificates and the term "Classes" includes the Classes of Multiclass PCs,
Classes of CPCs and the MACR Classes. See "Modification and Combination" in this
Supplement and Appendix 1 to this Supplement.
Freddie Mac guarantees to each "Holder" of a Security, other than a Call
Class, (i) the timely payment of interest at the applicable "Class Coupon" and
(ii) the payment of the principal amount of the Holder's Security as described
in this Supplement. Freddie Mac guarantees to the Holder of each Call Class all
proceeds due such Holder upon exercise of its right to cause Freddie Mac to
redeem the related Callable Class as described under "Redemption and Exchange"
in this Supplement.
Freddie Mac will make interest and principal payments on each monthly
"Payment Date," beginning December 15, 1996, on the Classes entitled to such
payments. See "Payments" in this Supplement.
This Series will involve the creation of an "Upper-Tier REMIC Pool" and a
"Lower-Tier REMIC Pool." Elections will be made to treat both REMIC Pools as
"real estate mortgage investment conduits" ("REMICs") pursuant to the Internal
Revenue Code. The R and RS Classes will be "Residual Classes" and the other
Classes of Multiclass PCs will be "Regular Classes." The Residual Classes will
be subject to transfer restrictions. See "Certain Federal Income Tax
Consequences" in this Supplement and in the Multiclass PC Offering Circular.
THE RISKS ASSOCIATED WITH THE SECURITIES MAY MAKE THEM UNSUITABLE FOR SOME
INVESTORS. SEE PAGE S-2 AND "PREPAYMENT AND YIELD ANALYSIS" IN THIS SUPPLEMENT.
INVESTORS SHOULD READ THIS SUPPLEMENT IN CONJUNCTION WITH THE DOCUMENTS
LISTED AT THE BOTTOM OF PAGE S-2.
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF THE SECURITIES ARE
OBLIGATIONS OF FREDDIE MAC ONLY. THE SECURITIES, INCLUDING ANY INTEREST THEREON,
ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT CONSTITUTE DEBTS OR
OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF THE UNITED
STATES OTHER THAN FREDDIE MAC. INCOME ON THE SECURITIES HAS NO EXEMPTION UNDER
FEDERAL LAW FROM FEDERAL, STATE OR LOCAL TAXATION. THE SECURITIES ARE EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE
"EXEMPTED SECURITIES" WITHIN THE MEANING OF THE SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
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CLASSES OF ORIGINAL WEIGHTED AVERAGE
MULTICLASS PRINCIPAL PRINCIPAL OR CLASS INTEREST CUSIP FINAL PAYMENT LIFE UNDER
PCS AND CPCS(1) AMOUNT(2) OTHER TYPE(3) COUPON TYPE(3) NUMBER DATE(4) SCENARIO III(5)
- ---------------------------- ------------- ------ ----------- ---------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
A .............. $ 56,474,000 PAC 6.75% FIX 3133T8 J B 4 September 15, 2020 3.9 Yrs
AA ............. 28,569,000 PAC 6.50 FIX 3133T8 J C 2 December 15, 2008 1.0
AB ............. 26,556,000 PAC 6.50 FIX 3133T8 J D 0 April 15, 2014 2.5
AC ............. 10,815,000 PAC 6.50 FIX 3133T8 J E 8 October 15, 2015 3.5
AD ............. 24,142,000 PAC 6.00 FIX 3133T8 J F 5 September 15, 2018 4.5
AE ............. 24,726,000 PAC 6.50 FIX 3133T8 J G 3 December 15, 2020 6.0
AG ............. 33,774,000 PAC 7.00 FIX 3133T8 J H 1 June 15, 2023 8.0
AH ............. 32,666,000 PAC 6.50 FIX 3133T8 J J 7 May 15, 2025 11.0
AJ ............. 17,550,000 PAC 7.00 FIX 3133T8 J K 4 April 15, 2026 15.0
AK ............. 12,359,000 PAC 7.00 FIX 3133T8 J L 2 November 15, 2026 21.0
AL ............. 8,470,000 AD/SCH 7.00 FIX 3133T8 J M 0 August 15, 2007 3.5
AM.............. 9,300,000 SCH 7.25 FIX 3133T8 J N 8 January 15, 2026 11.9
AN ............. 5,060,200 SUP 7.50 FIX 3133T8 J P 3 August 15, 2025 1.0
AO ............. 3,263,000 SUP 7.50 FIX 3133T8 J Q 1 October 15, 2025 2.9
AP ............. 1,728,000 SUP 7.50 FIX 3133T8 J R 9 November 15, 2025 3.9
AQ ............. 48,000 SUP 7.50 FIX 3133T8 J S 7 May 15, 2026 10.2
AR ............. 1,020,400 SCH 7.25 FIX 3133T8 J T 5 February 15, 2026 11.9
AS ............. 1,964,000 SUP 7.50 FIX 3133T8 J U 2 September 15, 2025 2.1
B .............. 87,324,700 SUP 6.75 FIX 3133T8 J V 0 November 15, 2023 4.4
D .............. 26,113,000 SEQ 8.00 FIX 3133T8 J X 6 November 15, 2024 12.0
F .............. 179,748,300 TAC (6) FLT 3133T8 K E 6 November 15, 2023 4.2
FA ............. 15,169,722 SC/PT (6) FLT 3133T8 K F 3 August 15, 2026 20.7
FB ............. 40,623,157 SUP (6) FLT 3133T8 K G 1 March 15, 2024 10.0
FC ............. 13,287,555 SUP (6) FLT 3133T8 K H 9 November 15, 2026 21.8
FQ ............. 9,510,000 SUP (6) FLT 3133T8 K J 5 May 15, 2026 10.2
IB ............. 8,229,812 NTL(AD/SEQ) 8.00 FIX/IO 3133T8 K M 8 December 15, 2011 --
IC ............. 12,258,285 NTL(PAC) 7.00 FIX/IO 3133T8 K N 6 May 15, 2025 --
<CAPTION>
CLASSES OF ORIGINAL WEIGHTED AVERAGE
MULTICLASS PRINCIPAL PRINCIPAL OR CLASS INTEREST CUSIP FINAL PAYMENT LIFE UNDER
PCS AND CPCS(1) AMOUNT(2) OTHER TYPE(3) COUPON TYPE(3) NUMBER DATE(4) SCENARIO III(5)
- ---------------------------- ------------- ------ ----------- ---------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
PA ............. $ 6,277,178 SC/PT 0.00% PO 3133T8 K Q 9 March 15, 2023 14.8 Yrs
PB ............. 2,045,400 CPT 0.00 PO 3133T8 K R 7 May 15, 2026 7.1
PO ............. 7,616,843 SUP 0.00 PO 3133T8 K S 5 March 15, 2024 10.0
S .............. 6,038,419 NTL(TAC) (6) INV/IO 3133T8 K V 8 November 15, 2023 --
SA ............. 3,033,945 SC/PT (6) INV 3133T8 K W 6 August 15, 2026 20.7
SB ............. 179,748,300 NTL(TAC) (6) INV/IO 3133T8 K X 4 November 15, 2023 --
SC ............. 40,623,157 NTL(SUP) (6) INV/IO 3133T8 K Y 2 March 15, 2024 --
SD ............. 3,796,445 SUP (6) INV 3133T8 K Z 9 November 15, 2026 21.8
SE ............. 6,277,178 SC/NTL(PT) (6) INV/IO/DLY 3133T8 L 2 1 March 15, 2023 --
SQ ............. 1,902,000 SUP (6) INV 3133T8 L 5 4 May 15, 2026 10.2
VA ............. 22,826,000 AD/SEQ 6.50 FIX 3133T8 L 6 2 November 15, 2003 3.8
VC ............. 14,725,000 AD/SEQ 7.00 FIX 3133T8 L 7 0 November 15, 2006 8.5
VD ............. 33,749,000 AD/SEQ 7.50 FIX 3133T8 L 8 8 December 15, 2011 12.3
VE ............. 2,984,000 AD/LIQ 7.00 FIX 3133T8 L 9 6 November 15, 2001 2.6
VG ............. 1,504,000 AD 7.00 FIX 3133T8 L A 3 November 15, 2003 6.0
VH ............. 3,638,000 AD 7.00 FIX 3133T8 L B 1 October 15, 2007 9.0
VJ ............. 4,431,000 AD 7.00 FIX 3133T8 L C 9 May 15, 2011 12.8
ZU ............. 13,000,000 SEQ 8.00 FIX/Z 3133T8 L K 1 November 15, 2026 21.9
ZA ............. 13,000,000 CALLABLE/SEQ 8.00 FIX/Z 3133T8 L E 5 November 15, 2026 21.9
ZT ............. 13,000,000 CALL -- -- 3133T8 L J 4 November 15, 2026 --
ZV ............. 17,800,000 SEQ 8.00 FIX/Z 3133T8 L L 9 October 15, 2022 15.4
Z .............. 17,800,000 CALLABLE/SEQ 8.00 FIX/Z 3133T8 L D 7 October 15, 2022 15.4
ZO ............. 17,800,000 CALL -- -- 3133T8 L H 8 October 15, 2022 --
ZB ............. 7,720,000 SCH 7.00 FIX/Z 3133T8 L F 2 September 15, 2025 3.5
ZC ............. 7,171,000 SCH 7.00 FIX/Z 3133T8 L G 0 November 15, 2026 20.2
R .............. 0 NPR 0.00 NPR 3133T8 K T 3 November 15, 2026 --
RS ............. 0 NPR 0.00 NPR 3133T8 K U 0 November 15, 2026 --
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The MACR Classes are shown on Appendix 1 to this Supplement.
(2) Subject to increase as described under "Increase in Size" in this
Supplement. The amount shown for a Notional or Call Class is its original
notional principal amount and does not represent principal that will be
paid; see "Payments -- Interest" in this Supplement.
(3) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular. The type of Class with
which the notional principal amount of a Notional Class will be reduced is
indicated in parentheses. A "Callable Class" is redeemable at the direction
of the Holder of the related "Call Class," as described in this Supplement.
(4) See "Final Payment Dates" in this Supplement.
(5) Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section, including the assumptions that each Class is issued and outstanding
from the Closing Date through retirement and that no redemptions occur.
Prepayments will not occur at the percentages of PSA assumed under the
scenario indicated above or any other prescribed rate, certain Classes will
not be outstanding on the Closing Date through retirement, and such
redemptions may occur. Accordingly, the actual weighted average lives of any
or all of the Classes are likely to differ from those shown, perhaps
significantly. See page S-7 for the PSA Prepayment Scenarios used in this
Supplement.
(6) The Floating Rate and Inverse Floating Rate Classes will bear interest as
described under "Terms Sheet -- Class Coupons" in this Supplement.
The Securities (other than the Call Classes and the ZU and ZV Classes, which
back CPCs) are offered by Bear, Stearns & Co. Inc. (the "Underwriter") from time
to time in negotiated transactions at varying prices to be determined at the
time of sale, plus accrued interest from November 1, 1996 on the Fixed Rate and
Delay Classes and from November 15, 1996 on the Floating Rate and Inverse
Floating Rate Classes other than the Delay Classes (the "Non-Delay Classes").
Each Call Class will be offered by the Underwriter in a negotiated transaction
with a single purchaser at a price to be determined at the time of sale. The ZU
and ZV Classes will each be issued and held by Freddie Mac unless and until the
related Callable Class has been redeemed. The Securities are offered by the
Underwriter, subject to sale by Freddie Mac and receipt and acceptance by the
Underwriter and subject to the Underwriter's right to reject any order in whole
or in part. It is expected that the Regular Classes, Classes of CPCs and MACR
Classes (in book-entry form) will be available for deposit at any Federal
Reserve Bank, and that delivery of the Residual Classes (in certificated form)
will be made at the offices of the Underwriter, 245 Park Avenue, New York, New
York 10167, on or about November 29, 1996 (the "Closing Date").
BEAR, STEARNS & CO. INC.
OFFERING CIRCULAR SUPPLEMENT DATED OCTOBER 15, 1996
<PAGE>
THE SECURITIES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE SECURITIES OF ANY CLASS UNLESS THE
INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, REDEMPTION, YIELD,
LIQUIDITY AND MARKET RISKS ASSOCIATED WITH THAT CLASS.
THE SECURITIES ARE COMPLEX SECURITIES AND IT IS IMPORTANT THAT EACH INVESTOR
IN ANY CLASS POSSESS, EITHER ALONE OR TOGETHER WITH AN INVESTMENT ADVISOR, THE
EXPERTISE NECESSARY TO EVALUATE THE INFORMATION CONTAINED AND INCORPORATED IN
THIS SUPPLEMENT IN THE CONTEXT OF THAT INVESTOR'S FINANCIAL SITUATION.
------------------------
THE YIELD OF EACH CLASS OF MULTICLASS PCS, EACH CALLABLE CLASS AND EACH MACR
CLASS WILL DEPEND UPON ITS PURCHASE PRICE, THE RATE OF PRINCIPAL PAYMENTS ON ITS
RELATED ASSET OR ASSETS (WHICH, IN TURN, WILL BE SENSITIVE TO THE RATE OF
PRINCIPAL PAYMENTS ON THE RELATED MORTGAGES), THE ACTUAL CHARACTERISTICS OF THE
RELATED MORTGAGES AND, IN THE CASE OF EACH CALLABLE CLASS, WHETHER A REDEMPTION
OF THAT CLASS OCCURS. THE YIELDS OF THE FLOATING RATE AND INVERSE FLOATING RATE
CLASSES WILL ALSO BE SENSITIVE TO THE LEVEL OF LIBOR OR COFI, AS APPLICABLE
(EACH, AN "INDEX"). THE MORTGAGES ARE SUBJECT TO PREPAYMENT AT ANY TIME WITHOUT
PENALTY. MORTGAGE PREPAYMENT RATES ARE LIKELY TO FLUCTUATE SIGNIFICANTLY FROM
TIME TO TIME, AS IS THE LEVEL OF EACH INDEX. IN ADDITION, PRINCIPAL PAYMENTS ON
THE MORTGAGES UNDERLYING ASSET GROUPS 3 AND 4 WILL BE ALLOCATED AMONG THE
VARIOUS CLASSES OF THE RELATED SERIES OF MULTICLASS PCS, AND SUCH ALLOCATIONS
WILL AFFECT THE SENSITIVITY OF THE YIELD OF EACH RELATED CLASS TO MORTGAGE
PREPAYMENT RATES GENERALLY. INVESTORS SHOULD CONSIDER THE ASSOCIATED RISKS,
INCLUDING:
- FAST PREPAYMENT RATES ON THE RELATED MORTGAGES CAN REDUCE THE YIELDS OF
THE INTEREST ONLY CLASSES AND ANY OTHER CLASSES PURCHASED AT A PREMIUM
OVER THEIR PRINCIPAL AMOUNTS. UNDER SOME PREPAYMENT SCENARIOS,
INVESTORS IN THE INTEREST ONLY CLASSES COULD FAIL TO FULLY RECOVER
THEIR INVESTMENTS.
- SLOW PREPAYMENT RATES ON THE RELATED MORTGAGES CAN REDUCE THE YIELDS OF
THE PRINCIPAL ONLY CLASSES AND ANY OTHER CLASSES PURCHASED AT A
DISCOUNT TO THEIR PRINCIPAL AMOUNTS.
- SMALL DIFFERENCES IN THE CHARACTERISTICS OF THE MORTGAGES CAN HAVE A
SIGNIFICANT EFFECT ON THE WEIGHTED AVERAGE LIVES AND YIELDS OF THE
RELATED CLASSES.
- LOW LEVELS OF LIBOR CAN REDUCE THE YIELDS OF THE FLOATING RATE CLASSES.
CONVERSELY, HIGH LEVELS OF THE APPLICABLE INDEX CAN SIGNIFICANTLY
REDUCE THE YIELDS OF THE INVERSE FLOATING RATE CLASSES AND (ESPECIALLY
IN COMBINATION WITH FAST MORTGAGE PREPAYMENT RATES) MAY RESULT IN THE
FAILURE OF INVESTORS IN THE S, SB, SC AND SE CLASSES TO FULLY RECOVER
THEIR INVESTMENTS.
- IN GENERAL, PRINCIPAL PAYMENT RATES ON THE SUPPORT AND COMPONENT
CLASSES ARE LIKELY TO EXHIBIT A HIGHER SENSITIVITY TO PREPAYMENTS ON
THE RELATED MORTGAGES THAN ARE PRINCIPAL PAYMENT RATES ON THE RELATED
PAC, SCHEDULED, TAC, ACCRETION DIRECTED AND SEQUENTIAL PAY CLASSES.
- IN GENERAL, THERE CAN BE NO ASSURANCE THAT THE GROUP 3 ASSET, WHICH WAS
STRUCTURED AS A TAC CLASS, WILL RECEIVE PRINCIPAL PAYMENTS IN
ACCORDANCE WITH ITS SCHEDULE.
- IN GENERAL, THE PRINCIPAL PAYMENT RATE ON THE GROUP 4 ASSET, WHICH IS A
SUPPORT CLASS, IS LIKELY TO EXHIBIT A HIGH DEGREE OF SENSITIVITY TO
PREPAYMENTS ON THE RELATED MORTGAGES.
- THE VALUE OF A CALLABLE CLASS AFTER IT HAS BECOME REDEEMABLE IS NOT
LIKELY TO EXCEED (AND MAY BE LOWER THAN) ITS REDEMPTION PRICE.
THE VALUE OF A CALL CLASS WILL DEPEND PRIMARILY UPON THE MARKET VALUE OF THE
RELATED CLASS OF MULTICLASS PCS FROM TIME TO TIME (WHICH WILL DEPEND ON
PREVAILING INTEREST RATES AND OTHER MARKET AND ECONOMIC CONDITIONS), MARKET
EXPECTATIONS REGARDING ITS LIKELY FUTURE VALUE AND THE COSTS ASSOCIATED WITH ANY
EXERCISE OF SUCH CALL CLASS HOLDER'S RIGHT OF REDEMPTION. AN INVESTOR IN A CALL
CLASS SHOULD CONSIDER THE RISK THAT IT MAY SUFFER A LOSS OF ALL OF ITS INITIAL
INVESTMENT.
SEE "PREPAYMENT AND YIELD ANALYSIS" IN THIS SUPPLEMENT.
------------------------
THE UNDERWRITER INTENDS TO MAKE A MARKET FOR THE PURCHASE AND SALE OF THE
SECURITIES AFTER THEIR INITIAL ISSUANCE BUT HAS NO OBLIGATION TO DO SO. THERE IS
NO ASSURANCE THAT SUCH A SECONDARY MARKET WILL DEVELOP OR, IF IT DEVELOPS, THAT
IT WILL CONTINUE. CONSEQUENTLY, INVESTORS MAY NOT BE ABLE TO SELL THEIR
SECURITIES READILY OR AT PRICES THAT WILL ENABLE THEM TO REALIZE THEIR DESIRED
YIELD. THE MARKET VALUES OF THE SECURITIES ARE LIKELY TO FLUCTUATE; SUCH
FLUCTUATIONS MAY BE SIGNIFICANT AND COULD RESULT IN SIGNIFICANT LOSSES TO
INVESTORS.
THE SECONDARY MARKETS FOR MORTGAGE-RELATED SECURITIES HAVE EXPERIENCED
PERIODS OF ILLIQUIDITY AND CAN BE EXPECTED TO DO SO IN THE FUTURE. ILLIQUIDITY
CAN HAVE A SEVERELY ADVERSE EFFECT ON THE PRICES OF SECURITIES THAT ARE
ESPECIALLY SENSITIVE TO PREPAYMENT, REDEMPTION OR INTEREST RATE RISK OR THAT
HAVE BEEN STRUCTURED TO MEET THE INVESTMENT REQUIREMENTS OF LIMITED CATEGORIES
OF INVESTORS.
------------------------
Investors should purchase Securities only if they have read and understand
this Supplement and the following documents:
- Freddie Mac's Multiclass Mortgage Participation Certificates Offering
Circular dated October 1, 1995 (the "Multiclass PC Offering Circular"),
which is attached to this Supplement;
- Freddie Mac's Offering Circular Supplements for the Group 3 and Group 4
Assets and their related Multiclass Mortgage Participation Certificates
Offering Circulars (each, an "Asset Offering Circular");
- Freddie Mac's Mortgage Participation Certificates Offering Circular
dated September 1, 1995 (the "PC Offering Circular");
- Freddie Mac's Giant Participation Certificates and Other Structured
Pass-Through Participation Certificates Offering Circular dated
September 1, 1995 (the "Giant PC Offering Circular"); and
- Freddie Mac's Information Statement dated March 29, 1996, its
Information Statement Supplements dated May 15, 1996, August 14, 1996
and November 14, 1996 and any other Information Statement Supplements
published by Freddie Mac through the time of purchase (collectively,
the "Information Statement").
This Supplement incorporates by reference the Asset Offering Circulars, the
PC Offering Circular, the Giant PC Offering Circular and the Information
Statement. Investors can order those documents: from Freddie Mac, by writing or
calling its Investor Inquiry Department at 8200 Jones Branch Drive, McLean,
Virginia 22102 (outside Washington, D.C. metropolitan area, phone 800/336-FMPC;
within Washington, D.C. metropolitan area, phone 703/450-3777); or from the
Underwriter, by writing or calling its Prospectus Department at One MetroTech
Center North, Brooklyn, New York, New York 11201-3859 (phone 212/272-1581).
Investors can obtain additional information regarding the Multiclass PCs,
CPCs, MACR Certificates, Assets, PCs and Mortgages from the sources described
under "General Information -- Additional Information" in this Supplement.
<PAGE>
TERMS SHEET
THIS TERMS SHEET CONTAINS SELECTED INFORMATION ABOUT THIS SERIES. INVESTORS
SHOULD REFER TO THE REMAINDER OF THIS SUPPLEMENT FOR FURTHER INFORMATION.
MODIFICATION AND COMBINATION
Holders of certain of the Regular Classes of Multiclass PCs will be
entitled, upon notice and payment of an exchange fee, to exchange all or a
portion of such Classes for proportionate interests in one or more related MACR
Classes shown on Appendix 1 to this Supplement. The Holders of MACR Classes will
be entitled to receive payments from the related Class or Classes of Multiclass
PCs. Holders of MACR Classes will be entitled to exchange all or any portion of
such MACR Classes for proportionate interests in the related Class or Classes of
Multiclass PCs or, in some cases, other related MACR Classes. See "Modification
and Combination" in this Supplement. Appendix 1 shows the combinations of the
Classes of Multiclass PCs and the related MACR Classes.
CLASS COUPONS
The Fixed Rate Classes will bear interest at the Class Coupons shown on the
cover page of this Supplement or on Appendix 1 to this Supplement.
The DP, PA, PB and PO Classes will be Principal Only Classes and will not
bear interest.
The Floating Rate and Inverse Floating Rate Classes will bear interest as
follows:
<TABLE>
<CAPTION>
CLASS COUPON SUBJECT TO
INITIAL -----------------------------
CLASS RATE(1) CLASS COUPON MINIMUM RATE MAXIMUM RATE
- -------------- ------------- ---------------------------------- ------------ ------------
<S> <C> <C> <C> <C>
MULTICLASS PCS
F 5.875% LIBOR + 0.50% 0.50% 9.0%
FA, FC and FQ 6.625 LIBOR + 1.25% 1.25 9.0
FB 6.275 LIBOR + 0.90% 0.90 9.5
S 48.372096 208.372108% - (LIBOR X 29.767444) 0 208.372108
SA and SQ 11.875 38.75% - (LIBOR X 5.0) 0 38.75
SB 1.5 8.5% - LIBOR 0 1.5
SC 3.225 8.6% - LIBOR 0 8.6
SD 8.3125 27.125% - (LIBOR X 3.5) 0 27.125
SE(2) 9.720666 21.0% - (COFI X 2.3333333) 0 21.0
MACR CLASSES
SG 17.19999 45.866660% - (LIBOR X 5.333333) 0 45.866660
SH(2) 9.720666 21.0% - (COFI X 2.3333333) 0 21.0
</TABLE>
-------------------
(1) Initial Rate will be in effect during first Accrual Period; Class Coupon
will adjust monthly thereafter.
(2) Delay Class.
See "Payments -- Interest" in this Supplement and "Description of Multiclass
PCs -- Interest Rate Indices" in the Multiclass PC Offering Circular.
NOTIONAL CLASSES
<TABLE>
<CAPTION>
ORIGINAL
NOTIONAL
CLASS PRINCIPAL AMOUNT REDUCES PROPORTIONATELY WITH
- ----- ---------------- ------------------------------------------------------
<S> <C>
MULTICLASS PCS
$ 4,279,875 VA (Accretion Directed/Sequential Pay Class)
1,840,625 VC (Accretion Directed/Sequential Pay Class)
2,109,312 VD (Accretion Directed/Sequential Pay Class)
IB ------------
$ 8,229,812
============
IC $ 8,809,428 AA, AB, AC, AE and AH, in the aggregate (PAC Classes)
3,448,857 AD (PAC Class)
------------
$ 12,258,285
============
S 6,038,419 F (TAC Class)
SB 179,748,300 F (TAC Class)
SC 40,623,157 FB (Support Class)
SE 6,277,178 PA (Pass-Through Class)
MACR CLASS
DI $ 26,113,000 D (Sequential Pay Class)
</TABLE>
See "Payments -- Interest -- Notional Classes" in this Supplement.
ALLOCATION OF PRINCIPAL
MULTICLASS PCS
On each Payment Date, Freddie Mac will pay:
ACCRETION
DIRECTED
AND
ACCRUAL
- The "ZV Accrual Amount" and "ZU Accrual Amount" for that Payment Date
to VA, VC, VD and ZV, in that order, until retired, and then to ZU
- The "Group 1 Asset Principal Amount" for that Payment Date in the
following order of priority:
1. Concurrently:
TAC
(a) 55.5555452531% to F, until reduced to its "Targeted Balance"
for that Payment Date
(b) 44.4444547469% as follows:
PAC
(i) Beginning September 15, 1998, to A, until reduced to its
Targeted Balance for that Payment Date
SUPPORT
(ii) To B, until retired
PAC
(iii) To A, until retired
SUPPORT
2. To FB and PO, pro rata, until retired
3. Concurrently:
TAC
(a) 55.5555452531% to F, until retired
(b) 44.4444547469% as follows:
PAC
(i) Beginning September 15, 1998, to A, until reduced to its
Targeted Balance for that Payment Date
SUPPORT
(ii) To B, until retired
PAC
(iii) To A, until retired
SEQUENTIAL
PAY
4. To D, VA, VC, VD, ZV and ZU, in that order, until retired
ACCRETION
DIRECTED
AND
ACCRUAL
- The "ZB Accrual Amount" for that Payment Date to AL, until retired,
and then to ZB
- The "ZC Accrual Amount" for that Payment Date to VE, VG, VH and VJ, in
that order, until retired, and then to ZC
- The "Group 2 Asset Principal Amount" for that Payment Date in the
following order of priority:
PAC
1. To AA, AB, AC, AD, AE, AG, AH, AJ and AK, in that order, until
reduced to their Targeted Balances for that Payment Date
2. To the Scheduled Classes and Component, until reduced to their
Targeted Balances for that Payment Date, as follows:
SCHEDULED
(a) To AL and ZB, in that order
(b) 96.5515950978% to AM and AR, in that order, and 3.4484049022%
to PB-1
(c) To ZC
3. Concurrently:
SUPPORT
(a) 93.3333333333% as follows:
(i) To AN, AS, AO and AP, in that order, until retired
(ii) To AQ, FQ and SQ, pro rata, until retired
(b) 6.6666666667% to PB-2, until retired
4. To FC and SD, pro rata, until retired
SCHEDULED
5. To AL and ZB, in that order, until retired
6. 96.5515950978% to AM and AR, in that order, and 3.4484049022% to
PB-1, until retired
ACCRETION
DIRECTED
AND
SCHEDULED
7. To VE, VG, VH, VJ and ZC, in that order, until retired
PAC
8. To AA, AB, AC, AD, AE, AG, AH, AJ and AK, in that order, until
retired
PASS-
THROUGH
- The "Group 3 Asset Principal Amount" for that Payment Date to PA,
until retired
- The "Group 4 Asset Principal Amount" for that Payment Date to FA and
SA, pro rata, until retired
The Targeted Balances (shown under "Payments -- Principal -- Targeted
Balances Schedules" in this Supplement) were structured as follows:
<TABLE>
<CAPTION>
CLASS OR COMPONENT STRUCTURING RANGE OR RATE
--------------------------------------------- -------------------------
<S> <C>
PAC (A)...................................... 100% PSA - 325% PSA
PAC (AA, AB, AC, AD, AE, AG, AH, AJ and
AK)........................................ 100% PSA - 250% PSA
Scheduled (AL, AM, AR, ZB, ZC and PB-1)...... 120% PSA - 185% PSA
TAC (F)...................................... 195% PSA
</TABLE>
MACR CLASSES AND CALLABLE CLASSES
On any Payment Date when payments of principal are to be allocated
from Multiclass PCs to MACR Certificates or Callable Classes, such payments will
be allocated from the applicable Class or Classes of Multiclass PCs to the
related MACR Class or Callable Class or, if there are two or more related MACR
Classes that are entitled to principal payments, to such MACR Classes, pro rata.
See "Payments -- Principal" and "Prepayment and Yield Analysis" in
this Supplement.
CALLABLE PASS-THROUGH CERTIFICATES
DESCRIPTION
Each Callable Class, together with the related Call Class, will
represent the entire interest in the related Class of Multiclass PCs. For this
purpose, the following Classes are "related":
MULTICLASS PCS CALLABLE CALL
- --------------- -------- ----
ZV Z ZO
ZU ZA ZT
Each such Class of Multiclass PCs will be issued on the Closing Date but
will be held by Freddie Mac unless and until the related Callable Class is
redeemed.
THE CALLABLE CLASSES
Interest
The Callable Classes will accrue interest at the rate of 8% per annum. See
"Payments -- Interest -- Accrual Classes" in this Supplement.
Allocation of Principal
On any Payment Date, when a payment of or addition to principal is made on
the ZV or ZU Class, Freddie Mac will pay or add such principal to the related
Callable Class, until redeemed or retired.
Redemption
Each Callable Class may be redeemed by Freddie Mac, at the direction of the
Holder of the related Call Class, on any Payment Date beginning in March 1997.
This is most likely to occur if the related Class of Multiclass PCs has a market
value in excess of its principal amount but could occur under other
circumstances. Upon such a redemption, the Holders of the Callable Class will
receive the outstanding principal amount of the Callable Class plus interest to
the date of redemption, calculated as described under "Redemption and Exchange"
in this Supplement.
THE CALL CLASSES
The Call Classes will not receive payments of principal or interest.
The Holder of each Call Class will have the right to direct Freddie Mac to
redeem the related Callable Class on any Payment Date beginning in March 1997.
After payment to Freddie Mac of the "Redemption Amount" for the redemption of
such Callable Class and an exchange fee in an amount equal to 1/32 of 1% of the
outstanding principal amount of the Callable Class (but not less than $7,500),
the Holder of the Call Class will be entitled to receive from Freddie Mac, in
exchange for the Call Class, the related Class of Multiclass PCs. See
"Redemption and Exchange" in this Supplement.
Only one Holder is permitted to hold a Call Class at any time.
COMPONENTS
ORIGINAL
DESIGNATION PRINCIPAL AMOUNT PRINCIPAL TYPE*
- ----------- ---------------- ----------------
PB-1 $ 368,600 SCH
PB-2 1,676,800 SUP
-------------
$2,045,400
=============
-------------------------------------
* See "Description of Multiclass PCs -- Standard
Definitions and Abbreviations for Classes" in the
Multiclass PC Offering Circular.
See "Payments -- Principal -- Component Class" in this Supplement.
THE ASSETS
The Group 1 Assets will consist of $500,000,000 of Freddie Mac PCs with
interest rates of 8% per annum.
The Group 2 Assets will consist of $300,000,000 of Freddie Mac PCs with
interest rates of 7% per annum.
The Group 3 and Group 4 Assets will have the following characteristics:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT IN
PERCENTAGE OF CLASS LOWER-TIER
ASSET IN LOWER-TIER REMIC POOL NOVEMBER 1996 CLASS PRINCIPAL TYPE/
GROUP CLASS REMIC POOL AS OF CLOSING DATE CLASS FACTOR COUPON INTEREST TYPE(1)
- ----- ------ ------------------- -------------------- ------------- ------ ----------------
<C> <S> <C> <C> <C> <C> <C>
3 1477-P 48.4777838727% $ 6,277,178 0.8878612 (2) TAC/INV/DLY
4 1876-G 55.7938296302 18,203,667 1.0000000 7.5% SUP/FIX
<CAPTION>
ASSET
GROUP CLASS FINAL PAYMENT DATE
- ----- ------ ------------------
<C> <S> <C>
3 1477-P March 15, 2023
4 1876-G August 15, 2026
</TABLE>
- ---------------
(1) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular.
(2) Class Coupon is calculated as shown in the applicable Asset Offering
Circular. See Exhibit I to this Supplement.
See "General Information -- Structure of Transaction -- The Assets" and
"Prepayment and Yield Analysis -- Prepayment and Weighted Average Life
Considerations -- The Assets" in this Supplement and Exhibits I and II to this
Supplement.
PSA PREPAYMENT SCENARIOS
This Supplement uses the following prepayment scenarios:
<TABLE>
<CAPTION>
PSA PREPAYMENT SCENARIOS*
-------------------------------
MULTICLASS PCS/MACR CLASSES/CALLABLE CLASSES/ASSET GROUP I II III IV V
----------------------------------------------------------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
A, B, D, F, FB, IB, PO, S, SB, SC, VA, VC, VD, ZV and ZU/C,
DA, DB, DC, DD, DE, DF, DG, DH, DI, DJ, DK, DL, DP, E and
SG/Z and ZA/Group 1...................................... 0% 100% 185% 325% 450%
AA, AB, AC, AD, AE, AG, AH, AJ, AK, AL, AM, AN, AO, AP, AQ,
AR, AS, FC, FQ, IC, PB, SD, SQ, VE, VG, VH, VJ, ZB and
ZC/H and J/Group 2....................................... 0 100 145 250 400
PA and SE/SH/Group 3....................................... 0 100 145 200 400
FA and SA/G/Group 4........................................ 0 100 145 200 400
</TABLE>
--------------------
* Expressed as percentages of PSA. See "Prepayment and Yield
Analysis -- General -- PSA Model" in this Supplement.
<PAGE>
WEIGHTED AVERAGE LIVES (IN YEARS)*
PSA PREPAYMENT SCENARIO
----------------------------------
I II III IV V
------ ------ ------ ------ ------
NO REDEMPTION OF CALLABLE
CLASSES
A............................. 12.3 3.9 3.9 3.9 3.6
AA............................ 5.7 1.0 1.0 1.0 1.0
AB............................ 12.4 2.5 2.5 2.5 2.4
AC............................ 15.3 3.5 3.5 3.5 2.9
AD............................ 17.4 4.5 4.5 4.5 3.4
AE............................ 19.8 6.0 6.0 6.0 4.1
AG............................ 22.0 8.0 8.0 8.0 5.2
AH............................ 24.2 11.0 11.0 11.0 7.1
AJ............................ 25.5 15.0 15.0 15.0 9.7
AK............................ 26.3 21.0 21.0 21.0 14.6
AL............................ 6.0 5.8 3.5 2.2 1.3
AM............................ 27.5 14.9 11.9 3.6 1.8
AN............................ 28.6 17.8 1.0 0.2 0.1
AO............................ 28.8 19.6 2.9 0.7 0.4
AP............................ 29.0 20.3 3.9 0.9 0.5
AQ, FQ, H and SQ.............. 29.2 22.2 10.2 1.3 0.7
AR............................ 27.7 16.0 11.9 4.1 2.0
AS............................ 28.7 18.9 2.1 0.5 0.3
B............................. 22.2 8.3 4.4 3.1 2.1
C and F....................... 18.3 6.6 4.2 3.5 2.7
D, DA, DB, DC, DD, DE, DF, DG,
DH, DJ, DK, DL and DP....... 27.6 18.3 12.0 7.4 5.5
E, FB, PO and SG.............. 26.7 15.6 10.0 1.4 0.9
FA, G, SA and Group 4 Asset... 28.0 24.4 20.7 8.2 1.3
FC, J and SD.................. 29.7 26.0 21.8 2.1 1.1
PA, SH and Group 3 Asset...... 24.0 20.2 14.8 4.5 0.6
PB............................ 28.7 19.5 7.1 1.4 0.7
VA............................ 3.8 3.8 3.8 3.8 3.7
VC............................ 8.5 8.5 8.5 7.9 6.2
VD............................ 12.7 12.7 12.3 8.9 7.0
VE............................ 2.6 2.6 2.6 2.6 1.6
VG............................ 6.0 6.0 6.0 4.2 2.0
VH............................ 9.0 9.0 9.0 4.5 2.1
VJ............................ 12.8 12.8 12.8 4.9 2.2
ZB............................ 26.9 12.1 3.5 2.4 1.4
ZC............................ 28.1 20.4 20.2 6.2 2.4
ZU and ZA..................... 29.0 25.5 21.9 16.2 12.6
ZV and Z...................... 21.2 19.6 15.4 10.9 8.6
Group 1 Assets................ 21.8 11.6 8.1 5.2 3.9
Group 2 Assets................ 21.3 10.9 8.8 5.9 3.9
REDEMPTION OF CALLABLE CLASSES
ON MARCH 15, 1997
Z............................. 0.3 0.3 0.3 0.3 0.3
ZA............................ 0.3 0.3 0.3 0.3 0.3
REDEMPTION OF CALLABLE CLASSES
ON NOVEMBER 15, 2001
Z............................. 5.0 5.0 5.0 5.0 5.0
ZA............................ 5.0 5.0 5.0 5.0 5.0
-------------------------
* Determined as described under "Prepayment and Yield Analysis" in
this Supplement, and subject to the assumptions and qualifications
in that section, including the assumption that each Class is issued
and outstanding from the Closing Date through retirement.
Prepayments will not occur at the percentages of PSA assumed in any
scenario or any other prescribed rate, certain Classes will not be
outstanding on the Closing Date and redemptions of Callable Classes
may occur on a date other than a date shown. Accordingly, the actual
weighted average lives of any or all of the Classes and of the
Assets are likely to differ from those shown, perhaps significantly.
<PAGE>
MORTGAGE CHARACTERISTICS (AS OF NOVEMBER 1, 1996)
GROUP 1 ASSETS -- ASSUMED MORTGAGE CHARACTERISTICS
<TABLE>
<CAPTION>
REMAINING TERM PER ANNUM
TO MATURITY LOAN AGE PER ANNUM INTEREST RATE
PRINCIPAL BALANCE (IN MONTHS) (IN MONTHS) INTEREST RATE OF RELATED PCS
- ----------------- -------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$ 500,000,000 356 4 8.500% 8.0%
</TABLE>
GROUP 2 ASSETS -- ASSUMED MORTGAGE CHARACTERISTICS
<TABLE>
<CAPTION>
REMAINING TERM PER ANNUM
TO MATURITY LOAN AGE PER ANNUM INTEREST RATE
PRINCIPAL BALANCE (IN MONTHS) (IN MONTHS) INTEREST RATE OF RELATED PCS
- ----------------- -------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$ 12,901,739 332 8 7.608% 7.0%
30,454,414 340 6 7.588 7.0
59,724,155 340 7 7.628 7.0
12,853,898 340 8 7.578 7.0
12,144,220 340 9 7.641 7.0
11,655,075 340 10 7.547 7.0
11,288,406 343 8 7.626 7.0
15,656,442 343 9 7.709 7.0
11,393,172 344 9 7.612 7.0
31,563,865 341 13 7.654 7.0
11,970,284 344 11 7.681 7.0
24,102,060 339 17 7.628 7.0
23,004,738 340 16 7.650 7.0
19,543,620 336 21 7.679 7.0
11,743,912 327 32 7.791 7.0
-------------
$ 300,000,000 339* 12* 7.638*
=============
</TABLE>
--------------------
* Weighted average by principal balance.
GROUP 3 AND GROUP 4 ASSETS -- MORTGAGE CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING TERM WEIGHTED AVERAGE WEIGHTED AVERAGE PER ANNUM
TO MATURITY LOAN AGE PER ANNUM INTEREST RATE
ASSET GROUP SERIES (IN MONTHS) (IN MONTHS) INTEREST RATE OF RELATED PCS
- ----------- ------ -------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
3 1477 300 46 7.796% 7.0%
4 1876 346 11 7.609 7.0
</TABLE>
The actual remaining terms to maturity, loan ages and interest rates of
most of the Mortgages differ from those shown above, in some cases
significantly. See "General Information -- The Mortgages" in this Supplement.
<PAGE>
GENERAL INFORMATION
MULTICLASS PC AGREEMENT
Freddie Mac will create the Securities under the Multiclass Mortgage
Participation Certificate Agreement, dated as of October 1, 1995, and a Terms
Supplement, to be dated the Closing Date (together, the "Multiclass PC
Agreement"). Investors can order copies of the Multiclass PC Agreement by
writing or calling the Investor Inquiry Department at Freddie Mac at the address
or phone numbers shown on page S-2. The Multiclass PC Agreement is incorporated
by reference in this Supplement.
Holders and anyone having a beneficial interest in the Multiclass PCs, MACR
Certificates or CPCs should refer to the Multiclass PC Agreement for a complete
description of their rights and obligations and the rights and obligations of
Freddie Mac. Holders and beneficial owners of Multiclass PCs, MACR Certificates
or CPCs will acquire their Securities subject to all terms and conditions of the
Multiclass PC Agreement, including the Terms Supplement.
FORM OF SECURITIES
The Regular Classes of Multiclass PCs, the MACR Classes and the Classes of
CPCs will be issued and may be held of record and transferred only on the
book-entry system of a Federal Reserve Bank. The Residual Classes will be issued
and may be held of record only in certificated form and will be transferable at
Texas Commerce Bank National Association or its successor (the "Registrar"). The
Classes of Multiclass PCs, the MACR Classes and the Callable Classes will be
issued in the denominations specified under "Description of Multiclass
PCs -- Form of Multiclass PCs, Holders, Minimum Principal Amounts and Transfers"
in the Multiclass PC Offering Circular. Each Call Class will be issued and must
be maintained and transferred in a denomination equal to the total notional
principal amount of that Class.
HOLDERS
The term "Holders" means (i) in the case of a Regular Class of Multiclass
PCs, a MACR Class or a Callable Class, the entities that appear on the
book-entry records of a Federal Reserve Bank as holders of that Class, (ii) in
the case of a Call Class, the single entity that appears on the book-entry
records of a Federal Reserve Bank as the holder of that Class and (iii) in the
case of a Residual Class, the entities or individuals that appear on the records
of the Registrar as the registered holders of that Class. The beneficial owner
of a Security is not necessarily the Holder.
STRUCTURE OF TRANSACTION
General
This Series will be a "Double-Tier Series." The Regular Classes of
Multiclass PCs and the R Class will represent beneficial ownership interests in
the Upper-Tier REMIC Pool. The Upper-Tier REMIC Pool will consist of the classes
of "regular interests" in the Lower-Tier REMIC Pool (the "Mortgage Securities").
The RS Class will represent the residual interest in the Lower-Tier REMIC Pool.
The creation of both an Upper-Tier and a Lower-Tier REMIC Pool is designed to
satisfy federal income tax requirements to permit the issuance of certain
Interest Only Classes, which will receive specified portions of the interest
payments on certain of the Mortgage Securities.
The Lower-Tier REMIC Pool will consist of the Assets. The Group 1 through
Group 4 Assets represent interests in portions of the cash flows provided by
their underlying PCs. The PCs include Gold Mortgage Participation Certificates
("Gold PCs") and/or Gold Giant Mortgage Participation Certificates ("Gold Giant
PCs"). Gold PCs represent undivided interests in discrete pools consisting of
specified Mortgages. Gold Giant PCs represent beneficial ownership interests in
discrete pools consisting of specified Gold PCs (or, in some cases, other Gold
Giant PCs).
The PCs have the interest rates shown under "Terms Sheet -- Mortgage
Characteristics" in this Supplement.
The Assets
The Assets are described generally under "Terms Sheet -- The Assets" in
this Supplement. For additional information about the Group 3 and Group 4
Assets, see the Asset Offering Circulars and "Prepayment and Yield
Analysis -- Prepayment and Weighted Average Life Considerations -- The Assets"
in this Supplement. The cover pages and terms sheets from the Asset Offering
Circulars are reproduced as Exhibits I and II to this Supplement.
It should be noted that there have been material changes in facts and
circumstances since the dates of the Asset Offering Circulars, including changes
in prepayment rates, prevailing interest rates and other economic factors, which
may limit the usefulness of, and be directly contrary to the assumptions used in
preparing the information set forth in, such documents.
The Underwriter intends to acquire the Assets in privately negotiated
transactions before delivering them to Freddie Mac on the Closing Date. On the
Closing Date, Freddie Mac expects to acquire the Assets from the Underwriter in
exchange for the Multiclass PCs (other than the ZU and ZV Classes) and the CPCs.
THE MORTGAGES
The Mortgages underlying the Assets are fixed-rate, first lien residential
mortgages and mortgage participations which had original terms to maturity of
360 months or less.
For purposes of this Supplement, Freddie Mac has made certain assumptions
regarding the remaining terms to maturity, loan ages and interest rates of the
Mortgages underlying the Group 1 and Group 2 Assets. See "Terms
Sheet -- Mortgage Characteristics" in this Supplement. The weighted average
remaining terms to maturity, weighted average loan ages and weighted average
interest rates of the Mortgages underlying the Group 3 and Group 4 Assets, as of
November 1, 1996, are shown under "Terms Sheet -- Mortgage Characteristics" in
this Supplement. However, the characteristics of most of the Mortgages differ
from those assumed or shown, in some cases significantly. This is the case even
if the weighted average characteristics of the Mortgages are the same as those
of mortgages having the characteristics assumed or shown. Small differences in
the characteristics of the Mortgages underlying each Asset Group can have a
significant effect on the payment behavior of the related Assets and the
weighted average lives and yields of the related Classes. See "Prepayment and
Yield Analysis" in this Supplement.
ADDITIONAL INFORMATION
Investors can obtain additional information regarding the Multiclass PCs,
CPCs, MACR Certificates, Assets, PCs and Mortgages from various sources,
including these:
- The Multiclass PC Agreement, including the Terms Supplement for this
Series, will create and set forth the terms of the Securities.
- A Supplemental Statement applicable to this Series will be available
shortly after the Closing Date.
- The PC Offering Circular describes Gold PCs generally.
- PC Offering Circular Supplements describe particular characteristics
of certain Gold PCs.
- The Giant PC Offering Circular describes Gold Giant PCs generally.
- Giant PC Offering Circular Supplements describe particular
characteristics of Gold Giant PCs.
- The Asset Offering Circulars describe the Group 3 and Group 4 Assets
and contain additional related information.
- The Supplemental Statements applicable to the related Series of
Multiclass PCs contain additional related information about the Group
3 and Group 4 Assets.
- Freddie Mac's Internet Web-Site (http://www.freddiemac.com) will
display schedules of the PCs and additional related information
shortly after the Closing Date.
Investors can order the documents listed above, as well as any updated
information concerning specific Gold PCs and Gold Giant PCs prepared by Freddie
Mac, by writing or calling the Investor Inquiry Department at Freddie Mac at the
address or phone numbers shown on page S-2.
REDEMPTION AND EXCHANGE
Each Callable Class, together with its related Call Class, will represent
the entire interest in the related Class of Multiclass PCs. Each such Class of
Multiclass PCs will be issued on the Closing Date but will be held by Freddie
Mac unless and until the related Callable Class is redeemed. The arrangement by
which CPCs are created, sold and administered is described under "Certain
Federal Income Tax Consequences -- General" in this Supplement.
The Holder of each Call Class has the right (i) to direct Freddie Mac to
redeem all and not less than all of the related Callable Class on any Payment
Date beginning in March 1997 and (ii) after payment to Freddie Mac of the
applicable "Redemption Amount" (as defined below), to exchange that Holder's
outstanding Call Class for the related Class of Multiclass PCs. An "exchange
fee," in an amount equal to 1/32 of 1% of the outstanding principal amount of
the Callable Class being redeemed (but not less than $7,500), will be payable to
Freddie Mac in connection with such transaction.
A Holder of a Call Class proposing to effectuate a redemption and exchange
as of any applicable Payment Date must so notify Freddie Mac's Structured
Finance Department in writing or by telefax during the preceding month but not
later than the fifth Business Day prior to the Record Date (as defined under
"Payments -- Payment Dates; Record Dates" in this Supplement) occurring in that
month. Notification in accordance with instructions from Freddie Mac must be
provided through a dealer who is a member of Freddie Mac's "REMIC Dealer Group."
Not later than the fifth Business Day prior to such Record Date, the Holder must
deposit with Freddie Mac the applicable Redemption Amount, which will equal the
sum of:
(i) 100% of the outstanding principal amount of the Callable Class
being redeemed, based on the Class Factor published for that
Class for the month prior to the month of redemption;
(ii) an amount equal to 30 days' interest on the Callable Class being
redeemed, based on such outstanding principal amount and the Class
Coupon for that Class; and
(iii) an amount equal to interest on the Callable Class being redeemed,
for the period from the first day of the month of redemption to
the Payment Date on which the redemption will occur, calculated
based on the Class Coupon for that Class and the sum of the
amounts described in clauses (i) and (ii) above.
Upon delivery of the Redemption Amount, the notice of redemption and
exchange will become irrevocable and redemption of the Callable Class being
redeemed will be made on the Payment Date in the next month (the "Redemption
Date").
If notice of redemption and exchange becomes effective, Freddie Mac, prior
to the Record Date preceding the month of redemption, will notify the Holders of
the affected Callable Class that such Class will be redeemed on the Redemption
Date. On or about the first business day of the month of redemption, the Class
Factors for the Callable Class being redeemed and its related Call Class will be
reduced to zero. The redemption of the Callable Class being redeemed will be at
a "Redemption Price" equal to the sum of:
(a) 100% of the outstanding principal amount of such Callable Class,
based on the Class Factor for that Class for the month prior to the month
of redemption;
(b) accrued interest at the Class Coupon for such Callable Class for
the related Accrual Period, based on such outstanding principal amount
(that is, 30 days' interest on such principal amount); and
(c) accrued interest at the Class Coupon for such Callable Class for
the period from the first day of the month of redemption to the Redemption
Date, based on the amount of principal that would have been outstanding on
such Callable Class immediately after such Redemption Date if such
redemption were not to occur (that is, approximately 14 days' interest on
such principal amount).
Payment of the Redemption Price will be in lieu of any payment of principal that
would otherwise be made on the Callable Class on the Redemption Date.
On the first Business Day of the month in which the Redemption Date for a
Callable Class occurs, Freddie Mac will transfer the Class of Multiclass PCs
underlying such Callable Class to the Holder of the related Call Class in
exchange for (a) such Call Class and (b) the exchange fee. On the Redemption
Date, Freddie Mac will remit to the Holder of the related Call Class (a) the
excess of (i) the Redemption Amount paid to Freddie Mac by the Holder of the
related Call Class plus the amount of the payment, if any, made on the
underlying Class of Multiclass PCs in the month of redemption over (ii) the
Redemption Price for the related Callable Class and (b) interest on the
Redemption Amount from the date tendered to the Redemption Date. Such interest
will be calculated for each day at the prevailing daily Federal Funds rate
determined as of close of business, less 25 basis points. Freddie Mac will
provide instructions for delivery of the Call Class, the Redemption Amount and
the exchange fee to the dealer through which delivery will be made.
The Holders of the Class of Multiclass PCs received in exchange for a Call
Class will become entitled to any payments on such Class of Multiclass PCs
beginning in the month following the month of exchange.
Any Callable Class, if redeemed, and the related Call Class will not be
reissued.
MODIFICATION AND COMBINATION
Subject to the rules, regulations and procedures of the Federal Reserve
Banks applicable to Freddie Mac's book-entry securities, all or a portion of
certain Regular Classes may be exchanged for a proportionate interest in one or
more of the MACR Classes shown in Appendix 1. Similarly, all or a portion of one
or more MACR Classes may be exchanged for the related Class or Classes of
Multiclass PCs or, in some cases, related MACR Classes. This process may be
repeated again and again. For this purpose, "related" Classes are those within
the same Combination in Appendix 1.
Each MACR Class issued in an exchange will represent a proportionate
beneficial ownership interest in, and will be entitled to receive a
proportionate amount of the cash flow from, the related Class or Classes of
Multiclass PCs, and the investors in a MACR Class will be treated as beneficial
owners of proportionate interests in the related Class or Classes of Multiclass
PCs.
Freddie Mac initially will issue the Classes shown on the cover page of
this Supplement. Certain of the Classes of Multiclass PCs may be exchanged, in
whole or in part, for MACR Classes on the Closing Date. The maximum original
principal (or notional principal) amount of each MACR Class shown in Appendix 1
represents the largest amount of that Class that could be supported by the
related Class or Classes of Multiclass PCs as of the Closing Date.
Which Classes of Multiclass PCs and MACR Certificates are outstanding at
any given time, and the outstanding principal (or notional principal) amounts of
such Classes, will depend upon principal payments and prepayments on such
Classes as well as any exchanges that occur. The aggregate outstanding principal
amount of all the Classes of Multiclass PCs, CPCs and MACR Classes, exclusive of
any notional principal amount, will at all times equal the aggregate outstanding
principal amount of the Assets.
Any exchange of related Classes shown on Appendix 1 will be permitted, so
long as the following constraints are met:
- If Classes of Multiclass PCs (or, except in the case of "Combination 4"
shown in Appendix 1, a MACR Class) are being exchanged, such Classes must
be exchanged in the "exchange proportions" shown on Appendix 1, which are
based at all times on the original principal amounts of such Classes.
- The aggregate principal amount (rounded to whole dollars) of the
Securities received in the exchange, immediately after the exchange, must
equal that of the Securities surrendered for exchange immediately before
the exchange (for this purpose, the principal amount of any Interest Only
Security always equals $0).
- The aggregate "Annual Interest Amount" (rounded to whole dollars) of the
Securities received in the exchange must equal that of the Securities
surrendered for exchange (the "Annual Interest Amount" for any Security
equals its outstanding principal amount or notional principal amount
times its Class Coupon or, in the case of a Floating Rate or Inverse
Floating Rate Class, its initial Class Coupon).
For example, within "Combination 4" shown on Appendix 1, a Holder could
exchange any one of the first four subcombinations of Classes shown in the
following table for any other such subcombination, or any one of the last three
subcombinations shown for any other such subcombination. Numerous other
subcombinations are possible.
ILLUSTRATIVE SUBCOMBINATIONS
<TABLE>
<CAPTION>
ORIGINAL PRINCIPAL OR ANNUAL
SUBCOMBINATION CLASS NOTIONAL PRINCIPAL AMOUNT CLASS COUPON INTEREST AMOUNT
- --------------- ------ ------------------------- ------------ ---------------
<C> <S> <C> <C> <C>
1
D $26,113,000 8.00% $ 2,089,040
2
DI $26,113,000(notional) 8.00% $ 2,089,040
DP 26,113,000 0.00 0
----------- -----------
$26,113,000 $ 2,089,040
=========== ===========
3
DI $ 4,896,188(notional) 8.00% $ 391,695
DB 26,113,000 6.50 1,697,345
----------- -----------
$26,113,000 $ 2,089,040
=========== ===========
4
DP $ 2,345,889 0.00% $ 0
DH 10,000,000 8.50 850,000
DJ 13,767,111 9.00 1,239,040
----------- -----------
$26,113,000 $ 2,089,040
=========== ===========
5
DE $10,000,000 7.50% $ 750,000
6
DP $ 2,500,000 0.00% $ 0
DL 7,500,000 10.00 750,000
----------- -----------
$10,000,000 $ 750,000
=========== ===========
7
DI $ 1,562,500(notional) 8.00% $ 125,000
DA 5,000,000 6.00 300,000
DB 5,000,000 6.50 325,000
----------- -----------
$10,000,000 $ 750,000
=========== ===========
</TABLE>
AT ANY GIVEN TIME, A HOLDER'S ABILITY TO EXCHANGE MULTICLASS PCS FOR
MACR CERTIFICATES OR TO EXCHANGE MACR CERTIFICATES FOR DIFFERENT MACR
CERTIFICATES OR FOR MULTICLASS PCS WILL BE LIMITED BY A NUMBER OF FACTORS. A
HOLDER MUST, AT THE TIME OF THE PROPOSED EXCHANGE, OWN THE APPROPRIATE CLASSES
IN THE APPROPRIATE PROPORTIONS IN ORDER TO EFFECT A DESIRED EXCHANGE. A HOLDER
THAT DOES NOT OWN THE APPROPRIATE CLASSES OR THE APPROPRIATE AMOUNTS OF SUCH
CLASSES MAY NOT BE ABLE TO OBTAIN THE NECESSARY CLASS OR CLASSES OF MULTICLASS
PCS OR MACR CERTIFICATES. THE HOLDER 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. IN ADDITION, PRINCIPAL
PAYMENTS AND PREPAYMENTS WILL, OVER TIME, DIMINISH THE AMOUNTS AVAILABLE FOR
EXCHANGE.
A Holder proposing to effectuate an exchange must notify Freddie Mac's
Structured Finance Department through a dealer who is a member of Freddie Mac's
"REMIC Dealer Group." Such notice must be given in writing or by telefax not
later than two Business Days before the proposed exchange date (which date,
subject to Freddie Mac'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 receipt of a Holder's notice, Freddie Mac will telephone the dealer to
provide instructions for delivering the Securities and the exchange fee to
Freddie Mac by wire transfer. A Holder's notice becomes irrevocable on the
second Business Day before the proposed exchange date.
A fee will be payable to Freddie Mac in connection with each exchange
equal to 2/32 of 1% of the outstanding principal amount (exclusive of any
notional principal amount) of the Securities to be submitted for exchange (but
not less than $5,000).
The first payment on a Multiclass PC or a MACR Certificate received in
an exchange transaction will be made on the Payment Date in the month following
the month of the exchange. Such payment will be made to the Holder of record as
of the close of business on the last day of the month of the exchange.
The outstanding principal or notional principal amounts of all Classes
of Securities are available on Freddie Mac's Internet Web-Site or by writing or
calling Freddie Mac's Investor Inquiry Department at the address or phone
numbers shown on page S-2.
PAYMENTS
PAYMENT DATES; RECORD DATES
Freddie Mac will make payments of principal and interest on the Securities
to Holders entitled to such payments on the 15th of each month or, if the 15th
is not a "Business Day," on the next Business Day (a "Payment Date"), beginning
in the month following the Closing Date.
On each Payment Date, any payment on a Security will be made to the Holder
of record as of the end of the preceding calendar month (each, a "Record Date").
METHOD OF PAYMENT
A Federal Reserve Bank will credit payments on the Regular Classes of
Multiclass PCs, the Callable Classes and the MACR Classes to the accounts of
Holders of these Classes monthly on each Payment Date. The Registrar will mail
any payments on the Residual Classes by check to the addresses of the Holders of
these Classes as they appear on the Registrar's records, not later than the
applicable Payment Date. A Holder of a Residual Class will be required to
present the Holder's certificate to the Registrar for payment under the
circumstances described under "Description of Multiclass PCs -- Form of
Multiclass PCs, Holders, Minimum Principal Amounts and Transfers" in the
Multiclass PC Offering Circular. A Holder that is not also the beneficial owner
of a Security, and each other financial intermediary in the chain to the
beneficial owner, will be responsible for remitting payments to their customers.
INTEREST
Freddie Mac will pay interest on each Payment Date to the Holders of each
Class of Securities on which interest has accrued, except in the case of the
Accrual Classes, which will receive payments as described under "Accrual
Classes." Investors can calculate the amount of interest to be paid on (or added
to the principal amount of) any Security on any Payment Date by using the
applicable "Class Factor" published in the preceding month. See "Class Factors"
below.
Categories of Classes
For purposes of interest payments, the Classes of Multiclass PCs and CPCs
will be categorized as shown under "Interest Type" on the cover page of this
Supplement, and the MACR Classes will be categorized as shown under "Interest
Type" on Appendix 1 to this Supplement. The abbreviations used on the cover page
and Appendix 1 are explained under "Description of Multiclass PCs -- Standard
Definitions and Abbreviations for Classes" in the Multiclass PC Offering
Circular.
Accrual Periods
The Accrual Period for the Fixed Rate and Delay Classes will be the
calendar month preceding the related Payment Date. The Accrual Period for the
Non-Delay Classes will be from the 15th of the month preceding the related
Payment Date to the 15th of the month of that Payment Date. In each case,
interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months. Interest payable on any Class on any Payment Date will consist of
30 days' interest on its balance as of the related Record Date.
Fixed Rate Classes
The Fixed Rate and Callable Classes will bear interest at the Class Coupons
shown on the cover page of this Supplement and on Appendix 1 to this Supplement.
Principal Only Classes
The DP, PA, PB and PO Classes will be Principal Only Classes and will not
bear interest.
Accrual Classes
The ZV, ZU, ZB and ZC Classes of Multiclass PCs and the Z and ZA Classes of
CPCs will be Accrual Classes. No payments of interest will be made on the
Accrual Classes except that, if the Z or ZA Class is redeemed, the Holders of
such Class will receive interest as described under "Redemption and Exchange" in
this Supplement. Interest accrued on each Accrual Class during each Accrual
Period will be added to its principal amount on the related Payment Date.
Payments of principal on each Accrual Class (including accrued interest that has
been added to its principal amount) will be made as described under "Terms
Sheet -- Allocation of Principal" in this Supplement.
Notional Classes
The Notional Classes will not receive principal payments. For convenience
in describing interest payments, the Notional Classes will have notional
principal amounts. The table under "Terms Sheet -- Notional Classes" in this
Supplement shows the original notional principal amounts of the Notional Classes
and the Class or Classes with which their notional principal amounts (or
portions thereof) will reduce proportionately.
Floating Rate and Inverse Floating Rate Classes
The Floating Rate and Inverse Floating Rate Classes will bear interest as
shown under "Terms Sheet -- Class Coupons" in this Supplement. The Class Coupons
for the Floating Rate and Inverse Floating Rate Classes will be based on (i) the
arithmetic mean of the London interbank offered quotations for one-month
Eurodollar deposits ("LIBOR") or (ii) the weighted average cost of funds for
member savings institutions of the Eleventh Federal Home Loan Bank District
("COFI").
For information regarding the manner in which Freddie Mac determines the
Indices and calculates the Class Coupons for Floating Rate and Inverse Floating
Rate Classes, see "Description of Multiclass PCs -- Interest Rate Indices" in
the Multiclass PC Offering Circular.
Freddie Mac's determination of each Index and its calculation of the Class
Coupons will be final, except in the case of clear error. Investors can get the
Index levels and the Class Coupons for the current and preceding Accrual Periods
from Freddie Mac's Internet Web-Site or by writing or calling Freddie Mac's
Investor Inquiry Department at the address or phone numbers shown on page S-2.
Call Classes
The Call Classes will not receive payments of interest.
PRINCIPAL
Freddie Mac will pay principal on each applicable Payment Date to the
Holders of the Classes on which principal is then due. The Holders of each such
Class will receive principal payments on a pro rata basis among the Securities
of that Class. Investors can calculate the amount of principal to be paid on
(or, in the case of an Accrual Class, the net amount to be paid on or added to)
any Security on any Payment Date by using the applicable Class Factors published
in the preceding and current months. See "Class Factors" below.
Categories of Classes
For purposes of principal payments, the Classes of Multiclass PCs and CPCs
will be categorized as shown under "Principal or Other Type" on the cover page
of this Supplement, and the MACR Classes will be categorized as shown under
"Principal or Other Type" on Appendix 1 to this Supplement. The abbreviations
used on the cover page or Appendix 1 are explained under "Description of
Multiclass PCs -- Standard Definitions and Abbreviations for Classes" in the
Multiclass PC Offering Circular.
Different categories of Classes will exhibit different degrees of
sensitivity to Mortgage prepayment rates. See "Prepayment and Yield Analysis" in
this Supplement.
Component Class
For convenience in describing principal payments, the PB Class will be a
"Component Class." It will be deemed to consist of "Components," having the
designations and original principal amounts shown under "Terms
Sheet -- Components" in this Supplement. The Components, together, will
constitute a single Class and will not be separately issued or transferable.
Amount of Payments
The total amount of principal payments that will be made on the Securities
on each Payment Date will equal the sum of:
- the amount of interest, if any, accrued on the ZV Class during the
related Accrual Period and not payable as interest on that Payment
Date (the "ZV Accrual Amount");
- the amount of interest, if any, accrued on the ZU Class during the
related Accrual Period and not payable as interest on that Payment
Date (the "ZU Accrual Amount");
- the amount of interest, if any, accrued on the ZB Class during the
related Accrual Period and not payable as interest on that Payment
Date (the "ZB Accrual Amount");
- the amount of interest, if any, accrued on the ZC Class during the
related Accrual Period and not payable as interest on that Payment
Date (the "ZC Accrual Amount"); and
- the amount of principal, if any, required to be paid on that Payment
Date on each Asset Group (the "Group 1 Asset Principal Amount," the
"Group 2 Asset Principal Amount," and so forth).
Allocation of Payments
On each Payment Date, Freddie Mac will pay the ZV, ZU, ZB and ZC Accrual
Amounts and the Group 1 through Group 4 Asset Principal Amounts as described
under "Terms Sheet -- Allocation of Principal" in this Supplement.
Call Classes
The Call Classes will not receive payments of principal. Each Call Class
will have a notional principal amount equal at all times to the principal amount
of the related Callable Class.
Targeted Balances Schedules
The schedules of "Targeted Balances" are shown below.
<PAGE>
TARGETED BALANCES*
PAC CLASSES
PAYMENT DATE
- --------------------
December 15, 1996... $ 27,687,198.32
January 15, 1997.... 26,757,504.38
February 15, 1997... 25,780,249.85
March 15, 1997...... 24,755,791.24
April 15, 1997...... 23,684,509.72
May 15, 1997........ 22,566,810.81
June 15, 1997....... 21,403,124.19
July 15, 1997....... 20,193,903.42
August 15, 1997..... 18,939,625.56
September 15,
1997.............. 17,644,077.16
October 15, 1997.... 16,307,727.00
November 15, 1997... 14,931,065.13
December 15, 1997... 13,514,602.57
January 15, 1998.... 12,062,856.05
February 15, 1998... 10,580,100.98
March 15, 1998...... 9,066,778.33
April 15, 1998...... 7,523,345.56
May 15, 1998........ 5,955,422.92
June 15, 1998....... 4,363,414.19
July 15, 1998....... 2,749,677.49
August 15, 1998..... 1,116,493.63
September 15, 1998
and after......... 0.00
AB A
August 15, 1998
and before........ $ 26,556,000.00 $ 56,474,000.00
September 15,
1998.............. 26,026,560.02 55,438,620.79
October 15, 1998.... 24,374,113.24 54,372,589.23
November 15, 1998... 22,724,923.70 53,276,372.72
December 15, 1998... 21,083,901.53 52,150,453.52
January 15, 1999.... 19,451,004.35 50,995,328.40
February 15, 1999... 17,826,189.99 49,845,862.82
March 15, 1999...... 16,209,416.50 48,702,027.16
April 15, 1999...... 14,600,642.17 47,563,791.91
May 15, 1999........ 12,999,825.47 46,431,127.73
June 15, 1999....... 11,406,925.10 45,304,005.44
July 15, 1999....... 9,821,899.97 44,182,396.00
August 15, 1999..... 8,244,709.19 43,066,270.50
September 15,
1999.............. 6,675,312.11 41,955,600.20
October 15, 1999.... 5,113,668.26 40,850,356.50
November 15, 1999... 3,559,737.38 39,750,510.97
December 15, 1999... 2,013,479.42 38,656,035.28
January 15, 2000.... 474,854.56 37,566,901.26
February 15, 2000
and after......... 0.00 --
AC
January 15, 2000
and before........ $ 10,815,000.00 --
February 15, 2000... 9,758,823.14 36,483,080.92
March 15, 2000...... 8,235,345.73 35,404,546.35
April 15, 2000...... 6,719,383.11 34,331,269.84
May 15, 2000........ 5,210,896.24 33,263,223.79
June 15, 2000....... 3,709,846.30 32,200,380.76
July 15, 2000....... 2,216,194.64 31,142,713.41
August 15, 2000..... $ 729,902.85 $ 30,090,194.59
September 15, 2000
and after......... 0.00 --
AD
August 15, 2000
and before........ $ 24,142,000.00 --
September 15,
2000.............. 23,392,932.68 29,042,797.27
October 15, 2000.... 21,921,246.10 28,000,494.55
November 15, 2000... 20,456,805.26 26,963,259.66
December 15, 2000... 18,999,572.51 25,931,065.99
January 15, 2001.... 17,549,510.40 24,903,887.06
February 15, 2001... 16,106,581.66 23,881,696.50
March 15, 2001...... 14,670,749.22 22,864,468.12
April 15, 2001...... 13,241,976.19 21,852,175.82
May 15, 2001........ 11,820,225.89 20,844,793.66
June 15, 2001....... 10,405,461.80 19,842,295.81
July 15, 2001....... 8,997,647.61 18,844,656.60
August 15, 2001..... 7,596,747.19 17,851,850.47
September 15,
2001.............. 6,202,724.59 16,863,851.99
October 15, 2001.... 4,815,544.05 15,880,635.89
November 15, 2001... 3,435,169.98 14,902,176.98
December 15, 2001... 2,061,567.00 13,928,450.23
January 15, 2002.... 694,699.89 12,959,430.73
February 15, 2002
and after......... 0.00 --
AE
January 15, 2002
and before........ $ 24,726,000.00 --
February 15, 2002... 24,060,533.61 11,995,093.70
March 15, 2002...... 22,707,033.32 11,035,414.49
April 15, 2002...... 21,360,164.33 10,080,368.57
May 15, 2002........ 20,019,892.15 9,129,931.53
June 15, 2002....... 18,686,182.46 8,184,079.08
July 15, 2002....... 17,359,001.11 7,242,787.08
August 15, 2002..... 16,038,314.13 6,306,031.49
September 15,
2002.............. 14,724,087.74 5,373,788.40
October 15, 2002.... 13,416,288.30 4,446,034.03
November 15, 2002... 12,114,882.37 3,522,744.69
December 15, 2002... 10,819,836.67 2,603,896.85
January 15, 2003.... 9,531,118.09 1,689,467.08
February 15, 2003... 8,248,693.70 779,432.08
March 15, 2003
and after......... -- 0.00
February 15, 2003
and before........ --
March 15, 2003...... 6,972,530.73
April 15, 2003...... 5,702,596.57
May 15, 2003........ 4,438,858.80
June 15, 2003....... 3,181,285.14
July 15, 2003....... 1,929,843.50
August 15, 2003..... 684,501.94
September 15, 2003
and after......... 0.00
- ---------------
* The Targeted Balances were calculated using, among other things, the
"structuring ranges" and the "structuring rate" shown under "Terms
Sheet -- Allocation of Principal" in this Supplement. See "Prepayment and
Yield Analysis" in this Supplement.
<PAGE>
PAYMENT DATE
- --------------------
AG
August 15, 2003
and before........ $ 33,774,000.00
September 15,
2003.............. 33,219,228.69
October 15, 2003.... 31,985,992.13
November 15, 2003... 30,758,760.83
December 15, 2003... 29,537,503.48
January 15, 2004.... 28,322,188.97
February 15, 2004... 27,112,786.33
March 15, 2004...... 25,909,264.75
April 15, 2004...... 24,711,593.58
May 15, 2004........ 23,519,742.33
June 15, 2004....... 22,333,680.66
July 15, 2004....... 21,153,378.40
August 15, 2004..... 19,978,805.51
September 15,
2004.............. 18,809,932.12
October 15, 2004.... 17,646,728.52
November 15, 2004... 16,489,165.14
December 15, 2004... 15,337,212.55
January 15, 2005.... 14,190,841.51
February 15, 2005... 13,050,022.89
March 15, 2005...... 11,914,727.74
April 15, 2005...... 10,784,927.22
May 15, 2005........ 9,668,003.47
June 15, 2005....... 8,567,037.67
July 15, 2005....... 7,481,808.48
August 15, 2005..... 6,412,097.55
September 15,
2005.............. 5,357,689.54
October 15, 2005.... 4,318,372.04
November 15, 2005... 3,293,935.55
December 15, 2005... 2,284,173.44
January 15, 2006.... 1,288,881.89
February 15, 2006... 307,859.89
March 15, 2006
and after......... 0.00
AH
February 15, 2006
and before........ $ 32,666,000.00
March 15, 2006...... 32,006,909.16
April 15, 2006...... 31,053,834.14
May 15, 2006........ 30,114,441.95
June 15, 2006....... 29,188,542.33
July 15, 2006....... 28,275,947.66
August 15, 2006..... 27,376,472.86
September 15,
2006.............. 26,489,935.38
October 15, 2006.... 25,616,155.19
November 15, 2006... 24,754,954.71
December 15, 2006... 23,906,158.80
January 15, 2007.... 23,069,594.70
February 15, 2007... 22,245,092.05
March 15, 2007...... 21,432,482.79
April 15, 2007...... 20,631,601.18
May 15, 2007........ 19,842,283.75
June 15, 2007....... 19,064,369.26
July 15, 2007....... 18,297,698.69
August 15, 2007..... 17,542,115.20
September 15,
2007.............. 16,797,464.09
October 15, 2007.... 16,063,592.79
November 15, 2007... 15,340,350.82
December 15, 2007... 14,627,589.76
January 15, 2008.... 13,925,163.22
February 15, 2008... 13,232,926.84
March 15, 2008...... 12,550,738.22
April 15, 2008...... 11,878,456.92
May 15, 2008........ 11,215,944.42
June 15, 2008....... 10,563,064.12
July 15, 2008....... $ 9,919,681.28
August 15, 2008..... 9,285,663.00
September 15,
2008.............. 8,660,878.23
October 15, 2008.... 8,045,197.69
November 15, 2008... 7,438,493.91
December 15, 2008... 6,840,641.15
January 15, 2009.... 6,251,515.39
February 15, 2009... 5,670,994.32
March 15, 2009...... 5,098,957.33
April 15, 2009...... 4,535,285.44
May 15, 2009........ 3,979,861.32
June 15, 2009....... 3,432,569.24
July 15, 2009....... 2,893,295.08
August 15, 2009..... 2,361,926.28
September 15,
2009.............. 1,838,351.82
October 15, 2009.... 1,322,462.22
November 15, 2009... 814,149.50
December 15, 2009... 313,307.16
January 15, 2010
and after......... 0.00
AJ
December 15, 2009
and before........ $ 17,550,000.00
January 15, 2010.... 17,369,830.18
February 15, 2010... 16,883,614.97
March 15, 2010...... 16,404,559.37
April 15, 2010...... 15,932,562.63
May 15, 2010........ 15,467,525.39
June 15, 2010....... 15,009,349.65
July 15, 2010....... 14,557,938.77
August 15, 2010..... 14,113,197.43
September 15,
2010.............. 13,675,031.62
October 15, 2010.... 13,243,348.65
November 15, 2010... 12,818,057.07
December 15, 2010... 12,399,066.73
January 15, 2011.... 11,986,288.70
February 15, 2011... 11,579,635.27
March 15, 2011...... 11,179,019.96
April 15, 2011...... 10,784,357.46
May 15, 2011........ 10,395,563.66
June 15, 2011....... 10,012,555.60
July 15, 2011....... 9,635,251.47
August 15, 2011..... 9,263,570.56
September 15,
2011.............. 8,897,433.32
October 15, 2011.... 8,536,761.26
November 15, 2011... 8,181,477.01
December 15, 2011... 7,831,504.23
January 15, 2012.... 7,486,767.65
February 15, 2012... 7,147,193.06
March 15, 2012...... 6,812,707.25
April 15, 2012...... 6,483,238.02
May 15, 2012........ 6,158,714.20
June 15, 2012....... 5,839,065.56
July 15, 2012....... 5,524,222.87
August 15, 2012..... 5,214,117.86
September 15,
2012.............. 4,908,683.18
October 15, 2012.... 4,607,852.43
November 15, 2012... 4,311,560.14
December 15, 2012... 4,019,741.72
January 15, 2013.... 3,732,333.48
February 15, 2013... 3,449,272.63
March 15, 2013...... 3,170,497.24
April 15, 2013...... 2,895,946.22
May 15, 2013........ 2,625,559.35
June 15, 2013....... 2,359,277.23
July 15, 2013....... $ 2,097,041.31
August 15, 2013..... 1,838,793.81
September 15,
2013.............. 1,584,477.77
October 15, 2013.... 1,334,037.04
November 15, 2013... 1,087,416.22
December 15, 2013... 844,560.69
January 15, 2014.... 605,416.60
February 15, 2014... 369,930.81
March 15, 2014...... 138,050.96
April 15, 2014
and after......... 0.00
AK
March 15, 2014
and before........ $ 12,359,000.00
April 15, 2014...... 12,268,725.40
May 15, 2014........ 12,043,903.20
June 15, 2014....... 11,822,534.12
July 15, 2014....... 11,604,568.64
August 15, 2014..... 11,389,957.93
September 15,
2014.............. 11,178,653.82
October 15, 2014.... 10,970,608.82
November 15, 2014... 10,765,776.10
December 15, 2014... 10,564,109.48
January 15, 2015.... 10,365,563.43
February 15, 2015... 10,170,093.04
March 15, 2015...... 9,977,654.04
April 15, 2015...... 9,788,202.76
May 15, 2015........ 9,601,696.16
June 15, 2015....... 9,418,091.77
July 15, 2015....... 9,237,347.74
August 15, 2015..... 9,059,422.78
September 15,
2015.............. 8,884,276.20
October 15, 2015.... 8,711,867.86
November 15, 2015... 8,542,158.18
December 15, 2015... 8,375,108.14
January 15, 2016.... 8,210,679.25
February 15, 2016... 8,048,833.59
March 15, 2016...... 7,889,533.72
April 15, 2016...... 7,732,742.77
May 15, 2016........ 7,578,424.36
June 15, 2016....... 7,426,542.62
July 15, 2016....... 7,277,062.18
August 15, 2016..... 7,129,948.17
September 15,
2016.............. 6,985,166.21
October 15, 2016.... 6,842,682.40
November 15, 2016... 6,702,463.30
December 15, 2016... 6,564,475.96
January 15, 2017.... 6,428,687.87
February 15, 2017... 6,295,067.00
March 15, 2017...... 6,163,581.73
April 15, 2017...... 6,034,200.93
May 15, 2017........ 5,906,893.87
June 15, 2017....... 5,781,630.26
July 15, 2017....... 5,658,380.25
August 15, 2017..... 5,537,114.38
September 15,
2017.............. 5,417,803.64
October 15, 2017.... 5,300,419.39
November 15, 2017... 5,184,933.42
December 15, 2017... 5,071,317.89
January 15, 2018.... 4,959,545.38
February 15, 2018... 4,849,588.83
March 15, 2018...... 4,741,421.58
April 15, 2018...... 4,635,017.34
May 15, 2018........ 4,530,350.16
June 15, 2018....... 4,427,394.51
July 15, 2018....... $ 4,326,125.17
August 15, 2018..... 4,226,517.30
September 15,
2018.............. 4,128,546.40
October 15, 2018.... 4,032,188.33
November 15, 2018... 3,937,419.27
December 15, 2018... 3,844,215.74
January 15, 2019.... 3,752,554.61
February 15, 2019... 3,662,413.05
March 15, 2019...... 3,573,768.56
April 15, 2019...... 3,486,598.97
May 15, 2019........ 3,400,882.41
June 15, 2019....... 3,316,597.32
July 15, 2019....... 3,233,722.45
August 15, 2019..... 3,152,236.85
September 15,
2019.............. 3,072,119.86
October 15, 2019.... 2,993,351.11
November 15, 2019... 2,915,910.53
December 15, 2019... 2,839,778.32
January 15, 2020.... 2,764,934.98
February 15, 2020... 2,691,361.26
March 15, 2020...... 2,619,038.20
April 15, 2020...... 2,547,947.11
May 15, 2020........ 2,478,069.55
June 15, 2020....... 2,409,387.35
July 15, 2020....... 2,341,882.61
August 15, 2020..... 2,275,537.66
September 15,
2020.............. 2,210,335.10
October 15, 2020.... 2,146,257.77
November 15, 2020... 2,083,288.75
December 15, 2020... $ 2,021,411.37
January 15, 2021.... 1,960,609.18
February 15, 2021... 1,900,865.99
March 15, 2021...... 1,842,165.81
April 15, 2021...... 1,784,492.90
May 15, 2021........ 1,727,831.73
June 15, 2021....... 1,672,167.01
July 15, 2021....... 1,617,483.65
August 15, 2021..... 1,563,766.78
September 15,
2021.............. 1,511,001.74
October 15, 2021.... 1,459,174.08
November 15, 2021... 1,408,269.56
December 15, 2021... 1,358,274.15
January 15, 2022.... 1,309,174.00
February 15, 2022... 1,260,955.48
March 15, 2022...... 1,213,605.13
April 15, 2022...... 1,167,109.71
May 15, 2022........ 1,121,456.15
June 15, 2022....... 1,076,631.57
July 15, 2022....... 1,032,623.29
August 15, 2022..... 989,418.78
September 15,
2022.............. 947,005.72
October 15, 2022.... 905,371.96
November 15, 2022... 864,505.50
December 15, 2022... 824,394.56
January 15, 2023.... 785,027.48
February 15, 2023... 746,392.79
March 15, 2023...... 708,479.19
April 15, 2023...... 671,275.54
May 15, 2023........ $ 634,770.84
June 15, 2023....... 598,954.27
July 15, 2023....... 563,815.16
August 15, 2023..... 529,343.00
September 15,
2023.............. 495,527.42
October 15, 2023.... 462,358.21
November 15, 2023... 429,825.29
December 15, 2023... 397,918.74
January 15, 2024.... 366,628.78
February 15, 2024... 335,945.78
March 15, 2024...... 306,880.63
April 15, 2024...... 278,382.66
May 15, 2024........ 250,442.97
June 15, 2024....... 223,052.79
July 15, 2024....... 196,203.49
August 15, 2024..... 171,029.94
September 15,
2024.............. 146,356.75
October 15, 2024.... 122,176.03
November 15, 2024... 98,480.00
December 15, 2024... 76,763.08
January 15, 2025.... 55,484.70
February 15, 2025... 34,637.92
March 15, 2025...... 16,017.22
April 15, 2025...... 9,573.81
May 15, 2025........ 5,622.95
June 15, 2025....... 1,752.58
July 15, 2025
and after......... 0.00
SCHEDULED CLASSES AND COMPONENT
<TABLE>
<CAPTION>
PAYMENT DATE
- ----------------------------
AL ZB
<S> <C> <C>
December 15, 1996........... $ 8,402,834.09 $ 7,658,781.48
January 15, 1997............ 8,330,905.52 7,593,222.03
February 15, 1997........... 8,254,276.73 7,523,378.55
March 15, 1997.............. 8,173,015.69 7,449,313.00
April 15, 1997.............. 8,087,195.85 7,371,092.32
May 15, 1997................ 7,996,896.05 7,288,788.37
June 15, 1997............... 7,902,200.43 7,202,477.85
July 15, 1997............... 7,803,198.37 7,112,242.19
August 15, 1997............. 7,699,984.32 7,018,167.52
September 15, 1997.......... 7,593,009.28 6,920,664.89
October 15, 1997............ 7,482,365.89 6,819,818.74
November 15, 1997........... 7,368,151.34 6,715,717.64
December 15, 1997........... 7,250,467.24 6,608,454.20
January 15, 1998............ 7,129,838.95 6,498,507.29
February 15, 1998........... 7,006,759.97 6,386,326.68
March 15, 1998.............. 6,881,316.66 6,271,991.10
April 15, 1998.............. 6,753,598.80 6,155,582.37
May 15, 1998................ 6,624,234.22 6,037,672.75
June 15, 1998............... 6,493,301.05 5,918,333.42
July 15, 1998............... 6,361,080.72 5,797,820.91
August 15, 1998............. 6,227,844.00 5,676,382.02
September 15, 1998.......... 6,094,313.57 5,554,675.42
October 15, 1998............ 5,961,153.25 5,433,306.15
November 15, 1998........... 5,829,378.40 5,313,199.68
December 15, 1998........... 5,699,488.63 5,194,811.36
January 15, 1999............ 5,571,467.88 5,078,126.57
February 15, 1999........... 5,445,300.21 4,963,130.77
March 15, 1999.............. 5,320,969.82 4,849,809.56
April 15, 1999.............. 5,198,461.01 4,738,148.65
May 15, 1999................ 5,077,758.22 4,628,133.82
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAYMENT DATE
- ----------------------------
<S> <C> <C>
June 15, 1999............... $ 4,958,846.00 $ 4,519,751.02
July 15, 1999............... 4,841,709.02 4,412,986.26
August 15, 1999............. 4,726,332.07 4,307,825.68
September 15, 1999.......... 4,612,700.05 4,204,255.54
October 15, 1999............ 4,500,797.99 4,102,262.16
November 15, 1999........... 4,390,611.03 4,001,832.02
December 15, 1999........... 4,282,124.42 3,902,951.66
January 15, 2000............ 4,175,323.54 3,805,607.76
February 15, 2000........... 4,070,193.85 3,709,787.07
March 15, 2000.............. 3,966,720.95 3,615,476.48
April 15, 2000.............. 3,864,890.56 3,522,662.94
May 15, 2000................ 3,764,688.48 3,431,333.54
June 15, 2000............... 3,666,100.64 3,341,475.44
July 15, 2000............... 3,569,113.08 3,253,075.91
August 15, 2000............. 3,473,711.94 3,166,122.34
September 15, 2000.......... 3,379,883.47 3,080,602.18
October 15, 2000............ 3,287,614.04 2,996,502.99
November 15, 2000........... 3,196,890.09 2,913,812.46
December 15, 2000........... 3,107,698.22 2,832,518.33
January 15, 2001............ 3,020,025.08 2,752,608.45
February 15, 2001........... 2,933,857.45 2,674,070.79
March 15, 2001.............. 2,849,182.23 2,596,893.37
April 15, 2001.............. 2,765,986.39 2,521,064.33
May 15, 2001................ 2,684,257.01 2,446,571.92
June 15, 2001............... 2,603,981.29 2,373,404.44
July 15, 2001............... 2,525,146.51 2,301,550.30
August 15, 2001............. 2,447,740.05 2,230,998.01
September 15, 2001.......... 2,371,749.40 2,161,736.17
October 15, 2001............ 2,297,162.14 2,093,753.45
November 15, 2001........... 2,223,965.95 2,027,038.62
December 15, 2001........... 2,152,148.61 1,961,580.55
January 15, 2002............ 2,081,697.98 1,897,368.17
February 15, 2002........... 2,012,602.04 1,834,390.52
March 15, 2002.............. 1,944,848.84 1,772,636.73
April 15, 2002.............. 1,878,426.55 1,712,095.98
May 15, 2002................ 1,813,323.40 1,652,757.58
June 15, 2002............... 1,749,527.75 1,594,610.88
July 15, 2002............... 1,687,028.01 1,537,645.37
August 15, 2002............. 1,625,812.72 1,481,850.56
September 15, 2002.......... 1,565,870.50 1,427,216.08
October 15, 2002............ 1,507,190.03 1,373,731.64
November 15, 2002........... 1,449,760.12 1,321,387.03
December 15, 2002........... 1,393,569.65 1,270,172.10
January 15, 2003............ 1,338,607.58 1,220,076.80
February 15, 2003........... 1,284,862.97 1,171,091.16
March 15, 2003.............. 1,232,324.97 1,123,205.28
April 15, 2003.............. 1,180,982.80 1,076,409.35
May 15, 2003................ 1,130,825.77 1,030,693.62
June 15, 2003............... 1,081,843.30 986,048.43
July 15, 2003............... 1,034,024.84 942,464.20
August 15, 2003............. 987,359.99 899,931.41
September 15, 2003.......... 941,838.37 858,440.64
October 15, 2003............ 897,449.73 817,982.51
November 15, 2003........... 854,183.87 778,547.75
December 15, 2003........... 812,030.69 740,127.14
January 15, 2004............ 770,980.16 702,711.55
February 15, 2004........... 731,022.34 666,291.91
March 15, 2004.............. 692,147.36 630,859.22
April 15, 2004.............. 654,345.43 596,404.57
May 15, 2004................ 617,606.83 562,919.10
June 15, 2004............... 581,921.95 530,394.03
July 15, 2004............... 547,281.22 498,820.66
August 15, 2004............. 513,675.16 468,190.35
September 15, 2004.......... 481,094.37 438,494.51
October 15, 2004............ 449,529.52 409,724.66
November 15, 2004........... 418,971.36 381,872.36
December 15, 2004........... 389,410.70 354,929.23
January 15, 2005............ 360,838.44 328,886.99
February 15, 2005........... 333,245.56 303,737.39
March 15, 2005.............. 306,623.08 279,472.27
April 15, 2005.............. 280,962.12 256,083.54
May 15, 2005................ 252,376.82 230,029.40
June 15, 2005............... 219,231.54 199,819.06
July 15, 2005............... 181,618.57 165,536.64
August 15, 2005............. 139,628.76 127,264.94
September 15, 2005.......... 93,351.54 85,085.47
October 15, 2005............ 42,874.95 39,078.47
November 15, 2005
and after................. 0.00 0.00
AM AR PB-1
October 15, 2005
and before................ $ 9,300,000.00 $ 1,020,400.00 $ 368,600.00
November 15, 2005........... 9,280,518.28 1,018,262.46 367,827.86
December 15, 2005........... 9,183,981.30 1,007,670.38 364,001.68
January 15, 2006............ 9,084,913.39 996,800.60 360,075.18
February 15, 2006........... 8,983,389.42 985,661.35 356,051.33
March 15, 2006.............. 8,879,482.85 974,260.68 351,933.06
April 15, 2006.............. 8,773,265.75 962,606.49 347,723.21
May 15, 2006................ 8,664,808.84 950,706.55 343,424.59
June 15, 2006............... 8,554,181.46 938,568.47 339,039.94
July 15, 2006............... 8,441,451.68 926,199.71 334,571.96
August 15, 2006............. 8,326,686.22 913,607.59 330,023.29
September 15, 2006.......... 8,209,950.57 900,799.31 325,396.54
October 15, 2006............ 8,091,308.92 887,781.89 320,694.24
November 15, 2006........... 7,970,824.26 874,562.27 315,918.90
December 15, 2006........... 7,848,558.33 861,147.20 311,072.96
January 15, 2007............ 7,724,571.71 847,543.33 306,158.82
February 15, 2007........... 7,598,923.77 833,757.18 301,178.84
March 15, 2007.............. 7,471,672.74 819,795.15 296,135.32
April 15, 2007.............. 7,342,875.71 805,663.48 291,030.53
May 15, 2007................ 7,212,588.66 791,368.33 285,866.68
June 15, 2007............... 7,080,866.43 776,915.71 280,645.94
July 15, 2007............... 6,947,762.83 762,311.53 275,370.46
August 15, 2007............. 6,813,330.58 747,561.56 270,042.31
September 15, 2007.......... 6,677,621.33 732,671.48 264,663.55
October 15, 2007............ 6,540,685.75 717,646.85 259,236.19
November 15, 2007........... 6,402,573.45 702,493.11 253,762.19
December 15, 2007........... 6,263,333.07 687,215.60 248,243.48
January 15, 2008............ 6,123,012.27 671,819.54 242,681.95
February 15, 2008........... 5,981,657.72 656,310.06 237,079.45
March 15, 2008.............. 5,839,315.19 640,692.17 231,437.79
April 15, 2008.............. 5,696,029.48 624,970.80 225,758.74
May 15, 2008................ 5,551,844.48 609,150.76 220,044.06
June 15, 2008............... 5,406,803.20 593,236.77 214,295.43
July 15, 2008............... 5,260,947.75 577,233.45 208,514.53
August 15, 2008............. 5,114,319.35 561,145.32 202,703.00
September 15, 2008.......... 4,966,958.41 544,976.81 196,862.44
October 15, 2008............ 4,818,904.46 528,732.27 190,994.41
November 15, 2008........... 4,670,196.22 512,415.94 185,100.45
December 15, 2008........... 4,520,871.59 496,031.98 179,182.06
January 15, 2009............ 4,370,967.68 479,584.45 173,240.71
February 15, 2009........... 4,220,520.80 463,077.36 167,277.84
March 15, 2009.............. 4,069,566.50 446,514.59 161,294.86
April 15, 2009.............. 3,918,139.57 429,899.96 155,293.15
May 15, 2009................ 3,766,274.05 413,237.21 149,274.05
June 15, 2009............... 3,614,003.24 396,529.99 143,238.89
July 15, 2009............... 3,461,359.72 379,781.88 137,188.95
August 15, 2009............. 3,308,375.38 362,996.37 131,125.50
September 15, 2009.......... 3,155,081.39 346,176.89 125,049.78
October 15, 2009............ 3,001,508.26 329,326.78 118,963.00
November 15, 2009........... 2,847,685.79 312,449.31 112,866.34
December 15, 2009........... 2,693,643.16 295,547.69 106,760.95
January 15, 2010............ 2,539,408.87 278,625.03 100,647.97
February 15, 2010........... 2,385,010.79 261,684.41 94,528.49
March 15, 2010.............. 2,230,476.18 244,728.81 $ 88,403.60
April 15, 2010.............. 2,075,831.65 227,761.14 82,274.36
May 15, 2010................ 1,921,103.24 210,784.27 76,141.79
June 15, 2010............... 1,766,316.36 193,800.99 70,006.90
July 15, 2010............... 1,611,495.87 176,814.02 63,870.68
August 15, 2010............. 1,456,666.02 159,826.02 57,734.09
September 15, 2010.......... 1,301,850.52 142,839.60 51,598.07
October 15, 2010............ 1,147,072.52 125,857.29 45,463.54
November 15, 2010........... 992,354.62 108,881.58 39,331.39
December 15, 2010........... 837,718.88 91,914.88 33,202.49
January 15, 2011............ 683,186.85 74,959.56 27,077.71
February 15, 2011........... 528,779.56 58,017.92 20,957.87
March 15, 2011.............. 374,517.51 41,092.22 14,843.79
April 15, 2011.............. 220,420.73 24,184.66 8,736.26
May 15, 2011................ 66,508.74 7,297.37 2,636.05
June 15, 2011
and after................. 0.00 0.00 0.00
ZC
May 15, 2011........ $ 19,728,000.00*
June 15, 2011....... 19,627,776.94
July 15, 2011....... 19,451,367.38
August 15, 2011..... 19,275,234.27
September 15,
2011.............. 19,099,397.91
October 15, 2011.... 18,923,878.06
November 15, 2011... 18,748,694.02
December 15, 2011... 18,573,864.55
January 15, 2012.... 18,399,407.94
February 15, 2012... 18,225,342.00
March 15, 2012...... 18,051,684.09
April 15, 2012...... 17,878,451.07
May 15, 2012........ 17,705,659.39
June 15, 2012....... 17,533,325.02
July 15, 2012....... 17,361,463.52
August 15, 2012..... 17,190,090.00
September 15,
2012.............. 17,019,219.16
October 15, 2012.... 16,848,865.31
November 15, 2012... 16,679,042.31
December 15, 2012... 16,509,763.65
January 15, 2013.... 16,341,042.44
February 15, 2013... 16,172,891.39
March 15, 2013...... 16,005,322.82
April 15, 2013...... 15,838,348.73
May 15, 2013........ 15,671,980.71
June 15, 2013....... 15,506,230.01
July 15, 2013....... 15,341,107.55
August 15, 2013..... 15,176,623.89
September 15,
2013.............. 15,012,789.25
October 15, 2013.... 14,849,613.54
November 15, 2013... 14,687,106.35
December 15, 2013... 14,525,276.92
January 15, 2014.... 14,364,134.22
February 15, 2014... 14,203,686.89
March 15, 2014...... 14,043,943.28
April 15, 2014...... 13,884,911.46
May 15, 2014........ 13,726,599.19
June 15, 2014....... 13,569,013.96
July 15, 2014....... 13,412,163.00
August 15, 2014..... 13,256,053.24
September 15, 2014.. 13,100,691.36
October 15, 2014.... 12,946,083.78
November 15, 2014... 12,792,236.68
December 15, 2014... 12,639,155.96
January 15, 2015.... 12,486,847.30
February 15, 2015... 12,335,316.13
March 15, 2015...... 12,184,567.65
April 15, 2015...... 12,034,606.83
May 15, 2015........ 11,885,438.40
June 15, 2015....... 11,737,066.89
July 15, 2015....... 11,589,496.61
August 15, 2015..... 11,442,731.64
September 15, 2015.. 11,296,775.87
October 15, 2015.... 11,151,633.00
November 15, 2015... 11,007,306.49
December 15, 2015... 10,863,799.63
January 15, 2016.... 10,721,115.54
February 15, 2016... 10,579,257.11
March 15, 2016...... 10,438,227.07
April 15, 2016...... 10,298,027.98
May 15, 2016........ 10,158,662.20
June 15, 2016....... 10,020,131.94
July 15, 2016....... 9,882,439.24
August 15, 2016..... 9,745,585.96
September 15, 2016.. 9,609,573.81
October 15, 2016.... 9,474,404.35
November 15, 2016... 9,340,078.97
December 15, 2016... 9,206,598.92
January 15, 2017.... 9,073,965.30
February 15, 2017... 8,942,179.07
March 15, 2017...... 8,811,241.05
April 15, 2017...... 8,681,151.92
May 15, 2017........ 8,551,912.21
June 15, 2017....... 8,423,522.34
July 15, 2017....... 8,295,982.60
August 15, 2017..... 8,169,293.15
September 15, 2017.. 8,043,454.02
October 15, 2017.... 7,918,465.13
November 15, 2017... 7,794,326.27
December 15, 2017... 7,671,037.15
January 15, 2018.... 7,548,597.31
February 15, 2018... 7,427,006.25
March 15, 2018...... 7,306,263.30
April 15, 2018...... 7,186,367.73
May 15, 2018........ 7,067,318.69
June 15, 2018....... 6,949,115.23
July 15, 2018....... 6,831,756.31
August 15, 2018..... 6,715,240.80
September 15, 2018.. 6,599,567.47
October 15, 2018.... 6,484,735.00
November 15, 2018... 6,370,741.99
December 15, 2018... 6,257,586.94
January 15, 2019.... 6,145,268.28
February 15, 2019... 6,033,784.37
March 15, 2019...... 5,923,133.46
April 15, 2019...... 5,813,313.75
May 15, 2019........ 5,704,323.37
June 15, 2019....... 5,596,160.34
July 15, 2019....... 5,488,822.64
August 15, 2019..... 5,382,308.19
September 15, 2019.. 5,276,614.81
October 15, 2019.... 5,171,740.28
November 15, 2019... 5,067,682.31
December 15, 2019... 4,964,438.54
January 15, 2020.... 4,862,006.57
February 15, 2020... 4,760,383.93
March 15, 2020...... 4,659,568.08
April 15, 2020...... 4,559,556.45
May 15, 2020........ 4,460,346.40
June 15, 2020....... 4,361,935.24
July 15, 2020....... 4,264,320.25
August 15, 2020..... 4,167,498.63
September 15, 2020.. 4,071,467.56
October 15, 2020.... 3,976,224.15
November 15, 2020... 3,881,765.49
December 15, 2020... 3,788,088.61
January 15, 2021.... 3,695,190.50
February 15, 2021... 3,603,068.13
March 15, 2021...... 3,511,718.40
April 15, 2021...... 3,421,138.19
May 15, 2021........ 3,331,324.36
June 15, 2021....... 3,242,273.70
July 15, 2021....... 3,153,982.99
- ---------------
* The Targeted Balance for the ZC Class for any Payment Date on or before April
15, 2011 equals its original principal amount, plus the ZC Accrual Amount for
each Payment Date through such Payment Date, assuming that no principal
payments are made on the ZC Class through such Payment Date.
August 15, 2021..... $ 3,066,448.97
September 15, 2021.. 2,979,668.35
October 15, 2021.... 2,893,637.82
November 15, 2021... 2,808,354.02
December 15, 2021... 2,723,813.58
January 15, 2022.... 2,640,013.10
February 15, 2022... 2,556,949.14
March 15, 2022...... 2,474,618.26
April 15, 2022...... 2,393,016.98
May 15, 2022........ 2,312,141.80
June 15, 2022....... 2,231,989.19
July 15, 2022....... 2,152,555.63
August 15, 2022..... 2,073,837.54
September 15, 2022.. 1,995,831.35
October 15, 2022.... 1,918,533.46
November 15, 2022... 1,841,940.25
December 15, 2022... 1,766,048.11
January 15, 2023.... 1,690,853.37
February 15, 2023... 1,616,352.39
March 15, 2023...... 1,542,541.48
April 15, 2023...... 1,469,416.97
May 15, 2023........ 1,396,975.15
June 15, 2023....... 1,325,212.32
July 15, 2023....... 1,254,124.76
August 15, 2023..... 1,183,708.73
September 15, 2023.. 1,113,960.51
October 15, 2023.... 1,044,876.34
November 15, 2023... 976,452.47
December 15, 2023... 908,685.15
January 15, 2024.... 841,570.59
February 15, 2024... 775,105.04
March 15, 2024...... 711,742.08
April 15, 2024...... 648,995.97
May 15, 2024........ 586,863.08
June 15, 2024....... 525,339.78
July 15, 2024....... 464,422.42
August 15, 2024..... 406,813.56
September 15, 2024.. 349,776.01
October 15, 2024.... 293,306.30
November 15, 2024... 237,400.96
December 15, 2024... 185,822.50
January 15, 2025.... 134,762.96
February 15, 2025... 84,219.11
March 15, 2025...... 38,738.89
April 15, 2025...... 22,887.04
May 15, 2025........ 13,160.01
June 15, 2025....... 3,531.80
July 15, 2025
and after......... 0.00
TAC CLASS*
F
December 15, 1996... $ 179,119,588.54
January 15, 1997.... 178,399,142.99
February 15, 1997... 177,587,309.25
March 15, 1997...... 176,684,524.90
April 15, 1997...... 175,691,319.22
May 15, 1997........ 174,608,312.85
June 15, 1997....... 173,436,217.41
July 15, 1997....... 172,175,834.90
August 15, 1997..... 170,828,057.03
September 15, 1997.. 169,393,864.32
October 15, 1997.... 167,874,325.08
November 15, 1997... 166,270,594.21
December 15, 1997... 164,583,911.93
January 15, 1998.... 162,815,602.27
February 15, 1998... 160,967,071.47
March 15, 1998...... 159,039,806.16
April 15, 1998...... 157,035,371.56
May 15, 1998........ 154,955,409.30
June 15, 1998....... 152,801,635.40
July 15, 1998....... 150,575,837.83
August 15, 1998..... 148,279,874.15
September 15, 1998.. 145,915,668.90
October 15, 1998.... 143,485,210.98
November 15, 1998... 140,990,550.82
December 15, 1998... 138,433,797.52
January 15, 1999.... 135,817,115.79
February 15, 1999... 133,228,013.14
March 15, 1999...... 130,666,203.12
April 15, 1999...... 128,131,402.29
May 15, 1999........ 125,623,330.09
June 15, 1999....... 123,141,708.88
July 15, 1999....... 120,686,263.89
August 15, 1999..... 118,256,723.18
September 15,
1999.............. 115,852,817.65
October 15, 1999.... 113,474,280.95
November 15, 1999... 111,120,849.50
December 15, 1999... 108,792,262.46
January 15, 2000.... 106,488,261.64
February 15, 2000... 104,208,591.58
March 15, 2000...... 101,952,999.40
April 15, 2000...... 99,721,234.89
May 15, 2000........ 97,513,050.38
June 15, 2000....... 95,328,200.81
July 15, 2000....... 93,166,443.62
August 15, 2000..... 91,027,538.75
September 15, 2000.. 88,911,248.66
October 15, 2000.... 86,817,338.21
November 15, 2000... 84,745,574.77
December 15, 2000... 82,695,728.05
January 15, 2001.... 80,667,570.17
February 15, 2001... 78,660,875.59
March 15, 2001...... 76,675,421.13
April 15, 2001...... 74,710,985.88
May 15, 2001........ 72,767,351.25
June 15, 2001....... 70,844,300.90
July 15, 2001....... 68,941,620.70
August 15, 2001..... 67,059,098.80
September 15, 2001.. 65,196,525.47
October 15, 2001.... 63,353,693.17
November 15, 2001... 61,530,396.55
December 15, 2001... 59,726,432.31
January 15, 2002.... 57,941,599.32
February 15, 2002... 56,175,698.52
March 15, 2002...... 54,428,532.84
April 15, 2002...... 52,699,907.34
May 15, 2002........ 50,989,629.06
June 15, 2002....... 49,297,507.01
July 15, 2002....... 47,623,352.22
August 15, 2002..... 45,966,977.64
September 15, 2002.. 44,328,198.19
October 15, 2002.... 42,706,830.67
November 15, 2002... 41,102,693.78
December 15, 2002... 39,515,608.12
January 15, 2003.... 37,945,396.12
February 15, 2003... 36,391,882.08
March 15, 2003...... 34,854,892.08
April 15, 2003...... 33,334,254.02
May 15, 2003........ 31,829,797.59
June 15, 2003....... 30,341,354.21
July 15, 2003....... 28,868,757.06
August 15, 2003..... 27,411,841.07
September 15, 2003.. 25,970,442.86
October 15, 2003.... 24,544,400.73
November 15, 2003... 23,133,554.65
December 15, 2003... 21,737,746.29
January 15, 2004.... 20,356,818.89
February 15, 2004... 18,990,617.38
March 15, 2004...... 17,638,988.24
April 15, 2004...... 16,301,779.59
May 15, 2004........ 14,978,841.07
June 15, 2004....... 13,670,023.91
July 15, 2004....... 12,375,180.88
August 15, 2004..... 11,094,166.28
September 15, 2004.. 9,826,835.86
October 15, 2004.... 8,573,046.93
November 15, 2004... 7,332,658.26
December 15, 2004... 6,105,530.07
January 15, 2005.... 4,891,524.03
February 15, 2005... 3,690,503.24
March 15, 2005...... 2,502,332.24
April 15, 2005...... 1,326,876.94
May 15, 2005........ 164,004.66
June 15, 2005
and after.......... 0.00
</TABLE>
- ---------------
* The Targeted Balances for the C Class are equal to 80.00003338% of the
Targeted Balances for the F Class.
<PAGE>
CLASS FACTORS
Description of Factors
On or about the first business day of each month after the Closing Date,
Freddie Mac will publish and make available on its Internet Web-Site a Class
Factor for each Class having a principal amount. The Class Factor for any Class
for any month will be a truncated seven-digit decimal which, when multiplied by
the original principal amount of a Security of that Class (assuming such Class
was issued on the Closing Date), will equal its remaining principal amount,
after giving effect to any principal payment to be made on the Payment Date in
the same month. The Class Factor for an Accrual Class will also reflect any
addition to its principal amount to be made on the same Payment Date. For
example, the January 1 Class Factor for any Class will reflect the remaining
principal amount of a Security of that Class, after giving effect to any
principal payment (or addition to principal) to be made on January 15. Freddie
Mac will also publish and make available on its Internet Web-Site Class Factors
for each Notional Class (including each Call Class), which will reflect the
remaining notional principal amount of a Security of that Class in an analogous
manner. The Class Factor for each Class for the month of the Closing Date is
1.0000000.
Component Factors for the PB Class Components will be available from
Freddie Mac's Internet Web-Site or upon request by writing or calling the
Investor Inquiry Department of Freddie Mac at the address or phone numbers shown
on page S-2. The Component Factor for a Component is analogous to the Class
Factor for a Class.
Use of Factors
For any Payment Date, investors can calculate the amount of principal to be
paid on (or, in the case of an Accrual Class, the net amount to be paid on or
added to the principal amount of) a Security of any Class entitled to principal
payments by multiplying the original principal amount of that Security by the
difference between its Class Factors for the preceding and current months. The
amount of interest to be paid on (or added to the principal amount of) a
Security of any Class on each Payment Date will equal 30 days' interest on its
outstanding principal amount (or notional principal amount) as determined by its
Class Factor for the preceding month, plus additional interest on a Callable
Class upon its redemption. See "Redemption and Exchange" in this Supplement.
For example, the amount of principal to be paid on (or, in the case of an
Accrual Class, the net amount to be paid on or added to the principal amount of)
any Security entitled to principal payments on February 15 will reflect the
difference between its January 1 and February 1 Class Factors. The amount of
interest to be paid on (or added to the principal amount of) any Security on
February 15 (other than a Callable Class upon its redemption) will equal 30
days' interest at its Class Coupon, accrued during the month of January (in the
case of the Fixed Rate and Delay Classes) or from January 15 to February 15 (in
the case of the Non-Delay Classes), on the principal amount (or notional
principal amount) of such Security determined by its January 1 Class Factor.
GUARANTEES
Freddie Mac guarantees to each Holder of a Security other than a Call Class
(i) the timely payment of interest at the applicable Class Coupon and (ii) the
payment of the principal amount of the Holder's Security as described in this
Supplement. Freddie Mac guarantees to the Holder of a Call Class all proceeds
due such Holder upon exercise of its right to cause Freddie Mac to redeem the
related Callable Class as described under "Redemption and Exchange" above. See
"Description of Multiclass PCs -- Guarantees" in the Multiclass PC Offering
Circular.
Freddie Mac also guarantees the payment of interest and principal on the
Assets, Gold PCs and Gold Giant PCs. See "PC Security Structure -- Guarantees"
in the PC Offering Circular and "Description of Pass-Through PCs -- Guarantees"
in the Giant PC Offering Circular.
OPTIONAL REDEMPTION
Freddie Mac may redeem the Mortgage Securities and the RS Class, in
whole but not in part, on any Payment Date when their aggregate outstanding
principal amount would be less than 1% of their aggregate original principal
amount. Upon any redemption, the redemption price of the Mortgage Securities
will be applied to retire the outstanding Regular Classes and the R Class. Any
outstanding MACR Classes and Callable Classes will be retired from the proceeds
of redemption of their related Regular Classes. The PCs are not redeemable. The
Group 3 and Group 4 Assets may become subject to the optional redemption
provisions applicable to their respective Series. See "Description of Multiclass
PCs -- Optional Redemption" in the Multiclass PC Offering Circular.
The right of the Holder of a Call Class to direct the redemption of the
related Callable Class will terminate when Freddie Mac gives notice that it will
redeem the Mortgage Securities and the RS Class.
RESIDUAL PROCEEDS
Upon surrender of their certificates to the Registrar, the Holders of the
RS Class will receive the proceeds of the remaining assets of the Lower-Tier
REMIC Pool, if any, after all required principal and interest payments on the
Mortgage Securities and the RS Class have been made. Upon like surrender, the
Holders of the R Class will receive the proceeds of the remaining assets of the
Upper-Tier REMIC Pool, if any, after all required principal and interest
payments on the Regular Classes and the R Class have been made. In both cases,
any remaining assets are not likely to be significant.
PREPAYMENT AND YIELD ANALYSIS
GENERAL
Mortgage Prepayments
The rates of principal payments on the PCs will depend directly, and the
rates of principal payments on the Group 3 and Group 4 Assets and the Securities
will depend indirectly, on the rates of principal payments on the related
Mortgages. Mortgage principal payments may be in the form of scheduled
amortization or partial or full prepayments. "Prepayments" include prepayments
by the borrower, liquidations resulting from default, casualty or condemnation
and payments made by Freddie Mac pursuant to its guarantee of principal (other
than scheduled amortization) on PCs. The Mortgages are subject to prepayment at
any time without penalty.
Mortgage prepayment rates are likely to fluctuate significantly. In
general, when prevailing mortgage interest rates decline significantly below the
interest rates on the Mortgages, the prepayment rate on the Mortgages is likely
to increase, although a number of other factors also may influence the
prepayment rate. See "Prepayments, Yields and Suitability" in the PC Offering
Circular.
Acceleration of mortgage payments as a result of transfers of mortgaged
properties is an important factor affecting prepayment rates. The Mortgages
generally provide that, in the event of the transfer or prospective transfer of
the underlying mortgaged property, the full unpaid principal balance is due and
payable at the option of the holder. Freddie Mac, in most cases, requires
mortgage servicers to enforce such "due-on-transfer" provisions where permitted
by applicable law. See "The Mortgages -- Mortgage Purchase and Servicing
Standards -- Mortgage Servicing -- Assumption and Due-on-Transfer Policies" in
the PC Offering Circular.
Information on the principal payment history of the PCs and the Group 3 and
Group 4 Assets is available from the Investor Inquiry Department at Freddie Mac
at the address or phone numbers shown on page S-2. However, historical payment
experience is not likely to be indicative of future payment experience on the
Mortgages, PCs and Assets.
PSA Model
Prepayments on pools of mortgages are commonly measured relative to a
variety of prepayment models. The particular model used in this Supplement is
the Public Securities Association's standard prepayment model, or "PSA." This
model assumes that mortgages will prepay at an annual rate of 0.2% in the first
month after origination, that the prepayment rate increases at an annual rate of
0.2% per month up to the 30th month after origination and that the prepayment
rate is constant at 6% per annum in the 30th and later months (this assumption
is called "100% PSA"). For example, at 100% PSA, mortgages with a loan age of
three months (i.e., mortgages in their fourth month after origination) are
assumed to prepay at an annual rate of 0.8%. "0% PSA" assumes no prepayments;
"50% PSA" assumes prepayment rates equal to 0.50 times 100% PSA; "200% PSA"
assumes prepayment rates equal to 2.00 times 100% PSA; and so forth. PSA is not
a description of historical prepayment experience or a prediction of the rate of
prepayment of the Mortgages.
Weighted Average Life
The weighted average life of a security refers to the average amount of
time that will elapse from the date of its issuance until each dollar of
principal has been repaid to the investor. The weighted average lives of the
Classes will depend primarily on the rate at which principal is paid on the
related Mortgages, on the manner in which such principal is allocated to the
related Assets and, in the case of each Callable Class, on whether and when a
redemption of that Class occurs. This Supplement shows weighted average lives
under various Mortgage prepayment assumptions. In each case, Freddie Mac has
calculated the weighted average life by (i) multiplying the assumed net
reduction, if any, in the principal amount on each Payment Date by the number of
years from the Closing Date to such Payment Date, (ii) summing the results and
(iii) dividing the sum by the aggregate amount of the assumed net reductions in
principal amount.
Yield
The yield of each Class will depend upon its purchase price, the rate of
principal payments on the related Asset or Assets (which will be sensitive to
the rate of principal payments on the related Mortgages), the manner in which
principal is allocated to the related Asset or Assets, the actual
characteristics of the related Mortgages and, the case of each Callable Class,
whether a redemption of that Class occurs. The yield of each Floating Rate or
Inverse Floating Rate Class will also depend on its sensitivity to the level of
the applicable Index. This Supplement shows pre-tax yields to maturity under
various scenarios. In each case, Freddie Mac has calculated the pre-tax yield by
(i) determining the monthly discount rate (whether positive or negative) that,
when applied to an assumed stream of cash flows to be paid on the applicable
Class, would cause the discounted present value of such assumed stream of cash
flows to equal an assumed purchase price (including accrued interest, if any) of
that Class and (ii) converting such monthly rate to a corporate bond equivalent
(i.e., semiannual payment) rate. The yield calculations do not take into account
any variations in the interest rates at which investors may be able to reinvest
payments received. Consequently, they do not reflect the return on any
investment when reinvestment rates other than the discount rate are considered.
Modeling Assumptions
In order to prepare the various tables and other statistical information in
this Supplement, Freddie Mac has made certain assumptions regarding the
underlying Mortgages. Unless otherwise noted, each table is based on the
following assumptions (the "Modeling Assumptions"), among others:
- The Mortgages underlying the Group 1 and Group 2 Assets have the
assumed characteristics shown under "Terms Sheet -- Mortgage
Characteristics" in this Supplement;
- As of November 1, 1996, each Mortgage underlying the Group 3 or Group
4 Asset has a remaining term to maturity equal to the weighted average
remaining term to maturity, a loan age equal to the weighted average
loan age, and an interest rate equal to the weighted average interest
rate, of all the Mortgages underlying the same PC;
- As of the Closing Date, the Assets have the principal balances shown
under "Terms Sheet -- The Assets" in this Supplement;
- Payments on the Assets and the Securities are always received on the
15th of the month, whether or not a Business Day;
- In the case of the information shown for a Callable Class, no
redemption occurs, except as otherwise indicated;
- Freddie Mac does not make an optional redemption;
- Payments on the Group 3 and Group 4 Assets are made as described in
their respective Asset Offering Circulars; and
- Each Class is issued and outstanding on the Closing Date, is held from
the Closing Date to retirement and is not exchanged in whole or in
part.
When reading the tables and the related text, investors should bear in mind
that the Modeling Assumptions, like any other stated assumptions, are unlikely
to be entirely consistent with actual experience. For example, most of the
Mortgages do not have the characteristics assumed, many Payment Dates will occur
on the first Business Day after the 15th of the month, certain Classes will not
be outstanding on the Closing Date and redemptions may occur as described above.
Principal Payment Stability
Mortgages and mortgage securities, such as the PCs, the Assets and the
Securities, are subject to prepayment uncertainty. The rates of principal
payments on the PCs will depend directly, and the rates of principal payments on
the Group 3 and Group 4 Assets and the Securities will depend indirectly, on the
rates of principal payments on their related Mortgages. However, within certain
limits, some Classes of Multiclass PCs and MACR Classes, such as the PAC,
Scheduled and TAC Classes, are expected to exhibit a lower level of prepayment
uncertainty than the related Mortgages and PCs. Such Classes are said to have a
degree of "stability." Stability in one Class or group of Classes is necessarily
offset by instability in other Classes, such as the Support Classes, which are
said to "support" the more stable Classes.
Suitability
The Securities, especially the Interest Only, Principal Only, Inverse
Floating Rate, Accrual, Call, Callable, Support, Component and Residual Classes,
are not suitable investments for all investors. The Securities are not
appropriate investments for any investor that requires a single lump sum payment
on a predetermined date or an otherwise certain payment stream. The Call Classes
will not receive payments of principal or interest. In addition, although the
Underwriter intends to make a market for the purchase and sale of the Securities
after their initial issuance, it has no obligation to do so. There is no
assurance that such a secondary market will develop, that any secondary market
will continue, or that the price at which an investor can sell an investment in
any Class will enable the investor to realize a desired yield on that
investment. The market values of the Classes are likely to fluctuate; such
fluctuations may be significant and could result in significant losses to
investors. The secondary markets for mortgage-related securities have
experienced periods of illiquidity and can be expected to do so in the future.
Illiquidity can have a severely adverse effect on the prices of Classes that are
especially sensitive to prepayment, redemption or interest rate risk or that
have been structured to meet the investment requirements of limited categories
of investors. Investors are encouraged to consult their own advisors regarding
the financial, legal, tax and other aspects of an investment in the Securities.
The flexibility created by the ability to modify and combine certain Classes of
Multiclass PCs and MACR Classes may affect the liquidity of the Classes and the
prices that potential purchasers are willing to pay in the secondary market. In
addition, the redemption feature of the Callable Classes may affect the market
values of those Classes. No investor should purchase Securities of any Class
unless the investor understands and is able to bear the prepayment, redemption,
yield, liquidity and market risks associated with that Class.
PREPAYMENT AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
Accretion Directed Classes
Payments of principal on each Accretion Directed Class are likely to be
stable, in varying degrees, under relatively slow prepayment scenarios because
the applicable Accrual Amount will be dedicated to making principal payments on
that Class, as described above, until it has been retired. The weighted average
life of any Accretion Directed Class cannot exceed its weighted average life as
shown in the following table under any prepayment scenario, even a scenario
where there are no prepayments. Moreover, based on the Modeling Assumptions,
each Accretion Directed Class would be retired on, but not before, its Final
Payment Date if the related Mortgages prepay at any rate at or below the rate
shown for that Class until its retirement.
ACCRETION DIRECTED CLASSES
MAXIMUM WEIGHTED
AVERAGE LIFE PREPAYMENT RATE
CLASS (IN YEARS) FINAL PAYMENT DATE AT OR BELOW
- ------ ---------------- ------------------ ---------------
AL 6.0 August 15, 2007 95% PSA
VA 3.8 November 15, 2003 370% PSA
VC 8.5 November 15, 2006 250% PSA
VD 12.7 December 15, 2011 150% PSA
VE 2.6 November 15, 2001 230% PSA
VG 6.0 November 15, 2003 210% PSA
VH 9.0 October 15, 2007 200% PSA
VJ 12.8 May 15, 2011 185% PSA
The Mortgages will have characteristics that differ from those of the
Modeling Assumptions. Therefore, even if the Mortgages prepay at a rate at or
somewhat below the rate shown for any Accretion Directed Class, that Class could
be retired before its Final Payment Date and its weighted average life could be
shortened.
The principal payment stability of the AL Class will be supported in part
by its receipt of the ZB Accrual Amount. It will be protected against early
retirement by the AN, AS, AO, AP, AQ, FQ, SQ, FC and SD Classes and PB-2
Component (the "Group 2 Support Classes and Component"). When those Classes and
Component are retired, however, the AL Class, if outstanding, will become more
sensitive to Mortgage prepayments and may be retired before its Final Payment
Date. The AL Class is also a Scheduled Class. See "PAC and Scheduled Classes and
Component" below.
The principal payment stability of the VA, VC and VD Classes will be
supported primarily by their receipt of the ZV and ZU Accrual Amounts. They will
be protected against early retirement by the A, B, D, F, FB and PO Classes. When
those Classes are retired, however, the VA, VC and VD Classes, if outstanding,
will become sensitive to Mortgage prepayments and may be retired before their
Final Payment Dates.
The principal payment stability of the VE, VG, VH and VJ Classes will be
supported primarily by their receipt of the ZC Accrual Amount. They will be
protected against early retirement by the Group 2 Support Classes and Component,
the AL, ZB, AM and AR Classes and the PB-1 Component. When those Classes and
Components are retired, however, the VE, VG, VH and VJ Classes, if outstanding,
will become sensitive to Mortgage prepayments and may be retired before their
Final Payment Dates.
PAC and Scheduled Classes and Component
Payments of principal on the PAC and Scheduled Classes and Component are
likely to be relatively stable because they will receive principal payments in
accordance with their schedules of Targeted Balances, so long as Mortgage
prepayments occur at rates that are neither too fast nor too slow to support
their schedules. Moreover, the PAC and Scheduled Classes and Component will have
cumulative priorities for future payments if they fall behind their schedules.
For each PAC or Scheduled Class or Component, there is a range of constant
Mortgage prepayment rates (an "Effective Range") at which such Class or
Component would adhere to its schedule of Targeted Balances. The Effective Range
at any time depends on the actual or assumed characteristics of the Mortgages at
that time. Based on the Modeling Assumptions, each PAC or Scheduled Class or
Component would adhere to its Targeted Balances schedule if the related
Mortgages were to prepay at any constant percentage of PSA within its initial
Effective Range shown below, until that Class or Component has been retired.
<PAGE>
INITIAL EFFECTIVE RANGES
<TABLE>
<CAPTION>
CLASS OR COMPONENT RANGE*
------------------------------------------------------- --------------------------
<S> <C>
PAC:
A.................................................... 100% PSA through 355% PSA
AA................................................... 100% PSA through 545% PSA
AB................................................... 100% PSA through 345% PSA
AC................................................... 100% PSA through 315% PSA
AD................................................... 100% PSA through 270% PSA
AE................................................... 100% PSA through 255% PSA
AG................................................... 100% PSA through 250% PSA
AH................................................... 100% PSA through 250% PSA
AJ................................................... 90% PSA through 250% PSA
AK................................................... 65% PSA through 250% PSA
SCHEDULED:
AL................................................... 115% PSA through 185% PSA
AM and ZB............................................ 120% PSA through 185% PSA
AR and PB-1.......................................... 120% PSA through 180% PSA
ZC................................................... 110% PSA through 180% PSA
</TABLE>
-------------------------
* The Targeted Balances schedules were prepared by calculating the
amounts that would be available for payments of principal using,
among other things, the Modeling Assumptions and the "structuring
ranges" shown under "Terms Sheet -- Allocation of Principal" in this
Supplement.
The underlying Mortgages will have characteristics that differ from those
of the Modeling Assumptions. The initial Effective Ranges, if calculated using
the actual characteristics of the Mortgages, could differ from those shown in
the table. Therefore, even if the Mortgages were to prepay at a constant rate
within the initial Effective Range shown for any PAC or Scheduled Class or
Component, but near its upper or lower end, that Class or Component could fail
to adhere to its Targeted Balances schedule.
Moreover, the Mortgages will not prepay at any constant rate. Non-constant
prepayment rates can cause any PAC or Scheduled Class or Component not to adhere
to its Targeted Balances schedule, even if such rates remain within its initial
Effective Range. The Effective Range for any PAC or Scheduled Class or Component
can narrow or "drift" upward or downward over time.
The principal payment stability of the A Class will be supported in part by
the B, FB and PO Classes. The principal payment stability of the other PAC
Classes will be supported in part by the Scheduled Classes and Component, by the
VE, VG, VH and VJ Classes and by the Group 2 Support Classes and Component. The
principal payment stability of the Scheduled Classes and Component will be
supported in part by the Group 2 Support Classes and Component. When its
supporting Classes and Components are retired, any outstanding PAC or Scheduled
Class or Component will no longer have an Effective Range and will become more
sensitive to Mortgage prepayments.
If the Mortgages prepay at rates that are generally below the Effective
Range for any PAC or Scheduled Class or Component, the available principal may
be insufficient to reduce that Class or Component to its Targeted Balance and
its weighted average life may be extended, perhaps significantly. If the
Mortgages prepay at rates that are generally above the Effective Range for any
PAC or Scheduled Class or Component, its weighted average life may be shortened,
perhaps significantly. However, the weighted average lives of one or more of the
PAC and Scheduled Classes and Component could be extended under certain
scenarios involving Mortgage prepayments at rates that are generally above their
Effective Ranges.
The entire Group 1 and Group 2 Asset Principal Amounts will be distributed
monthly on each Payment Date and will not be retained for distribution on
subsequent Payment Dates. Thus, the likelihood that the PAC and Scheduled
Classes and Component will adhere to their Targeted Balances schedules will not
be enhanced by averaging high and low principal payments in different months.
TAC Classes
Payments of principal on the F and C Classes are expected to be more
stable than would be the case if the TAC Classes were not entitled to receive
payments, to the extent of available principal, according to their schedules of
Targeted Balances. Based on the Modeling Assumptions, the TAC Classes would
adhere to their Targeted Balances schedules if the related Mortgages were to
prepay at a constant rate of 195% PSA until the TAC Classes have been retired.
However, because the characteristics of the related Mortgages will differ from
those assumed and because the related Mortgages will not prepay at 195% PSA or
any other constant rate, it is not likely that the TAC Classes will consistently
adhere to their Targeted Balances schedules.
The principal payment stability of the TAC Classes will be supported in
part by the FB and PO Classes. When the FB and PO Classes are retired, the TAC
Classes, if outstanding, will become more sensitive to Mortgage prepayments.
Based on the Modeling Assumptions, if the related Mortgages prepay at rates
that are generally below approximately 195% PSA, the Group 1 Asset Principal
Amount may be insufficient to reduce the TAC Classes to their Targeted Balances
and their weighted average lives may be extended, perhaps significantly. Based
on the Modeling Assumptions, if the related Mortgages prepay at rates that are
generally above approximately 195% PSA, the weighted average lives of the TAC
Classes may be shortened, perhaps significantly. However, the weighted average
lives of the TAC Classes could be extended under certain scenarios involving
Mortgage prepayments that are generally above such rate.
As is the case with the PAC and Scheduled Classes and Component, the
likelihood that the TAC Classes will adhere to their Targeted Balances schedules
will not be enhanced by averaging high and low principal payments in different
months.
Support Classes and Component
Each Support Class or Component will support the principal payment
stability of the Accretion Directed, PAC, TAC and/or Scheduled Classes and
Component as described above. Thus, each Support Class or Component is likely to
be much more sensitive to Mortgage prepayments than is any Class or Component it
supports. The Support Classes and Component may receive no principal payments
for extended periods of time and may receive principal payments that vary widely
from period to period. Relatively fast Mortgage prepayments may significantly
shorten, and relatively slow Mortgage prepayments may significantly extend, the
weighted average lives of the Support Classes and Component.
Component Class
The PB Class consists of a Scheduled Component and, primarily, a Support
Component. The principal payment characteristics of the PB Class will be similar
to those of a Support Class.
Sequential Pay Classes
As described above, each Sequential Pay Class will receive payments of its
related Asset Principal Amount in a prescribed sequence. While it is receiving
principal payments from its related Asset Principal Amount, the sensitivity of
each Sequential Pay Class (other than an Accretion Directed Class) to
prepayments on the underlying Mortgages will be approximately the same as that
of its related Assets. See "The Assets" below. The Z and ZA Classes, which are
Sequential Pay Classes, are also Callable Classes. If either Callable Class is
redeemed, its weighted average life will be reduced, perhaps significantly.
Pass-Through Classes
Each Pass-Through Class will receive all or a specified portion of the
principal payments made on its underlying Asset on each Payment Date. The
sensitivity of each Pass-Through Class to prepayments on the related Mortgages
will be the same as that of the underlying Asset. See "The Assets" below.
MACR Classes
The principal payment characteristics of a MACR Class will reflect the
principal payment characteristics of its related Class or Classes of Multiclass
PCs. However, since a MACR Class may be formed through the combination of
Classes of Multiclass PCs which have different principal payment
characteristics, the principal payment characteristics of the MACR Classes
should be viewed in terms of the resulting combination of Multiclass PCs in the
aggregate rather than as a group of individual Classes of Multiclass PCs with
different principal payment characteristics. For example, the C Class, which is
a TAC Class, is a combination of a PAC Class and a Support Class.
The Assets
For purposes of receiving principal payments, the Group 3 and Group 4
Assets are categorized as shown under "Terms Sheet -- The Assets" in this
Supplement.
The Group 3 Asset was structured to receive principal payments in
accordance with a schedule. However, it does not currently have any Effective
Range. The principal payment stability of the Group 3 Asset is supported by
certain other classes in its Series. When those supporting classes are retired,
the Group 3 Asset, if outstanding, will become more sensitive to Mortgage
prepayments. Moreover, the Group 3 Asset supports other classes in its Series.
There can be no assurance that the Group 3 Asset will receive principal payments
in accordance with its schedule.
The Group 4 Asset is a Support Class. The Group 4 Asset is likely to be
much more sensitive to prepayments on the underlying Mortgages than are the
related PCs and the classes in its Series that it supports. The Group 4 Asset
may receive principal payments that vary widely from period to period.
See "Prepayment and Yield Analysis -- Prepayment and Weighted Average Life
Considerations" in the Asset Offering Circulars.
Declining Balances Table
The following table shows, for the indicated Classes of Securities and the
underlying Assets, (i) the percentages of their original principal amounts (or,
in the case of the Assets, their outstanding principal amounts as of the Closing
Date) that would be outstanding after each of the dates shown under various
prepayment scenarios and assuming that each Class is issued and outstanding from
the Closing Date through retirement and that no redemption occurs, and (ii)
their corresponding weighted average lives assuming that no redemption occurs
or, in the case of a Callable Class, that a redemption occurs on one of the
Payment Dates shown. Freddie Mac has prepared this table using the Modeling
Assumptions. However, for 0% PSA, Freddie Mac has assumed that each Mortgage
underlying the Group 1 or Group 2 Assets bears interest at a per annum rate 2.5%
above that of such Assets and has a remaining term to maturity of 360 months and
a loan age of 0 months. The Mortgages do not have the characteristics assumed,
and Mortgage prepayment rates will differ from those assumed in the scenarios.
These differences may affect the actual payment behavior and weighted average
life of any Class or Asset. For example, because of the diverse remaining terms
to maturity, loan ages and interest rates of the Mortgages, principal payments
on any Class or Asset may be faster or (except at 0% PSA in the case of the
Group 1 and Group 2 Assets and related Classes) slower than indicated, even if
the Mortgages were to prepay under the scenarios shown. This may be the case
even if the weighted average remaining term to maturity, weighted average loan
age and weighted average interest rate of the Mortgages are the same as those of
mortgages having the characteristics assumed.
<PAGE>
PERCENTAGES OF ORIGINAL PRINCIPAL AMOUNTS OUTSTANDING* AND WEIGHTED AVERAGE
LIVES
<TABLE>
<CAPTION>
A AA AB
---------------------------------- ---------------------------------- ------------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- ------------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997....... 100 100 100 100 100 94 52 52 52 52 100 100 100 100 100
November 15, 1998....... 99 94 94 94 94 86 0 0 0 0 100 86 86 86 86
November 15, 1999....... 97 70 70 70 70 79 0 0 0 0 100 13 13 13 0
November 15, 2000....... 94 48 48 48 45 70 0 0 0 0 100 0 0 0 0
November 15, 2001....... 91 26 26 26 4 61 0 0 0 0 100 0 0 0 0
November 15, 2002....... 88 6 6 6 0 50 0 0 0 0 100 0 0 0 0
November 15, 2003....... 84 0 0 0 0 39 0 0 0 0 100 0 0 0 0
November 15, 2004....... 80 0 0 0 0 26 0 0 0 0 100 0 0 0 0
November 15, 2005....... 76 0 0 0 0 12 0 0 0 0 100 0 0 0 0
November 15, 2006....... 71 0 0 0 0 0 0 0 0 0 97 0 0 0 0
November 15, 2007....... 65 0 0 0 0 0 0 0 0 0 79 0 0 0 0
November 15, 2008....... 59 0 0 0 0 0 0 0 0 0 59 0 0 0 0
November 15, 2009....... 52 0 0 0 0 0 0 0 0 0 38 0 0 0 0
November 15, 2010....... 44 0 0 0 0 0 0 0 0 0 14 0 0 0 0
November 15, 2011....... 36 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2012....... 26 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2013....... 16 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2014....... 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2015....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2016....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2017....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2018....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2019....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2020....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2021....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2022....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)........... 12.3 3.9 3.9 3.9 3.6 5.7 1.0 1.0 1.0 1.0 12.4 2.5 2.5 2.5 2.4
<CAPTION>
AC
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 100 100 100 100 100
November 15, 1998............. 100 100 100 100 100
November 15, 1999............. 100 100 100 100 22
November 15, 2000............. 100 0 0 0 0
November 15, 2001............. 100 0 0 0 0
November 15, 2002............. 100 0 0 0 0
November 15, 2003............. 100 0 0 0 0
November 15, 2004............. 100 0 0 0 0
November 15, 2005............. 100 0 0 0 0
November 15, 2006............. 100 0 0 0 0
November 15, 2007............. 100 0 0 0 0
November 15, 2008............. 100 0 0 0 0
November 15, 2009............. 100 0 0 0 0
November 15, 2010............. 100 0 0 0 0
November 15, 2011............. 69 0 0 0 0
November 15, 2012............. 0 0 0 0 0
November 15, 2013............. 0 0 0 0 0
November 15, 2014............. 0 0 0 0 0
November 15, 2015............. 0 0 0 0 0
November 15, 2016............. 0 0 0 0 0
November 15, 2017............. 0 0 0 0 0
November 15, 2018............. 0 0 0 0 0
November 15, 2019............. 0 0 0 0 0
November 15, 2020............. 0 0 0 0 0
November 15, 2021............. 0 0 0 0 0
November 15, 2022............. 0 0 0 0 0
November 15, 2023............. 0 0 0 0 0
November 15, 2024............. 0 0 0 0 0
November 15, 2025............. 0 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 15.3 3.5 3.5 3.5 2.9
</TABLE>
<TABLE>
<CAPTION>
AD AE AG
---------------------------------- ---------------------------------- ------------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- ------------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997....... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1998....... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1999....... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 2000....... 100 85 85 85 0 100 100 100 100 58 100 100 100 100 100
November 15, 2001....... 100 14 14 14 0 100 100 100 100 0 100 100 100 100 60
November 15, 2002....... 100 0 0 0 0 100 49 49 49 0 100 100 100 100 0
November 15, 2003....... 100 0 0 0 0 100 0 0 0 0 100 91 91 91 0
November 15, 2004....... 100 0 0 0 0 100 0 0 0 0 100 49 49 49 0
November 15, 2005....... 100 0 0 0 0 100 0 0 0 0 100 10 10 10 0
November 15, 2006....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2007....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2008....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2009....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2010....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2011....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2012....... 99 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2013....... 65 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2014....... 26 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2015....... 0 0 0 0 0 85 0 0 0 0 100 0 0 0 0
November 15, 2016....... 0 0 0 0 0 39 0 0 0 0 100 0 0 0 0
November 15, 2017....... 0 0 0 0 0 0 0 0 0 0 93 0 0 0 0
November 15, 2018....... 0 0 0 0 0 0 0 0 0 0 53 0 0 0 0
November 15, 2019....... 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0
November 15, 2020....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2021....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2022....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)........... 17.4 4.5 4.5 4.5 3.4 19.8 6.0 6.0 6.0 4.1 22.0 8.0 8.0 8.0 5.2
<CAPTION>
AH
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 100 100 100 100 100
November 15, 1998............. 100 100 100 100 100
November 15, 1999............. 100 100 100 100 100
November 15, 2000............. 100 100 100 100 100
November 15, 2001............. 100 100 100 100 100
November 15, 2002............. 100 100 100 100 98
November 15, 2003............. 100 100 100 100 50
November 15, 2004............. 100 100 100 100 14
November 15, 2005............. 100 100 100 100 0
November 15, 2006............. 100 76 76 76 0
November 15, 2007............. 100 47 47 47 0
November 15, 2008............. 100 23 23 23 0
November 15, 2009............. 100 2 2 2 0
November 15, 2010............. 100 0 0 0 0
November 15, 2011............. 100 0 0 0 0
November 15, 2012............. 100 0 0 0 0
November 15, 2013............. 100 0 0 0 0
November 15, 2014............. 100 0 0 0 0
November 15, 2015............. 100 0 0 0 0
November 15, 2016............. 100 0 0 0 0
November 15, 2017............. 100 0 0 0 0
November 15, 2018............. 100 0 0 0 0
November 15, 2019............. 100 0 0 0 0
November 15, 2020............. 59 0 0 0 0
November 15, 2021............. 4 0 0 0 0
November 15, 2022............. 0 0 0 0 0
November 15, 2023............. 0 0 0 0 0
November 15, 2024............. 0 0 0 0 0
November 15, 2025............. 0 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 24.2 11.0 11.0 11.0 7.1
</TABLE>
- ---------------
* Rounded to nearest whole percentage.
<PAGE>
<TABLE>
<CAPTION>
AJ AK AL
---------------------------------- ---------------------------------- -----------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- -----------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997........ 100 100 100 100 100 100 100 100 100 100 93 93 87 87 87
November 15, 1998........ 100 100 100 100 100 100 100 100 100 100 86 86 69 69 0
November 15, 1999........ 100 100 100 100 100 100 100 100 100 100 79 79 52 0 0
November 15, 2000........ 100 100 100 100 100 100 100 100 100 100 71 71 38 0 0
November 15, 2001........ 100 100 100 100 100 100 100 100 100 100 62 62 26 0 0
November 15, 2002........ 100 100 100 100 100 100 100 100 100 100 53 53 17 0 0
November 15, 2003........ 100 100 100 100 100 100 100 100 100 100 43 43 10 0 0
November 15, 2004........ 100 100 100 100 100 100 100 100 100 100 32 32 5 0 0
November 15, 2005........ 100 100 100 100 76 100 100 100 100 100 20 17 0 0 0
November 15, 2006........ 100 100 100 100 38 100 100 100 100 100 8 0 0 0 0
November 15, 2007........ 100 100 100 100 10 100 100 100 100 100 0 0 0 0 0
November 15, 2008........ 100 100 100 100 0 100 100 100 100 84 0 0 0 0 0
November 15, 2009........ 100 100 100 100 0 100 100 100 100 62 0 0 0 0 0
November 15, 2010........ 100 73 73 73 0 100 100 100 100 45 0 0 0 0 0
November 15, 2011........ 100 47 47 47 0 100 100 100 100 33 0 0 0 0 0
November 15, 2012........ 100 25 25 25 0 100 100 100 100 24 0 0 0 0 0
November 15, 2013........ 100 6 6 6 0 100 100 100 100 17 0 0 0 0 0
November 15, 2014........ 100 0 0 0 0 100 87 87 87 12 0 0 0 0 0
November 15, 2015........ 100 0 0 0 0 100 69 69 69 9 0 0 0 0 0
November 15, 2016........ 100 0 0 0 0 100 54 54 54 6 0 0 0 0 0
November 15, 2017........ 100 0 0 0 0 100 42 42 42 4 0 0 0 0 0
November 15, 2018........ 100 0 0 0 0 100 32 32 32 3 0 0 0 0 0
November 15, 2019........ 100 0 0 0 0 100 24 24 24 2 0 0 0 0 0
November 15, 2020........ 100 0 0 0 0 100 17 17 17 1 0 0 0 0 0
November 15, 2021........ 100 0 0 0 0 100 11 11 11 1 0 0 0 0 0
November 15, 2022........ 0 0 0 0 0 94 7 7 7 0 0 0 0 0 0
November 15, 2023........ 0 0 0 0 0 3 3 3 3 0 0 0 0 0 0
November 15, 2024........ 0 0 0 0 0 1 1 1 1 0 0 0 0 0 0
November 15, 2025........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2026........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)............ 25.5 15.0 15.0 15.0 9.7 26.3 21.0 21.0 21.0 14.6 6.0 5.8 3.5 2.2 1.3
<CAPTION>
AM
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 100 100 100 100 100
November 15, 1998............. 100 100 100 100 0
November 15, 1999............. 100 100 100 100 0
November 15, 2000............. 100 100 100 2 0
November 15, 2001............. 100 100 100 0 0
November 15, 2002............. 100 100 100 0 0
November 15, 2003............. 100 100 100 0 0
November 15, 2004............. 100 100 100 0 0
November 15, 2005............. 100 100 100 0 0
November 15, 2006............. 100 100 86 0 0
November 15, 2007............. 100 100 69 0 0
November 15, 2008............. 100 100 50 0 0
November 15, 2009............. 100 100 31 0 0
November 15, 2010............. 100 98 11 0 0
November 15, 2011............. 100 47 0 0 0
November 15, 2012............. 100 0 0 0 0
November 15, 2013............. 100 0 0 0 0
November 15, 2014............. 100 0 0 0 0
November 15, 2015............. 100 0 0 0 0
November 15, 2016............. 100 0 0 0 0
November 15, 2017............. 100 0 0 0 0
November 15, 2018............. 100 0 0 0 0
November 15, 2019............. 100 0 0 0 0
November 15, 2020............. 100 0 0 0 0
November 15, 2021............. 100 0 0 0 0
November 15, 2022............. 100 0 0 0 0
November 15, 2023............. 100 0 0 0 0
November 15, 2024............. 0 0 0 0 0
November 15, 2025............. 0 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 27.5 14.9 11.9 3.6 1.8
</TABLE>
<TABLE>
<CAPTION>
AN AO AP
---------------------------------- ---------------------------------- -------------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- ------------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997....... 100 100 51 0 0 100 100 100 0 0 100 100 100 0 0
November 15, 1998....... 100 100 0 0 0 100 100 100 0 0 100 100 100 0 0
November 15, 1999....... 100 100 0 0 0 100 100 43 0 0 100 100 100 0 0
November 15, 2000....... 100 100 0 0 0 100 100 0 0 0 100 100 40 0 0
November 15, 2001....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2002....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2003....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2004....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2005....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2006....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2007....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2008....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2009....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2010....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2011....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2012....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2013....... 100 100 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2014....... 100 38 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2015....... 100 0 0 0 0 100 100 0 0 0 100 100 0 0 0
November 15, 2016....... 100 0 0 0 0 100 8 0 0 0 100 100 0 0 0
November 15, 2017....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2018....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2019....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2020....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2021....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2022....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2023....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2024....... 100 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 15, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)........... 28.6 17.8 1.0 0.2 0.1 28.8 19.6 2.9 0.7 0.4 29.0 20.3 3.9 0.9 0.5
<CAPTION>
AQ, FQ, H AND SQ
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 100 100 100 93 0
November 15, 1998............. 100 100 100 0 0
November 15, 1999............. 100 100 100 0 0
November 15, 2000............. 100 100 100 0 0
November 15, 2001............. 100 100 89 0 0
November 15, 2002............. 100 100 77 0 0
November 15, 2003............. 100 100 68 0 0
November 15, 2004............. 100 100 62 0 0
November 15, 2005............. 100 100 59 0 0
November 15, 2006............. 100 100 56 0 0
November 15, 2007............. 100 100 50 0 0
November 15, 2008............. 100 100 43 0 0
November 15, 2009............. 100 100 33 0 0
November 15, 2010............. 100 100 23 0 0
November 15, 2011............. 100 100 11 0 0
November 15, 2012............. 100 100 0 0 0
November 15, 2013............. 100 100 0 0 0
November 15, 2014............. 100 100 0 0 0
November 15, 2015............. 100 100 0 0 0
November 15, 2016............. 100 100 0 0 0
November 15, 2017............. 100 86 0 0 0
November 15, 2018............. 100 55 0 0 0
November 15, 2019............. 100 24 0 0 0
November 15, 2020............. 100 0 0 0 0
November 15, 2021............. 100 0 0 0 0
November 15, 2022............. 100 0 0 0 0
November 15, 2023............. 100 0 0 0 0
November 15, 2024............. 100 0 0 0 0
November 15, 2025............. 95 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 29.2 22.2 10.2 1.3 0.7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AR AS B
---------------------------------- ---------------------------------- -----------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- -----------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997........ 100 100 100 100 100 100 100 100 0 0 99 93 88 88 88
November 15, 1998........ 100 100 100 100 0 100 100 61 0 0 98 83 70 68 54
November 15, 1999........ 100 100 100 100 0 100 100 0 0 0 98 83 59 48 20
November 15, 2000........ 100 100 100 100 0 100 100 0 0 0 98 82 50 30 0
November 15, 2001........ 100 100 100 0 0 100 100 0 0 0 98 82 43 18 0
November 15, 2002........ 100 100 100 0 0 100 100 0 0 0 98 81 38 11 0
November 15, 2003........ 100 100 100 0 0 100 100 0 0 0 98 72 26 0 0
November 15, 2004........ 100 100 100 0 0 100 100 0 0 0 98 60 11 0 0
November 15, 2005........ 100 100 100 0 0 100 100 0 0 0 98 49 0 0 0
November 15, 2006........ 100 100 86 0 0 100 100 0 0 0 98 38 0 0 0
November 15, 2007........ 100 100 69 0 0 100 100 0 0 0 98 28 0 0 0
November 15, 2008........ 100 100 50 0 0 100 100 0 0 0 98 18 0 0 0
November 15, 2009........ 100 100 31 0 0 100 100 0 0 0 98 9 0 0 0
November 15, 2010........ 100 100 11 0 0 100 100 0 0 0 98 1 0 0 0
November 15, 2011........ 100 100 0 0 0 100 100 0 0 0 98 0 0 0 0
November 15, 2012........ 100 41 0 0 0 100 100 0 0 0 98 0 0 0 0
November 15, 2013........ 100 0 0 0 0 100 100 0 0 0 98 0 0 0 0
November 15, 2014........ 100 0 0 0 0 100 100 0 0 0 98 0 0 0 0
November 15, 2015........ 100 0 0 0 0 100 25 0 0 0 92 0 0 0 0
November 15, 2016........ 100 0 0 0 0 100 0 0 0 0 83 0 0 0 0
November 15, 2017........ 100 0 0 0 0 100 0 0 0 0 72 0 0 0 0
November 15, 2018........ 100 0 0 0 0 100 0 0 0 0 61 0 0 0 0
November 15, 2019........ 100 0 0 0 0 100 0 0 0 0 48 0 0 0 0
November 15, 2020........ 100 0 0 0 0 100 0 0 0 0 34 0 0 0 0
November 15, 2021........ 100 0 0 0 0 100 0 0 0 0 18 0 0 0 0
November 15, 2022........ 100 0 0 0 0 100 0 0 0 0 1 0 0 0 0
November 15, 2023........ 100 0 0 0 0 100 0 0 0 0 0 0 0 0 0
November 15, 2024........ 0 0 0 0 0 100 0 0 0 0 0 0 0 0 0
November 15, 2025........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2026........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)............ 27.7 16.0 11.9 4.1 2.0 28.7 18.9 2.1 0.5 0.3 22.2 8.3 4.4 3.1 2.1
<CAPTION>
C AND F
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 99 96 93 93 93
November 15, 1998............. 98 88 79 78 70
November 15, 1999............. 97 78 63 57 40
November 15, 2000............. 96 69 49 37 18
November 15, 2001............. 95 60 37 22 2
November 15, 2002............. 94 52 26 9 0
November 15, 2003............. 92 44 16 0 0
November 15, 2004............. 91 37 7 0 0
November 15, 2005............. 89 30 0 0 0
November 15, 2006............. 87 23 0 0 0
November 15, 2007............. 85 17 0 0 0
November 15, 2008............. 82 11 0 0 0
November 15, 2009............. 80 6 0 0 0
November 15, 2010............. 77 0 0 0 0
November 15, 2011............. 73 0 0 0 0
November 15, 2012............. 70 0 0 0 0
November 15, 2013............. 66 0 0 0 0
November 15, 2014............. 61 0 0 0 0
November 15, 2015............. 56 0 0 0 0
November 15, 2016............. 50 0 0 0 0
November 15, 2017............. 44 0 0 0 0
November 15, 2018............. 37 0 0 0 0
November 15, 2019............. 29 0 0 0 0
November 15, 2020............. 21 0 0 0 0
November 15, 2021............. 11 0 0 0 0
November 15, 2022............. 1 0 0 0 0
November 15, 2023............. 0 0 0 0 0
November 15, 2024............. 0 0 0 0 0
November 15, 2025............. 0 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 18.3 6.6 4.2 3.5 2.7
</TABLE>
<TABLE>
<CAPTION>
D, DA, DB, DC, DD,
DE, DF, DG, DH, DJ, FA, G, SA AND
DK, DL AND DP E, FB, PO AND SG GROUP 4 ASSET
---------------------------------- ---------------------------------- -----------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- -----------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997....... 100 100 100 100 100 100 100 100 72 44 100 100 100 100 80
November 15, 1998....... 100 100 100 100 100 100 100 100 19 0 100 100 100 100 0
November 15, 1999....... 100 100 100 100 100 100 100 100 0 0 100 100 100 75 0
November 15, 2000....... 100 100 100 100 100 100 100 100 0 0 100 100 100 56 0
November 15, 2001....... 100 100 100 100 100 100 100 100 0 0 100 100 100 42 0
November 15, 2002....... 100 100 100 100 0 100 100 100 0 0 100 100 100 32 0
November 15, 2003....... 100 100 100 87 0 100 100 100 0 0 100 100 100 26 0
November 15, 2004....... 100 100 100 0 0 100 100 100 0 0 100 100 100 22 0
November 15, 2005....... 100 100 100 0 0 100 100 95 0 0 100 100 100 22 0
November 15, 2006....... 100 100 100 0 0 100 100 49 0 0 100 100 99 22 0
November 15, 2007....... 100 100 100 0 0 100 100 8 0 0 100 100 99 22 0
November 15, 2008....... 100 100 48 0 0 100 100 0 0 0 100 100 99 22 0
November 15, 2009....... 100 100 0 0 0 100 100 0 0 0 100 100 99 22 0
November 15, 2010....... 100 100 0 0 0 100 100 0 0 0 100 100 98 22 0
November 15, 2011....... 100 100 0 0 0 100 70 0 0 0 100 100 96 22 0
November 15, 2012....... 100 100 0 0 0 100 38 0 0 0 100 100 87 22 0
November 15, 2013....... 100 100 0 0 0 100 9 0 0 0 100 100 78 22 0
November 15, 2014....... 100 63 0 0 0 100 0 0 0 0 100 100 69 22 0
November 15, 2015....... 100 14 0 0 0 100 0 0 0 0 100 100 61 22 0
November 15, 2016....... 100 0 0 0 0 100 0 0 0 0 100 100 53 18 0
November 15, 2017....... 100 0 0 0 0 100 0 0 0 0 100 91 45 15 0
November 15, 2018....... 100 0 0 0 0 100 0 0 0 0 100 78 38 13 0
November 15, 2019....... 100 0 0 0 0 100 0 0 0 0 100 66 31 10 0
November 15, 2020....... 100 0 0 0 0 100 0 0 0 0 100 54 25 8 0
November 15, 2021....... 100 0 0 0 0 100 0 0 0 0 100 42 19 6 0
November 15, 2022....... 100 0 0 0 0 100 0 0 0 0 100 30 13 4 0
November 15, 2023....... 100 0 0 0 0 26 0 0 0 0 100 19 8 3 0
November 15, 2024....... 0 0 0 0 0 0 0 0 0 0 48 9 4 1 0
November 15, 2025....... 0 0 0 0 0 0 0 0 0 0 4 1 0 0 0
November 15, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)........... 27.6 18.3 12.0 7.4 5.5 26.7 15.6 10.0 1.4 0.9 28.0 24.4 20.7 8.2 1.3
<CAPTION>
FC, J AND SD
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 100 100 100 100 74
November 15, 1998............. 100 100 100 62 0
November 15, 1999............. 100 100 100 0 0
November 15, 2000............. 100 100 100 0 0
November 15, 2001............. 100 100 100 0 0
November 15, 2002............. 100 100 100 0 0
November 15, 2003............. 100 100 100 0 0
November 15, 2004............. 100 100 100 0 0
November 15, 2005............. 100 100 100 0 0
November 15, 2006............. 100 100 100 0 0
November 15, 2007............. 100 100 100 0 0
November 15, 2008............. 100 100 100 0 0
November 15, 2009............. 100 100 100 0 0
November 15, 2010............. 100 100 100 0 0
November 15, 2011............. 100 100 100 0 0
November 15, 2012............. 100 100 100 0 0
November 15, 2013............. 100 100 91 0 0
November 15, 2014............. 100 100 82 0 0
November 15, 2015............. 100 100 73 0 0
November 15, 2016............. 100 100 64 0 0
November 15, 2017............. 100 100 55 0 0
November 15, 2018............. 100 100 47 0 0
November 15, 2019............. 100 100 38 0 0
November 15, 2020............. 100 94 30 0 0
November 15, 2021............. 100 72 23 0 0
November 15, 2022............. 100 50 15 0 0
November 15, 2023............. 100 28 8 0 0
November 15, 2024............. 100 7 2 0 0
November 15, 2025............. 100 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 29.7 26.0 21.8 2.1 1.1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PA, SH AND GROUP 3 ASSET PB VA
---------------------------------- ---------------------------------- ------------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- ------------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997........ 100 100 100 86 12 100 100 91 55 18 89 89 89 89 89
November 15, 1998........ 100 100 100 62 0 100 100 80 18 0 77 77 77 77 77
November 15, 1999........ 100 100 96 45 0 100 100 69 18 0 64 64 64 64 64
November 15, 2000........ 100 100 93 32 0 100 100 60 2 0 49 49 49 49 49
November 15, 2001........ 100 100 91 24 0 100 100 54 0 0 34 34 34 34 34
November 15, 2002........ 100 100 90 20 0 100 100 49 0 0 17 17 17 17 0
November 15, 2003........ 100 100 90 18 0 100 100 45 0 0 0 0 0 0 0
November 15, 2004........ 100 100 88 16 0 100 100 43 0 0 0 0 0 0 0
November 15, 2005........ 100 100 84 14 0 100 100 42 0 0 0 0 0 0 0
November 15, 2006........ 100 100 80 13 0 100 100 38 0 0 0 0 0 0 0
November 15, 2007........ 100 100 76 12 0 100 100 33 0 0 0 0 0 0 0
November 15, 2008........ 100 100 71 11 0 100 100 26 0 0 0 0 0 0 0
November 15, 2009........ 100 100 66 10 0 100 100 19 0 0 0 0 0 0 0
November 15, 2010........ 100 100 60 9 0 100 100 11 0 0 0 0 0 0 0
November 15, 2011........ 100 100 55 8 0 100 91 5 0 0 0 0 0 0 0
November 15, 2012........ 100 100 48 7 0 100 83 0 0 0 0 0 0 0 0
November 15, 2013........ 100 91 41 5 0 100 82 0 0 0 0 0 0 0 0
November 15, 2014........ 100 78 34 2 0 100 71 0 0 0 0 0 0 0 0
November 15, 2015........ 100 65 27 0 0 100 59 0 0 0 0 0 0 0 0
November 15, 2016........ 100 53 20 0 0 100 47 0 0 0 0 0 0 0 0
November 15, 2017........ 100 40 14 0 0 100 35 0 0 0 0 0 0 0 0
November 15, 2018........ 100 28 8 0 0 100 22 0 0 0 0 0 0 0 0
November 15, 2019........ 100 15 2 0 0 100 9 0 0 0 0 0 0 0 0
November 15, 2020........ 51 4 0 0 0 100 0 0 0 0 0 0 0 0 0
November 15, 2021........ 1 0 0 0 0 100 0 0 0 0 0 0 0 0 0
November 15, 2022........ 0 0 0 0 0 100 0 0 0 0 0 0 0 0 0
November 15, 2023........ 0 0 0 0 0 100 0 0 0 0 0 0 0 0 0
November 15, 2024........ 0 0 0 0 0 82 0 0 0 0 0 0 0 0 0
November 15, 2025........ 0 0 0 0 0 38 0 0 0 0 0 0 0 0 0
November 15, 2026........ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)............ 24.0 20.2 14.8 4.5 0.6 28.7 19.5 7.1 1.4 0.7 3.8 3.8 3.8 3.8 3.7
<CAPTION>
VC
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 100 100 100 100 100
November 15, 1998............. 100 100 100 100 100
November 15, 1999............. 100 100 100 100 100
November 15, 2000............. 100 100 100 100 100
November 15, 2001............. 100 100 100 100 100
November 15, 2002............. 100 100 100 100 89
November 15, 2003............. 99 99 99 99 0
November 15, 2004............. 68 68 68 47 0
November 15, 2005............. 35 35 35 0 0
November 15, 2006............. 0 0 0 0 0
November 15, 2007............. 0 0 0 0 0
November 15, 2008............. 0 0 0 0 0
November 15, 2009............. 0 0 0 0 0
November 15, 2010............. 0 0 0 0 0
November 15, 2011............. 0 0 0 0 0
November 15, 2012............. 0 0 0 0 0
November 15, 2013............. 0 0 0 0 0
November 15, 2014............. 0 0 0 0 0
November 15, 2015............. 0 0 0 0 0
November 15, 2016............. 0 0 0 0 0
November 15, 2017............. 0 0 0 0 0
November 15, 2018............. 0 0 0 0 0
November 15, 2019............. 0 0 0 0 0
November 15, 2020............. 0 0 0 0 0
November 15, 2021............. 0 0 0 0 0
November 15, 2022............. 0 0 0 0 0
November 15, 2023............. 0 0 0 0 0
November 15, 2024............. 0 0 0 0 0
November 15, 2025............. 0 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 8.5 8.5 8.5 7.9 6.2
</TABLE>
<TABLE>
<CAPTION>
VD VE VG
---------------------------------- ---------------------------------- ------------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- ------------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997....... 100 100 100 100 100 83 83 83 83 83 100 100 100 100 100
November 15, 1998....... 100 100 100 100 100 64 64 64 64 4 100 100 100 100 100
November 15, 1999....... 100 100 100 100 100 44 44 44 44 0 100 100 100 100 0
November 15, 2000....... 100 100 100 100 100 23 23 23 23 0 100 100 100 100 0
November 15, 2001....... 100 100 100 100 100 0 0 0 0 0 99 99 99 0 0
November 15, 2002....... 100 100 100 100 100 0 0 0 0 0 50 50 50 0 0
November 15, 2003....... 100 100 100 100 46 0 0 0 0 0 0 0 0 0 0
November 15, 2004....... 100 100 100 100 0 0 0 0 0 0 0 0 0 0 0
November 15, 2005....... 100 100 100 45 0 0 0 0 0 0 0 0 0 0 0
November 15, 2006....... 100 100 100 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2007....... 83 83 83 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2008....... 65 65 65 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2009....... 45 45 37 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2010....... 24 24 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2011....... 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2012....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2013....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2014....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2015....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2016....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2017....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2018....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2019....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2020....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2021....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2022....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (Years)........... 12.7 12.7 12.3 8.9 7.0 2.6 2.6 2.6 2.6 1.6 6.0 6.0 6.0 4.2 2.0
<CAPTION>
VH
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 100 100 100 100 100
November 15, 1998............. 100 100 100 100 100
November 15, 1999............. 100 100 100 100 0
November 15, 2000............. 100 100 100 100 0
November 15, 2001............. 100 100 100 0 0
November 15, 2002............. 100 100 100 0 0
November 15, 2003............. 99 99 99 0 0
November 15, 2004............. 76 76 76 0 0
November 15, 2005............. 51 51 51 0 0
November 15, 2006............. 24 24 24 0 0
November 15, 2007............. 0 0 0 0 0
November 15, 2008............. 0 0 0 0 0
November 15, 2009............. 0 0 0 0 0
November 15, 2010............. 0 0 0 0 0
November 15, 2011............. 0 0 0 0 0
November 15, 2012............. 0 0 0 0 0
November 15, 2013............. 0 0 0 0 0
November 15, 2014............. 0 0 0 0 0
November 15, 2015............. 0 0 0 0 0
November 15, 2016............. 0 0 0 0 0
November 15, 2017............. 0 0 0 0 0
November 15, 2018............. 0 0 0 0 0
November 15, 2019............. 0 0 0 0 0
November 15, 2020............. 0 0 0 0 0
November 15, 2021............. 0 0 0 0 0
November 15, 2022............. 0 0 0 0 0
November 15, 2023............. 0 0 0 0 0
November 15, 2024............. 0 0 0 0 0
November 15, 2025............. 0 0 0 0 0
November 15, 2026............. 0 0 0 0 0
Weighted Average
Life (Years)................. 9.0 9.0 9.0 4.5 2.1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VJ ZB ZC
---------------------------------- ---------------------------------- -------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- -------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ----- ---- ----- ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997............. 100 100 100 100 100 107 107 87 87 87 107 107 107 107 107
November 15, 1998............. 100 100 100 100 100 115 115 69 69 0 115 115 115 115 115
November 15, 1999............. 100 100 100 100 0 123 123 52 49 0 123 123 123 123 0
November 15, 2000............. 100 100 100 100 0 132 132 38 0 0 132 132 132 132 0
November 15, 2001............. 100 100 100 32 0 142 142 26 0 0 142 142 142 142 0
November 15, 2002............. 100 100 100 0 0 152 152 17 0 0 152 152 152 75 0
November 15, 2003............. 100 100 100 0 0 163 163 10 0 0 163 163 163 24 0
November 15, 2004............. 100 100 100 0 0 175 175 5 0 0 175 175 175 2 0
November 15, 2005............. 100 100 100 0 0 187 187 0 0 0 187 187 187 0 0
November 15, 2006............. 100 100 100 0 0 201 187 0 0 0 201 201 201 0 0
November 15, 2007............. 96 96 96 0 0 210 154 0 0 0 215 215 215 0 0
November 15, 2008............. 71 71 71 0 0 210 109 0 0 0 231 231 231 0 0
November 15, 2009............. 44 44 44 0 0 210 57 0 0 0 248 248 248 0 0
November 15, 2010............. 15 15 15 0 0 210 0 0 0 0 266 266 266 0 0
November 15, 2011............. 0 0 0 0 0 210 0 0 0 0 275 275 261 0 0
November 15, 2012............. 0 0 0 0 0 210 0 0 0 0 275 275 233 0 0
November 15, 2013............. 0 0 0 0 0 210 0 0 0 0 275 207 205 0 0
November 15, 2014............. 0 0 0 0 0 210 0 0 0 0 275 178 178 0 0
November 15, 2015............. 0 0 0 0 0 210 0 0 0 0 275 153 153 0 0
November 15, 2016............. 0 0 0 0 0 210 0 0 0 0 275 130 130 0 0
November 15, 2017............. 0 0 0 0 0 210 0 0 0 0 275 109 109 0 0
November 15, 2018............. 0 0 0 0 0 210 0 0 0 0 275 89 89 0 0
November 15, 2019............. 0 0 0 0 0 210 0 0 0 0 275 71 71 0 0
November 15, 2020............. 0 0 0 0 0 210 0 0 0 0 275 54 54 0 0
November 15, 2021............. 0 0 0 0 0 210 0 0 0 0 275 39 39 0 0
November 15, 2022............. 0 0 0 0 0 210 0 0 0 0 275 26 26 0 0
November 15, 2023............. 0 0 0 0 0 73 0 0 0 0 275 14 14 0 0
November 15, 2024............. 0 0 0 0 0 0 0 0 0 0 176 3 3 0 0
November 15, 2025............. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 15, 2026............. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
WEIGHTED AVERAGE LIFE (YEARS)
Redemption on March 15,
1997*........................ -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
Redemption on November 15,
2001*........................ -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
No Redemption.................12.8 12.8 12.8 4.9 2.2 26.9 12.1 3.5 2.4 1.4 28.1 20.4 20.2 6.2 2.4
<CAPTION>
ZU AND ZA
----------------------------------
PSA PREPAYMENT SCENARIO
----------------------------------
DATE I II III IV V
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100
November 15, 1997............. 108 108 108 108 108
November 15, 1998............. 117 117 117 117 117
November 15, 1999............. 127 127 127 127 127
November 15, 2000............. 138 138 138 138 138
November 15, 2001............. 149 149 149 149 149
November 15, 2002............. 161 161 161 161 161
November 15, 2003............. 175 175 175 175 175
November 15, 2004............. 189 189 189 189 189
November 15, 2005............. 205 205 205 205 205
November 15, 2006............. 222 222 222 222 198
November 15, 2007............. 240 240 240 240 141
November 15, 2008............. 260 260 260 260 101
November 15, 2009............. 282 282 282 232 72
November 15, 2010............. 305 305 305 181 51
November 15, 2011............. 331 331 331 141 36
November 15, 2012............. 358 358 358 110 25
November 15, 2013............. 388 388 388 85 18
November 15, 2014............. 420 420 352 65 12
November 15, 2015............. 455 455 297 50 9
November 15, 2016............. 493 493 248 38 6
November 15, 2017............. 534 534 205 28 4
November 15, 2018............. 578 542 167 21 3
November 15, 2019............. 626 460 134 15 2
November 15, 2020............. 678 382 106 11 1
November 15, 2021............. 734 308 80 7 1
November 15, 2022............. 785 237 58 5 0
November 15, 2023............. 785 168 39 3 0
November 15, 2024............. 759 103 23 2 0
November 15, 2025............. 399 40 8 1 0
November 15, 2026............. 0 0 0 0 0
WEIGHTED AVERAGE LIFE (YEARS)
Redemption on March 15,
1997*........................ 0.3 0.3 0.3 0.3 0.3
Redemption on November 15,
2001*........................ 5.0 5.0 5.0 5.0 5.0
No Redemption................. 29.0 25.5 21.9 16.2 12.6
</TABLE>
<TABLE>
<CAPTION>
ZV AND Z GROUP 1 ASSETS GROUP 2 ASSETS
---------------------------------- ---------------------------------- --------------------------------
PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO PSA PREPAYMENT SCENARIO
---------------------------------- ---------------------------------- --------------------------------
DATE I II III IV V I II III IV V I II III IV V
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date.................. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 15, 1997............. 108 108 108 108 108 99 97 95 92 90 99 95 94 90 85
November 15, 1998............. 117 117 117 117 117 99 92 87 78 71 99 89 85 77 66
November 15, 1999............. 127 127 127 127 127 98 86 76 62 51 98 83 77 65 49
November 15, 2000............. 138 138 138 138 138 98 80 67 50 37 97 77 69 54 37
November 15, 2001............. 149 149 149 149 149 97 74 59 40 27 96 71 62 45 28
November 15, 2002............. 161 161 161 161 161 96 69 52 31 19 95 66 56 38 21
November 15, 2003............. 175 175 175 175 175 95 64 45 25 14 94 61 50 32 15
November 15, 2004............. 189 189 189 189 142 94 59 40 20 10 93 56 45 26 11
November 15, 2005............. 205 205 205 205 52 93 55 35 16 7 92 51 40 22 9
November 15, 2006............. 222 222 222 186 0 92 50 30 12 5 90 47 36 18 6
November 15, 2007............. 240 240 240 99 0 90 46 26 10 4 89 43 32 15 5
November 15, 2008............. 260 260 260 26 0 89 43 23 8 3 87 39 28 12 3
November 15, 2009............. 282 282 282 0 0 87 39 20 6 2 85 36 25 10 3
November 15, 2010............. 305 305 259 0 0 85 36 17 5 1 83 33 22 8 2
November 15, 2011............. 331 331 174 0 0 83 32 15 4 1 81 29 19 7 1
November 15, 2012............. 312 312 94 0 0 80 29 13 3 1 78 26 17 6 1
November 15, 2013............. 290 290 20 0 0 78 26 11 2 0 75 24 15 4 1
November 15, 2014............. 267 267 0 0 0 75 24 9 2 0 72 21 13 4 1
November 15, 2015............. 241 241 0 0 0 71 21 8 1 0 69 18 11 3 0
November 15, 2016............. 214 165 0 0 0 68 19 6 1 0 65 16 9 2 0
November 15, 2017............. 184 69 0 0 0 64 16 5 1 0 61 14 7 2 0
November 15, 2018............. 152 0 0 0 0 59 14 4 1 0 56 11 6 1 0
November 15, 2019............. 117 0 0 0 0 54 12 3 0 0 51 9 5 1 0
November 15, 2020............. 79 0 0 0 0 49 10 3 0 0 46 7 4 1 0
November 15, 2021............. 38 0 0 0 0 43 8 2 0 0 40 6 3 0 0
November 15, 2022............. 0 0 0 0 0 36 6 2 0 0 33 4 2 0 0
November 15, 2023............. 0 0 0 0 0 28 4 1 0 0 26 2 1 0 0
November 15, 2024............. 0 0 0 0 0 20 3 1 0 0 18 1 0 0 0
November 15, 2025............. 0 0 0 0 0 10 1 0 0 0 10 0 0 0 0
November 15, 2026............. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
WEIGHTED AVERAGE LIFE (YEARS)
Redemption on March 15,
1997*........................ 0.3 0.3 0.3 0.3 0.3 -- -- -- -- -- -- -- -- -- --
Redemption on November 15,
2001*........................ 5.0 5.0 5.0 5.0 5.0 -- -- -- -- -- -- -- -- -- --
No Redemption................. 21.2 19.6 15.4 10.9 8.6 21.8 11.6 8.1 5.2 3.9 21.3 10.9 8.8 5.9 3.9
</TABLE>
- ---------------
* Redemption scenarios apply only to Z and ZA Classes.
YIELD CONSIDERATIONS
An investor seeking to maximize yield should make a decision whether to
invest in any Class based on the anticipated yield of that Class resulting from
its purchase price; the investor's own projection of Mortgage prepayment rates
and Asset principal payment rates under a variety of scenarios; in the case of
the Callable Classes, the investor's own projection of the likelihood of a
redemption of such Classes under a variety of scenarios; and, in the case of the
Floating Rate and Inverse Floating Rate Classes, the investor's own projection
of levels of the applicable Index under a variety of scenarios. Freddie Mac
makes no representation regarding Mortgage prepayment rates, Asset principal
payment rates, the likelihood of a redemption of a Callable Class, the level of
either Index or the yield of any Class.
Prepayments and Redemption: Effect on Yields
The yields to investors will be sensitive in varying degrees to the rate of
Mortgage prepayments. In the case of the Interest Only Classes and any other
Classes purchased at a premium over their principal amounts, faster than
anticipated rates of principal payments could result in actual yields to
investors that are lower than the anticipated yields. Investors in the Interest
Only Classes should also consider the risk that rapid Mortgage prepayment rates
could result in the failure of investors to fully recover their investments. In
the case of the Principal Only Classes and any other Classes purchased at a
discount to their principal amounts, slower than anticipated rates of principal
payments could result in actual yields to investors that are lower than the
anticipated yields.
The Callable Classes may be redeemed on any Payment Date beginning in March
1997, as described under "Redemption and Exchange" in this Supplement. The
redemption of a Callable Class would have the effect of decreasing the weighted
average life of such Callable Class. The earlier after the Closing Date that a
redemption occurs, the greater would be such effect.
Rapid rates of prepayments on the Mortgages (or a redemption) are likely to
coincide with periods of low prevailing interest rates. During such periods, the
yields at which an investor may be able to reinvest amounts received as
principal payments on the investor's Class of Multiclass PCs may be lower than
the yield on that Class. Conversely, slow rates of prepayments on the Mortgages
are likely to coincide with periods of high prevailing interest rates. During
such periods, the amount of principal payments available to an investor for
reinvestment at such high rates may be relatively low.
The Mortgages will not prepay at any constant rate until maturity, nor will
all of the Mortgages prepay at the same rate at any one time. The timing of
changes in the rate of prepayments may affect the actual yield to an investor,
even if the average rate of principal prepayments is consistent with the
investor's expectation. In general, the earlier a prepayment of principal on the
Mortgages, the greater the effect on an investor's yield. As a result, the
effect on an investor's yield of principal prepayments occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the Closing Date is not likely to be offset by a later
equivalent reduction (or increase) in the rate of principal prepayments.
The Indices: Effect on Yields of Floating Rate and Inverse Floating Rate
Classes
Investors in the Floating Rate Classes should consider the risk that lower
than anticipated levels of LIBOR could result in actual yields to investors that
are lower than the anticipated yields and the fact that their Class Coupons
cannot exceed their specified maximum rates. Conversely, investors in the
Inverse Floating Rate Classes should consider the risk that higher than
anticipated levels of the applicable Index could result in actual yields to
investors that are significantly lower than the anticipated yields and the fact
that their Class Coupons can fall as low as 0%. Further, high levels of the
applicable Index (especially in combination with fast Mortgage prepayment rates)
may result in the failure of investors in the S, SB, SC and SE Classes to fully
recover their investments.
Changes in either Index may not correlate with changes in mortgage interest
rates. It is possible that lower prevailing mortgage interest rates (which would
be expected to result in faster prepayments) could occur concurrently with a
higher level of either Index. Conversely, higher prevailing mortgage interest
rates (which would be expected to result in slower prepayments) could occur
concurrently with a lower level of either Index.
Neither of the Indices will remain constant at any level. The timing of
changes in the level of the applicable Index may affect the actual yield to an
investor, even if the average level is consistent with the investor's
expectation. In general, the earlier a change in the level of the applicable
Index, the greater the effect on an investor's yield. As a result, the effect on
an investor's yield of an Index level that is higher (or lower) than the rate
anticipated by the investor during earlier periods is not likely to be offset by
a later equivalent reduction (or increase).
Payment Delay: Effect on Yields of Fixed Rate and Delay Classes
The effective yield on any Fixed Rate or Delay Class will be less than the
yield otherwise produced by its Class Coupon and purchase price because (i) on
the first Payment Date 30 days' interest will be payable on (or, in the case of
an Accrual Class, added to the principal amount of) that Class even though
interest began to accrue approximately 45 days earlier and (ii) on each
subsequent Payment Date (except in the case of a Callable Class upon its
redemption) the interest payable will accrue during the related Accrual Period,
which will end approximately 15 days earlier. In the event of a redemption of a
Callable Class, interest payable on such Class will include interest to the date
of redemption, as described under "Redemption and Exchange" in this Supplement.
If the outstanding balance of any Fixed Rate or Delay Class is reduced on the
Payment Date that falls within an Accrual Period, that Class will accrue
interest during such Accrual Period on its reduced balance, even though its
balance had been higher for approximately the first 15 days of the Accrual
Period. The payment that is made on the Payment Date following such Accrual
Period will include interest on the reduced balance only, not on the amount that
was paid on the preceding Payment Date, and no interest at all will be paid on
any Class after its balance has been reduced to zero.
Yield Tables
The following tables show the pre-tax yields to maturity (corporate bond
equivalent) of the Principal Only, Interest Only and Inverse Floating Rate
Classes at various constant percentages of PSA and, in the case of the Inverse
Floating Rate Classes, at various constant levels of the applicable Index. The
tables for the Interest Only Classes also show annual and total interest
payments on those Classes. Freddie Mac has prepared these tables using the
Modeling Assumptions and the assumed purchase prices shown in the table
captions. Where the assumed price is expressed as a dollar amount, it includes
accrued interest. Where the assumed price is expressed as a percentage of
original principal amount, it excludes accrued interest and Freddie Mac has
added accrued interest, if any, in calculating the yields shown. The assumed
prices are not necessarily those at which actual sales will occur.
<PAGE>
INTEREST PAYMENTS AND PRE-TAX YIELDS
DI CLASS
(ASSUMED PRICE: $11,146,914.34)
(PAYMENTS IN THOUSANDS)
<TABLE>
<CAPTION>
PSA PREPAYMENT ASSUMPTION
TWELVE CONSECUTIVE -------------------------------------------------
MONTHS THROUGH 100% 185% 325% 450% 466%
- ----------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
November 15, 1997................................. $ 2,089 $ 2,089 $ 2,089 $ 2,089 $ 2,089
November 15, 1998................................. 2,089 2,089 2,089 2,089 2,089
November 15, 1999................................. 2,089 2,089 2,089 2,089 2,089
November 15, 2000................................. 2,089 2,089 2,089 2,089 2,089
November 15, 2001................................. 2,089 2,089 2,089 2,089 2,089
November 15, 2002................................. 2,089 2,089 2,089 1,062 703
November 15, 2003................................. 2,089 2,089 2,083 0 0
November 15, 2004................................. 2,089 2,089 842 0 0
November 15, 2005................................. 2,089 2,089 0 0 0
November 15, 2006................................. 2,089 2,089 0 0 0
November 15, 2007................................. 2,089 2,089 0 0 0
November 15, 2008................................. 2,089 1,702 0 0 0
November 15, 2009................................. 2,089 448 0 0 0
November 15, 2010................................. 2,089 0 0 0 0
November 15, 2011................................. 2,089 0 0 0 0
November 15, 2012................................. 2,089 0 0 0 0
November 15, 2013................................. 2,089 0 0 0 0
November 15, 2014................................. 1,849 0 0 0 0
November 15, 2015................................. 846 0 0 0 0
November 15, 2016................................. 54 0 0 0 0
November 15, 2017 and after....................... 0 0 0 0 0
--------- --------- --------- --------- ---------
Total Payments*................................... $ 38,263 $ 25,129 $ 15,459 $ 11,507 $ 11,148
========= ========= ========= ========= =========
Pre-Tax Yield..................................... 18.9% 16.6% 9.6% 1.2% 0.0%
</TABLE>
IB CLASS
(ASSUMED PRICE: $2,766,593.38)
(PAYMENTS IN THOUSANDS)
<TABLE>
<CAPTION>
PSA PREPAYMENT ASSUMPTION
-------------------------------------------------
0%
TWELVE CONSECUTIVE THROUGH
MONTHS THROUGH 150% 185% 325% 450% 607%
- ---------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
November 15, 1997...................................... $ 641 $ 641 $ 641 $ 641 $ 641
November 15, 1998...................................... 601 601 601 601 601
November 15, 1999...................................... 558 558 558 558 558
November 15, 2000...................................... 512 512 512 512 512
November 15, 2001...................................... 461 461 461 461 376
November 15, 2002...................................... 406 406 406 402 78
November 15, 2003...................................... 347 347 347 175 0
November 15, 2004...................................... 294 294 293 27 0
November 15, 2005...................................... 248 248 149 0 0
November 15, 2006...................................... 197 197 29 0 0
November 15, 2007...................................... 156 156 0 0 0
November 15, 2008...................................... 126 126 0 0 0
November 15, 2009...................................... 95 94 0 0 0
November 15, 2010...................................... 60 21 0 0 0
November 15, 2011...................................... 23 0 0 0 0
November 15, 2012 and after............................ 0 0 0 0 0
--------- --------- --------- --------- ---------
Total Payments*........................................ $ 4,725 $ 4,663 $ 3,997 $ 3,377 $ 2,767
========= ========= ========= ========= =========
Pre-Tax Yield.......................................... 13.6% 13.5% 11.3% 7.2% 0.0%
</TABLE>
- ---------------
* Total payments may not equal sums of columns due to rounding.
<PAGE>
IC CLASS
(ASSUMED PRICE: $3,209,825.12)
(PAYMENTS IN THOUSANDS)
<TABLE>
<CAPTION>
PSA PREPAYMENT ASSUMPTION
---------------------------------------
100%
TWELVE CONSECUTIVE THROUGH
MONTHS THROUGH 50% 250% 388% 400%
- ------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
November 15, 1997............................................. $ 840 $ 830 $ 830 $ 830
November 15, 1998............................................. 791 748 748 748
November 15, 1999............................................. 733 652 646 640
November 15, 2000............................................. 675 557 409 380
November 15, 2001............................................. 617 413 194 183
November 15, 2002............................................. 561 270 163 163
November 15, 2003............................................. 481 190 136 122
November 15, 2004............................................. 371 163 67 53
November 15, 2005............................................. 277 163 14 6
November 15, 2006............................................. 221 150 0 0
November 15, 2007............................................. 172 102 0 0
November 15, 2008............................................. 163 58 0 0
November 15, 2009............................................. 163 22 0 0
November 15, 2010............................................. 163 0 0 0
November 15, 2011............................................. 128 0 0 0
November 15, 2012............................................. 77 0 0 0
November 15, 2013............................................. 26 0 0 0
November 15, 2014 and after................................... 0 0 0 0
--------- --------- --------- ---------
Total Payments*............................................... $ 6,461 $ 4,317 $ 3,207 $ 3,126
========= ========= ========= =========
Pre-Tax Yield................................................. 17.9% 9.2% 0.0% (1.1)%
</TABLE>
S CLASS
(ASSUMED PRICE: $4,944,326.14)
(PAYMENTS IN THOUSANDS)
<TABLE>
<CAPTION>
4.3750% LIBOR 5.3750% LIBOR 6.1875% LIBOR
--------------------------------------- --------------------------------------- -------------------
PSA PREPAYMENT PSA PREPAYMENT PSA PREPAYMENT
ASSUMPTION ASSUMPTION ASSUMPTION
TWELVE CONSECUTIVE --------------------------------------- --------------------------------------- -------------------
MONTHS THROUGH 100% 185% 325% 450% 100% 185% 325% 450% 100% 185%
- ----------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 15, 1997............. $ 4,487 $ 4,440 $ 4,434 $ 4,434 $ 2,871 $ 2,841 $ 2,838 $ 2,838 $ 1,557 $ 1,542
November 15, 1998............. 4,350 4,111 4,083 3,997 2,693 2,545 2,528 2,474 1,346 1,273
November 15, 1999............. 3,920 3,395 3,259 2,613 2,427 2,101 2,017 1,617 1,213 1,051
November 15, 2000............. 3,471 2,680 2,240 1,371 2,149 1,659 1,386 849 1,074 830
November 15, 2001............. 3,047 2,047 1,403 470 1,886 1,267 868 291 943 634
November 15, 2002............. 2,647 1,485 733 9 1,639 920 454 6 819 460
November 15, 2003............. 2,270 988 200 0 1,405 612 124 0 703 306
November 15, 2004............. 1,914 547 0 0 1,185 339 0 0 592 169
November 15, 2005............. 1,577 157 0 0 976 97 0 0 488 49
November 15, 2006............. 1,260 0 0 0 780 0 0 0 390 0
November 15, 2007............. 960 0 0 0 594 0 0 0 297 0
November 15, 2008............. 676 0 0 0 418 0 0 0 209 0
November 15, 2009............. 407 0 0 0 252 0 0 0 126 0
November 15, 2010............. 154 0 0 0 95 0 0 0 48 0
November 15, 2011............. 2 0 0 0 1 0 0 0 1 0
November 15, 2012 and after... 0 0 0 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Payments*............... $ 31,141 $ 19,851 $ 16,352 $ 12,894 $ 19,370 $ 12,381 $ 10,215 $ 8,075 $ 9,807 $ 6,312
========= ========= ========= ========= ========= ========= ========= ======== ======== ========
Pre-Tax Yield................. 107.9% 100.9% 98.5% 92.1% 58.5% 50.4% 46.2% 37.1% 20.7% 9.9%
<CAPTION>
7.0000% LIBOR
6.1875% LIBOR AND HIGHER
------------------- ---------------------------------------
PSA PREPAYMENT PSA PREPAYMENT
ASSUMPTION ASSUMPTION
TWELVE CONSECUTIVE ------------------- ---------------------------------------
MONTHS THROUGH 325% 450% 100% 185% 325% 450%
- ------------------------------ --------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
November 15, 1997............. $ 1,541 $1,541 $243 $243 $243 $243
November 15, 1998............. 1,264 1,237 0 0 0 0
November 15, 1999............. 1,009 809 0 0 0 0
November 15, 2000............. 693 424 0 0 0 0
November 15, 2001............. 434 146 0 0 0 0
November 15, 2002............. 227 3 0 0 0 0
November 15, 2003............. 62 0 0 0 0 0
November 15, 2004............. 0 0 0 0 0 0
November 15, 2005............. 0 0 0 0 0 0
November 15, 2006............. 0 0 0 0 0 0
November 15, 2007............. 0 0 0 0 0 0
November 15, 2008............. 0 0 0 0 0 0
November 15, 2009............. 0 0 0 0 0 0
November 15, 2010............. 0 0 0 0 0 0
November 15, 2011............. 0 0 0 0 0 0
November 15, 2012 and after... 0 0 0 0 0 0
--------- --------- ----- ----- ----- -----
Total Payments*............... $ 5,229 $4,159 $243 $243 $243 $243
========= ========= ===== ===== ===== =====
Pre-Tax Yield................. 2.7% (10.1)% ** ** ** **
</TABLE>
- ---------------
* Total payments may not equal sums of columns due to rounding.
** Less than (99.9)%.
<PAGE>
SB CLASS
(ASSUMED PRICE: $6,227,619.52)
(PAYMENTS IN THOUSANDS)
<TABLE>
<CAPTION>
7.00% LIBOR 8.50% LIBOR
AND LOWER 7.75% LIBOR AND HIGHER
--------------------------------------- --------------------------------------- -------------------
PSA PREPAYMENT PSA PREPAYMENT PSA PREPAYMENT
ASSUMPTION ASSUMPTION ASSUMPTION
TWELVE CONSECUTIVE --------------------------------------- --------------------------------------- -------------------
MONTHS THROUGH 100% 185% 325% 450% 100% 185% 325% 450% 100% 185%
- ----------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 15, 1997............. $ 2,650 $ 2,623 $ 2,619 $ 2,619 $ 1,437 $ 1,424 $1,422 $1,422 $225 $225
November 15, 1998............. 2,486 2,349 2,333 2,284 1,243 1,175 1,167 1,142 0 0
November 15, 1999............. 2,240 1,940 1,862 1,493 1,120 970 931 747 0 0
November 15, 2000............. 1,983 1,532 1,280 783 992 766 640 392 0 0
November 15, 2001............. 1,741 1,170 801 269 871 585 401 134 0 0
November 15, 2002............. 1,513 849 419 5 756 424 210 3 0 0
November 15, 2003............. 1,297 564 114 0 649 282 57 0 0 0
November 15, 2004............. 1,094 313 0 0 547 156 0 0 0 0
November 15, 2005............. 901 90 0 0 451 45 0 0 0 0
November 15, 2006............. 720 0 0 0 360 0 0 0 0 0
November 15, 2007............. 548 0 0 0 274 0 0 0 0 0
November 15, 2008............. 386 0 0 0 193 0 0 0 0 0
November 15, 2009............. 233 0 0 0 116 0 0 0 0 0
November 15, 2010............. 88 0 0 0 44 0 0 0 0 0
November 15, 2011............. 1 0 0 0 1 0 0 0 0 0
November 15, 2012 and after... 0 0 0 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- --------- --------- ---- ----
Total Payments*............... $ 17,880 $ 11,429 $ 9,429 $ 7,454 $ 9,053 $ 5,827 $4,827 $3,839 $225 $225
========= ========= ======== ======== ======== ======== ========= ========= ==== ====
Pre-Tax Yield................. 37.5% 28.3% 22.7% 11.8% 9.8% (2.4)% (11.0)% (25.3)% ** **
8.50% LIBOR
AND HIGHER
-------------------
PSA PREPAYMENT
ASSUMPTION
TWELVE CONSECUTIVE -------------------
MONTHS THROUGH 325% 450%
- ------------------------------ --------- ---------
November 15, 1997............. $225 $225
November 15, 1998............. 0 0
November 15, 1999............. 0 0
November 15, 2000............. 0 0
November 15, 2001............. 0 0
November 15, 2002............. 0 0
November 15, 2003............. 0 0
November 15, 2004............. 0 0
November 15, 2005............. 0 0
November 15, 2006............. 0 0
November 15, 2007............. 0 0
November 15, 2008............. 0 0
November 15, 2009............. 0 0
November 15, 2010............. 0 0
November 15, 2011............. 0 0
November 15, 2012 and after... 0 0
----- -----
Total Payments*............... $225 $225
===== =====
Pre-Tax Yield................. ** **
SC CLASS
(ASSUMED PRICE: $1,574,316.60)
(PAYMENTS IN THOUSANDS)
4.375% LIBOR 5.375% LIBOR 7.000% LIBOR
--------------------------------------- --------------------------------------- -------------------
PSA PREPAYMENT PSA PREPAYMENT PSA PREPAYMENT
ASSUMPTION ASSUMPTION ASSUMPTION
TWELVE CONSECUTIVE --------------------------------------- --------------------------------------- -------------------
MONTHS THROUGH 100% 185% 325% 450% 100% 185% 325% 450% 100% 185%
- ----------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 15, 1997............. $ 1,682 $ 1,682 $ 1,504 $ 1,330 $ 1,310 $ 1,310 $ 1,174 $1,041 $ 705 $ 705
November 15, 1998............. 1,716 1,716 839 220 1,310 1,310 640 168 650 650
November 15, 1999............. 1,716 1,716 64 0 1,310 1,310 49 0 650 650
November 15, 2000............. 1,716 1,716 0 0 1,310 1,310 0 0 650 650
November 15, 2001............. 1,716 1,716 0 0 1,310 1,310 0 0 650 650
November 15, 2002............. 1,716 1,716 0 0 1,310 1,310 0 0 650 650
November 15, 2003............. 1,716 1,716 0 0 1,310 1,310 0 0 650 650
November 15, 2004............. 1,716 1,716 0 0 1,310 1,310 0 0 650 650
November 15, 2005............. 1,716 1,715 0 0 1,310 1,309 0 0 650 649
November 15, 2006............. 1,716 1,255 0 0 1,310 958 0 0 650 475
November 15, 2007............. 1,716 509 0 0 1,310 388 0 0 650 193
November 15, 2008............. 1,716 21 0 0 1,310 16 0 0 650 8
November 15, 2009............. 1,716 0 0 0 1,310 0 0 0 650 0
November 15, 2010............. 1,716 0 0 0 1,310 0 0 0 650 0
November 15, 2011............. 1,500 0 0 0 1,145 0 0 0 568 0
November 15, 2012............. 948 0 0 0 724 0 0 0 359 0
November 15, 2013............. 421 0 0 0 322 0 0 0 160 0
November 15, 2014............. 28 0 0 0 21 0 0 0 11 0
November 15, 2015 and after... 0 0 0 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Payments*............... $ 26,892 $ 17,196 $ 2,406 $ 1,551 $ 20,553 $ 13,152 $ 1,863 $1,210 $ 10,252 $ 6,580
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Pre-Tax Yield................. 140.6% 140.6% 63.2% (2.7)% 102.9% 102.9% 21.9% (40.7)% 47.5% 46.8%
<CAPTION>
8.625% LIBOR
7.000% LIBOR AND HIGHER
------------------- ---------------------------------------
PSA PREPAYMENT PSA PREPAYMENT
ASSUMPTION ASSUMPTION
TWELVE CONSECUTIVE ------------------- ---------------------------------------
MONTHS THROUGH 325% 450% 100% 185% 325% 450%
- ------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
November 15, 1997............. $637 $572 $109 $109 $109 $109
November 15, 1998............. 318 83 0 0 0 0
November 15, 1999............. 24 0 0 0 0 0
November 15, 2000............. 0 0 0 0 0 0
November 15, 2001............. 0 0 0 0 0 0
November 15, 2002............. 0 0 0 0 0 0
November 15, 2003............. 0 0 0 0 0 0
November 15, 2004............. 0 0 0 0 0 0
November 15, 2005............. 0 0 0 0 0 0
November 15, 2006............. 0 0 0 0 0 0
November 15, 2007............. 0 0 0 0 0 0
November 15, 2008............. 0 0 0 0 0 0
November 15, 2009............. 0 0 0 0 0 0
November 15, 2010............. 0 0 0 0 0 0
November 15, 2011............. 0 0 0 0 0 0
November 15, 2012............. 0 0 0 0 0 0
November 15, 2013............. 0 0 0 0 0 0
November 15, 2014............. 0 0 0 0 0 0
November 15, 2015 and after... 0 0 0 0 0 0
-------- ----- ----- ----- ----- -----
Total Payments*............... $979 $655 $109 $109 $109 $109
======== ===== ===== ===== ===== =====
Pre-Tax Yield................. (46.8)% ** ** ** ** **
</TABLE>
- ---------------
* Total payments may not equal sums of columns due to rounding.
** Less than (99.9)%.
<PAGE>
SE CLASS
(ASSUMED PRICE: $2,166,006.29)
(PAYMENTS IN THOUSANDS)
<TABLE>
<CAPTION>
3.834% COFI 4.834% COFI 6.834% COFI
--------------------------------------- --------------------------------------- -------------------
PSA PREPAYMENT PSA PREPAYMENT PSA PREPAYMENT
ASSUMPTION ASSUMPTION ASSUMPTION
TWELVE CONSECUTIVE --------------------------------------- --------------------------------------- -------------------
MONTHS THROUGH 100% 145% 200% 400% 100% 145% 200% 400% 100% 145%
- ----------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 15, 1997............. $ 744 $ 744 $ 724 $ 459 $ 610 $ 610 $ 594 $ 380 $ 342 $ 342
November 15, 1998............. 757 757 567 11 610 610 457 9 317 317
November 15, 1999............. 757 747 408 0 610 603 329 0 317 313
November 15, 2000............. 757 716 292 0 610 578 236 0 317 300
November 15, 2001............. 757 696 214 0 610 561 173 0 317 292
November 15, 2002............. 757 685 168 0 610 553 135 0 317 287
November 15, 2003............. 757 682 145 0 610 550 117 0 317 286
November 15, 2004............. 757 671 129 0 610 542 104 0 317 282
November 15, 2005............. 757 652 115 0 610 526 93 0 317 273
November 15, 2006............. 757 625 104 0 610 504 84 0 317 262
November 15, 2007............. 757 593 93 0 610 478 75 0 317 249
November 15, 2008............. 757 557 85 0 610 449 68 0 317 234
November 15, 2009............. 757 518 77 0 610 418 62 0 317 217
November 15, 2010............. 757 477 71 0 610 385 57 0 317 200
November 15, 2011............. 757 436 65 0 610 351 53 0 317 183
November 15, 2012............. 757 393 61 0 610 317 49 0 317 165
November 15, 2013............. 734 340 46 0 592 274 37 0 308 143
November 15, 2014............. 642 284 28 0 518 229 23 0 269 119
November 15, 2015............. 546 230 12 0 440 186 9 0 229 97
November 15, 2016............. 449 179 1 0 362 144 0 0 188 75
November 15, 2017............. 354 129 0 0 285 104 0 0 148 54
November 15, 2018............. 259 83 0 0 209 67 0 0 109 35
November 15, 2019............. 166 39 0 0 134 31 0 0 70 16
November 15, 2020............. 77 4 0 0 62 3 0 0 32 2
November 15, 2021............. 7 0 0 0 6 0 0 0 3 0
November 15, 2022 and after... 0 0 0 0 0 0 0 0 0 0
--------- --------- --------- --- --------- --------- --------- --------- --------- ---------
Total Payments*............... $ 15,329 $ 11,239 $ 3,404 $ 470 $ 12,371 $ 9,074 $ 2,755 $ 389 $ 6,457 $ 4,742
========= ========= ======== ====== ========= ======== ======== ========= ========= =========
Pre-Tax Yield................. 37.8% 36.1% 12.4% ** 30.1% 28.2% 5.8% ** 14.4% 11.8%
<CAPTION>
9.001% COFI
6.834% COFI AND HIGHER
------------------- ---------------------------------------
PSA PREPAYMENT PSA PREPAYMENT
ASSUMPTION ASSUMPTION
TWELVE CONSECUTIVE ------------------- ---------------------------------------
MONTHS THROUGH 200% 400% 100% 145% 200% 400%
- ------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
November 15, 1997............. $ 333 $222 $51 $51 $51 $51
November 15, 1998............. 238 5 0 0 0 0
November 15, 1999............. 171 0 0 0 0 0
November 15, 2000............. 123 0 0 0 0 0
November 15, 2001............. 90 0 0 0 0 0
November 15, 2002............. 70 0 0 0 0 0
November 15, 2003............. 61 0 0 0 0 0
November 15, 2004............. 54 0 0 0 0 0
November 15, 2005............. 48 0 0 0 0 0
November 15, 2006............. 43 0 0 0 0 0
November 15, 2007............. 39 0 0 0 0 0
November 15, 2008............. 36 0 0 0 0 0
November 15, 2009............. 32 0 0 0 0 0
November 15, 2010............. 30 0 0 0 0 0
November 15, 2011............. 27 0 0 0 0 0
November 15, 2012............. 25 0 0 0 0 0
November 15, 2013............. 19 0 0 0 0 0
November 15, 2014............. 12 0 0 0 0 0
November 15, 2015............. 5 0 0 0 0 0
November 15, 2016............. 0 0 0 0 0 0
November 15, 2017............. 0 0 0 0 0 0
November 15, 2018............. 0 0 0 0 0 0
November 15, 2019............. 0 0 0 0 0 0
November 15, 2020............. 0 0 0 0 0 0
November 15, 2021............. 0 0 0 0 0 0
November 15, 2022 and after... 0 0 0 0 0 0
--------- ----- ----- ----- ----- -----
Total Payments*............... $ 1,457 $227 $51 $51 $51 $51
========= ===== ===== ===== ===== =====
Pre-Tax Yield................. (7.1)% ** ** ** ** **
</TABLE>
- ---------------
* Total payments may not equal sums of columns due to rounding.
** Less than (99.9)%.
PRE-TAX YIELDS
DP CLASS
(ASSUMED PRICE: 58.64281%)
100% PSA 185% PSA 325% PSA 450% PSA
- -------- -------- -------- --------
2.9% 4.5% 7.4% 10.0%
PA CLASS
(ASSUMED PRICE: 56.25%)
100% PSA 145% PSA 200% PSA 400% PSA
- -------- -------- -------- --------
2.9% 4.1% 18.7% 136.1%
PB CLASS
(ASSUMED PRICE: 50.0%)
100% PSA 145% PSA 250% PSA 400% PSA
- -------- -------- -------- --------
3.6% 12.5% 74.9% 169.7%
<PAGE>
PO CLASS
(ASSUMED PRICE: 78.5%)
100% PSA 185% PSA 325% PSA 450% PSA
- -------- -------- -------- --------
1.6% 2.4% 18.8% 30.1%
SA CLASS
(ASSUMED PRICE: 81.2344%)
<TABLE>
<CAPTION>
LIBOR 100% PSA 145% PSA 200% PSA 400% PSA
- ----------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
4.3750%.............................................. 21.7% 21.7% 24.4% 37.3%
5.3750............................................... 15.2 15.3 18.0 31.1
6.5625............................................... 7.8 7.9 10.4 23.9
7.7500 and Higher.................................... 0.9 1.0 2.9 16.9
</TABLE>
SD CLASS
(ASSUMED PRICE: 69.5%)
<TABLE>
<CAPTION>
LIBOR 100% PSA 145% PSA 250% PSA 400% PSA
- ----------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
4.3750%.............................................. 17.7% 17.8% 33.8% 52.4%
5.3750............................................... 12.5 12.7 29.1 47.5
6.5625............................................... 6.7 7.0 23.6 41.7
7.7500 and Higher.................................... 1.4 1.7 18.2 36.1
</TABLE>
SG CLASS
(ASSUMED PRICE: 82.25%)
<TABLE>
<CAPTION>
LIBOR 100% PSA 185% PSA 325% PSA 450% PSA
- -------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
4.375%.................................................. 29.0% 29.4% 43.4% 53.2%
5.375................................................... 22.0 22.5 36.6 46.3
7.000................................................... 11.2 11.9 25.9 35.4
8.625 and Higher........................................ 1.3 2.1 15.7 25.1
</TABLE>
SH CLASS
(ASSUMED PRICE: 90.0%)
<TABLE>
<CAPTION>
COFI 100% PSA 145% PSA 200% PSA 400% PSA
- ----------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
3.834%............................................... 13.8% 14.0% 16.3% 31.9%
4.834................................................ 11.2 11.4 13.6 29.3
6.834................................................ 6.0 6.2 8.2 24.2
9.001 and Higher..................................... 0.5 0.7 2.5 18.7
</TABLE>
SQ CLASS
(ASSUMED PRICE: 82.75%)
<TABLE>
<CAPTION>
LIBOR 100% PSA 145% PSA 250% PSA 400% PSA
- ----------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
4.3750%.............................................. 21.3% 22.1% 35.6% 50.8%
5.3750............................................... 14.9 15.9 29.5 44.6
6.5625............................................... 7.7 8.8 22.5 37.4
7.7500 and Higher.................................... 0.9 1.9 15.6 30.4
</TABLE>
<PAGE>
The Mortgages will not prepay at any constant rate until maturity, nor will
either Index remain constant at any level. Moreover, the Mortgages have
characteristics that differ from those of the Modeling Assumptions. Therefore,
the actual pre-tax yield of any Class may differ from any of those shown in the
table for that Class, even if purchased at the assumed price shown, and the
actual annual and total payments for the Interest Only Classes may also differ
from any of those shown in the tables for those Classes.
VALUE OF THE CALL CLASSES
The value of each Call Class will depend primarily upon the market value of
the related Class of Multiclass PCs from time to time (which value will depend
on prevailing interest rates and other market and economic conditions), market
expectations regarding its likely future value, and the costs associated with
any exercise of such Call Class Holder's right of redemption. Freddie Mac makes
no representation regarding the value of an investment in either Call Class. An
investor in a Call Class should consider the risk that it may suffer a loss of
all of its initial investment.
FINAL PAYMENT DATES
The Final Payment Date for each Class is the latest date by which it will
be retired. The assumptions used in calculating the Final Payment Dates are
highly conservative, and the actual retirement of any Class may occur earlier
than its Final Payment Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a discussion of certain federal income tax consequences of
the beneficial ownership of the Classes. The discussion does not purport to
address all the federal income tax consequences that may be applicable to
particular categories of beneficial owners, some of which may be subject to
special rules. Accordingly, beneficial owners should consult their own tax
advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership, exchange or disposition of the Classes.
Subject to the assumptions described in "Certain Federal Income Tax
Consequences -- REMIC Election" in the Multiclass PC Offering Circular, the
Upper-Tier REMIC Pool and the Lower-Tier REMIC Pool each will qualify as a REMIC
for federal income tax purposes. The Regular Classes will be the "regular
interests" in the Upper-Tier REMIC Pool. The R Class will be the "residual
interest" in the Upper-Tier REMIC Pool and the RS Class will be the "residual
interest" in the Lower-Tier REMIC Pool.
Cadwalader, Wickersham & Taft, special counsel to Freddie Mac, has advised
Freddie Mac that in the firm's opinion, the arrangement pursuant to which the
MACR Classes are created, sold, and administered (the "MACR Pool") will be
classified as a grantor trust under subpart E, part I of subchapter J of the
Internal Revenue Code (the "Code"). The interests in the Regular Classes that
have been exchanged with Freddie Mac for MACR Classes (including any exchanges
effective on the Closing Date) will be the assets of the MACR Pool (the
"underlying" Regular Classes) and the MACR Classes will represent beneficial
ownership of these assets.
Cadwalader, Wickersham & Taft is also of the opinion that the arrangement
pursuant to which each pair of the CPCs is created, sold and administered (each,
a "CPC Pool") will be classified as a grantor trust under the Code. Freddie Mac
intends to report income, gain, loss and deductions to the Internal Revenue
Service and to the Holders of CPCs in accordance with this characterization. The
Assets of each CPC Pool will consist of (i) the related Regular Class of
Multiclass PCs and (ii) the rights of such pool under a related Guaranteed
Investment and Fee Contract (a "GIFC") to be executed by Freddie Mac in its
corporate capacity and dated the Closing Date, and pursuant to which certain
amounts payable by the Holder of the related Call Class upon a redemption are
invested with Freddie Mac from the date of receipt by that pool at a rate of
return guaranteed by Freddie Mac. Such investments will be at Freddie Mac's
discretion and for its own risk and benefit.
REGULAR CLASSES
The Regular Classes will be treated as debt instruments for federal income
tax purposes and may be issued with original issue discount ("OID") or at a
premium. Based in part on the level of LIBOR as of the date of this Supplement
and on assumptions regarding the initial prices at which substantial portions of
the Regular Classes will be sold to the public, Freddie Mac expects to report
income to the Internal Revenue Service and to Holders of the Regular Classes
assuming they are issued as follows:
- OID: AH, B, IB, IC, PA, PB, PO, S, SA, SB, SC, SD, SE, SQ, ZB, ZC, ZU
and ZV Classes.
- De Minimis OID: AD, AE, AJ, AK, FA, FC, FQ, VC and VH Classes.
- Premium: A, AA, AB, AC, AG, AL, AM, AN, AO, AP, AQ, AR, AS, D, VA, VD,
VE, VG and VJ Classes.
OID generally will result in recognition of taxable income in advance of
the receipt of cash attributable to such income. The "Prepayment Assumption"
used in determining whether OID is de minimis and in computing the rate of
accrual of OID or the amortization of premium is Prepayment Scenario III. See
"Certain Federal Income Tax Consequences -- Taxation of Regular
Classes -- Original Issue Discount" and "--Premium" in the Multiclass PC
Offering Circular.
Freddie Mac intends to report any original issue or market discount or
premium with respect to the Floating Rate Classes assuming that each variable
rate is a fixed rate equal to the value of the variable rate as of the date of
this Supplement. See "Certain Federal Income Tax Consequences -- Taxation of
Regular Classes -- Floating Rate and Inverse Floating Rate Classes" in the
Multiclass PC Offering Circular.
RESIDUAL CLASSES
Special tax considerations apply to the Residual Classes. The taxation of
the Residual Classes can produce a significantly less favorable after-tax return
than if (i) the Residual Classes were taxable as debt instruments or (ii) no
portion of the taxable income on the Residual Classes were treated as "excess
inclusions." In certain periods, taxable income and the resulting tax liability
on the R Class may exceed any payments on that Class. See "Certain Federal
Income Tax Consequences -- Taxation of Residual Classes" in the Multiclass PC
Offering Circular. In addition, a substantial tax may be imposed on certain
transferors of the Residual Classes and certain beneficial owners of such
Classes that are "pass-through entities." See "Certain Federal Income Tax
Consequences -- Transfers of Interests in a Residual Class -- Disqualified
Organizations" in the Multiclass PC Offering Circular. Investors should not
purchase either Residual Class before consulting their tax advisors.
Freddie Mac intends to report accruals of original issue and market
discount and to amortize premium with respect to the Group 3 and Group 4 Assets
using Prepayment Scenario III, rather than the prepayment assumptions used in
their respective Series.
Excess Inclusions
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting thrift institutions to use net operating losses and other
allowable deductions to offset their excess inclusion income from REMIC residual
interests, effective for taxable years beginning after December 31, 1995, except
with respect to REMIC residual interests that are held at all times after
October 31, 1995. In addition, under the legislation, for purposes of computing
alternative minimum tax, taxable income is determined without regard to the
special rule for excess inclusions, and the alternative minimum taxable income
of any beneficial owner of a REMIC residual interest is not less than such
beneficial owner's excess inclusion for the year, effective for all taxable
years beginning after December 31, 1986, unless the taxpayer elects application
only to taxable years beginning after August 20, 1996.
Certain Transfers of Residual Classes
The REMIC Regulations (as defined under "Certain Federal Income Tax
Consequences -- Taxation of Residual Classes -- Excess Inclusions" in the
Multiclass PC Offering Circular) disregard:
- A transfer of a "noneconomic residual" unless a significant purpose
of the transfer is not to impede the assessment or collection of tax;
and
- Except in certain cases, a transfer of a residual interest to a
foreign investor or a transfer of a residual interest from a foreign
investor to a U.S. investor (accordingly, the Multiclass PC Agreement
prohibits the transfer of an interest in a Residual Class to or from
a foreign investor without Freddie Mac's written consent).
In such cases, the transferor would continue to be treated as the owner of the
residual interest and thus would continue to be subject to tax on its allocable
portion of the net income of the REMIC. See "Certain Federal Income Tax
Consequences -- Transfers of Interests in a Residual Class -- Additional
Transfer Restrictions" in the Multiclass PC Offering Circular.
Residual Class with Negative Fair Market Value
The federal income tax consequences of any consideration paid to a
transferee on a transfer of a Residual Class are unclear. The REMIC Regulations
do not address whether a residual interest could have a negative basis and a
negative issue price. The preamble indicates that the Internal Revenue Service
is considering the tax treatment of these types of residual interests. Any
transferee receiving consideration should consult its tax advisors.
Reporting and Administrative Matters
Freddie Mac will furnish Holders of the Residual Classes the information it
deems necessary or appropriate to enable them to prepare any reports required
under the Code or applicable Treasury regulations. Freddie Mac does not intend
to hold the Residual Classes for its account, and applicable law may not permit
Freddie Mac to perform tax administrative functions for the REMIC Pools.
Accordingly, the Holders of the Residual Classes may have certain tax
administrative obligations (for which Freddie Mac will act as attorney-in-fact
and agent). See "Certain Federal Income Tax Consequences -- Reporting and
Administrative Matters" in the Multiclass PC Offering Circular.
MACR CLASSES
General
The MACR Classes will represent beneficial ownership of the underlying
Regular Classes set forth in Appendix 1. Certain MACR Classes (the "Strip MACR
Classes") will represent the right to receive a disproportionate part of the
principal and interest payments on a single underlying Regular Class. Each MACR
Class other than a Strip MACR Class (a "Combination MACR Class") will represent
beneficial ownership of undivided interests in more than one underlying Regular
Class.
The Strip MACR Classes are the MACR Classes created by Combination 4 shown
on Appendix 1. The Combination MACR Classes are the other MACR Classes.
Tax Status
The MACR Classes should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A) and assets described in Code
Section 7701(a)(19)(C). OID and interest accruing on MACR Classes should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B).
Strip MACR Classes
A purchaser of a Strip MACR Class will be treated as owning, pursuant
to Code Section 1286, "stripped bonds" to the extent of its share of principal
payments and "stripped coupons" to the extent of its share of interest payments
on the underlying Regular Class. Although it is unclear how the OID computations
on a Strip MACR Class should be made, Freddie Mac intends to treat each Strip
MACR Class as a single debt instrument for purposes of information reporting.
The Internal Revenue Service could contend, however, that in certain cases a
Strip MACR Class should be treated as an undivided interest in the underlying
Regular Class to the extent that the Strip MACR Class represents an equal pro
rata portion of principal and interest on such Regular Class, and an installment
obligation consisting of "stripped bonds" or "stripped coupons" with respect to
the remainder. An investor should consult its tax advisor as to the proper
treatment of a Strip MACR Class in this regard.
A beneficial owner who purchases a Strip MACR Class should calculate OID
with respect to the Strip MACR Class and include such OID in its ordinary income
for federal income tax purposes as it accrues, which may be prior to the receipt
of the cash attributable to such income, in accordance with a constant interest
method that takes into account the compounding of interest. Although the matter
is not entirely clear, a beneficial owner of a Strip MACR Class should accrue
OID using a method similar to that described with respect to the accrual of OID
on a Regular Class under "Certain Federal Income Tax Consequences -- Taxation of
Regular Classes -- Original Issue Discount" in the Multiclass PC Offering
Circular. Consequently, the beneficial owner determines its yield to maturity
based on its purchase price and on a schedule of payments projected using a
prepayment assumption, and then makes periodic adjustments to take into account
actual prepayment experience. With respect to a particular beneficial owner, it
is not clear whether the prepayment assumption used for calculating OID would be
determined at the time of purchase of the Strip MACR Class or would be the
original Prepayment Assumption with respect to the underlying Regular Class. An
investor should consult its tax advisor regarding this matter. For purposes of
information reporting relating to OID, Freddie Mac will use the original yield
to maturity of the Strip MACR Class determined as of the Closing Date,
calculated based on the original Prepayment Assumption.
If OID accruing during any period, computed as described above, is negative
for any such period, the beneficial owner will be entitled to offset such amount
only against future positive OID accruing from such Strip MACR Class, and
Freddie Mac intends to report income in all cases in this manner. Although not
entirely free from doubt, such a beneficial owner may be entitled to deduct a
loss to the extent that its remaining basis would exceed the maximum amount of
future payments to which such owner is entitled, assuming no further prepayments
of the Mortgages (or, perhaps, assuming prepayments at a rate equal to the
Prepayment Assumption). While the issue is not free from doubt, all or a portion
of such loss may be treated as a capital loss if the Strip MACR Class is a
capital asset in the hands of the owner.
An investor that exchanges an underlying Regular Class for Strip MACR
Classes and then sells one of the Strip MACR Classes also is subject to the
coupon stripping rules of Code Section 1286. As of the date of such sale, the
beneficial owner must allocate its basis in the Regular Class between the part
of the Regular Class underlying the Strip MACR Class sold and the part of the
Regular Class underlying the Strip MACR Class retained in proportion to their
relative fair market values. The beneficial owner is treated under Code Section
1286 as purchasing the Strip MACR Class retained for the amount of basis
allocated to such Class. The beneficial owner calculates OID with respect to
such retained Class as described above and recognizes gain or loss on the Strip
MACR Class sold as described below.
Although the matter is not free from doubt, an investor that acquires in
one transaction a combination of Strip MACR Classes that may be exchanged for an
underlying Regular Class should be treated as owning the underlying Regular
Class. If an investor acquires such a combination in separate transactions, the
law is unclear as to whether the combination should be aggregated or treated as
separate debt instruments for each Strip MACR Class.
If a beneficial owner sells its Strip MACR Class, the investor will
realize gain or loss on the sale of its part of the underlying Regular Class in
an amount equal to the difference between the amount realized and its adjusted
basis in such part. The seller's adjusted basis in such part generally is equal
to the seller's allocated cost of such part, increased by income previously
included, and reduced (but not below zero) by distributions previously received
and by any amortized premium in respect of such part. If a beneficial owner
holds the class as a capital asset, any gain or loss realized will be capital
gain or loss, except to the extent provided under "Certain Federal Income Tax
Consequences -- Sale or Exchange of Multiclass PCs" in the Multiclass PC
Offering Circular.
Combination MACR Classes
A beneficial owner of a Combination MACR Class will be treated as owning an
undivided interest in each of the underlying Regular Classes. An investor that
purchases a Combination MACR Class must allocate its purchase price among the
underlying Regular Classes in accordance with their relative fair market values
as of the purchase date. Such investor should account for its interest in an
underlying Regular Class as described under "Certain Federal Income Tax
Consequences -- Taxation of Regular Classes" in the Multiclass PC Offering
Circular.
Taxation of Foreign Investors
Interest, including OID, distributable to the beneficial owner of a MACR
Class that is a non-U.S. person not engaged in a U.S. trade or business
generally will be considered "portfolio interest" and, therefore, will not be
subject to the 30% United States withholding tax provided that such non-U.S.
person provides an appropriate statement, signed under penalties of perjury,
identifying the beneficial owner and stating, among other things, that the
beneficial owner of the MACR Class is a non-U.S. person. If such statement is
not provided, 30% withholding may apply unless an income tax treaty reduces or
eliminates such tax. If the interest is effectively connected with the conduct
of a trade or business within the United States by a non-U.S. person, such
non-U.S. person will be subject to United States federal income tax at regular
rates. Beneficial owners of MACR Classes that are non-U.S. persons should
consult their own tax advisors.
Backup Withholding
Distributions made on the MACR Classes and proceeds from the sale of MACR
Classes to or through certain brokers may be subject to a "backup" withholding
tax of 31% of "reportable payments" (including interest accruals, OID and, under
certain circumstances, distributions in reduction of principal amount) unless,
in general, the beneficial owner complies with certain procedures or is an
exempt recipient. Any amounts so withheld from distributions on the MACR Classes
would be refunded by the Internal Revenue Service or allowed as a credit against
the beneficial owner's federal income tax.
Information Reporting
Freddie Mac will furnish or make available, within a reasonable time after
the end of each calendar year, to each Holder of a MACR Class, such information
as Freddie Mac deems necessary or desirable to assist Holders in preparing their
federal income tax returns, or to enable Holders to make such information
available to beneficial owners or other financial intermediaries for which such
Holders hold such MACR Class as nominees. The amount reported by Freddie Mac may
not be correct for any particular beneficial owner of a MACR Class.
CPCS
Status of Classes
Callable Class. A beneficial owner of an interest in a Callable Class will
be treated as (i) owning an undivided interest in the underlying Regular Class
and (ii) writing a call option on its interest in the underlying Regular Class
represented by the right of the beneficial owner of the related Call Class to
direct Freddie Mac to redeem such Callable Class as described under "Redemption
and Exchange" in this Supplement (the related "Call Right"). A beneficial owner
of an interest in a Callable Class will not be treated by reason of such
ownership as (i) owning any interest in a Regular Class underlying any other
Callable Class or (ii) writing a call option on any interest in a Regular Class
underlying any other Callable Class. A thrift institution, REMIC, real estate
investment trust or regulated investment company should consult its tax advisor
before purchasing an interest in a Callable Class.
Call Class. The beneficial owner of a Call Class will be treated as having
purchased a call option on the underlying Regular Class for an option premium in
an amount equal to the price paid for the Call Class. The beneficial owner of a
Call Class will not be treated by reason of such ownership as owning a call upon
or otherwise having any interest in a Regular Class underlying any other
Callable Class. A thrift institution, REMIC, real estate investment trust or
regulated investment company should consult its tax advisor before purchasing an
interest in a Call Class. It would appear that if the beneficial owner of a Call
Class held an interest in the related Callable Class, such an option would be
proportionately extinguished for at least as long as the beneficial owner of the
Call Class held such interest, and such beneficial owner would be treated as
holding solely its proportionate share of the underlying Regular Class.
Taxation of Classes
Callable Class. A beneficial owner of an interest in a Callable Class
should be considered (i) to have purchased its interest in the underlying
Regular Class for a price equal to the sum of the cost of its interest in the
Callable Class plus an option premium amount equal to the fair market value at
the time of such purchase of the related Call Right, and (ii) to have written a
call option on its interest in the underlying Regular Class in exchange for such
premium amount. Accordingly, such beneficial owner's basis in its interest in
the underlying Regular Class will be greater than the amount such beneficial
owner paid for its interest in the Callable Class. Similarly, when a beneficial
owner sells an interest in a Callable Class, such beneficial owner will be
deemed to have sold its interest in the underlying Regular Class for a price
equal to the sum of the sales price for its interest in the Callable Class plus
an amount equal to the fair market value of the related Call Right at the time
of sale, which amount such beneficial owner is deemed to have paid to be
relieved of its obligation under such Call Right. Accordingly, the amount
realized by such beneficial owner with respect to its interest in the underlying
Regular Class will be greater than the amount of cash received by such
beneficial owner.
The anticipated material federal income tax consequences to a beneficial
owner of an interest in a Callable Class of purchasing, owning and disposing of
such beneficial owner's interest in the underlying Regular Class are described
under "Regular Classes" above and "Certain Federal Income Tax
Consequences -- Taxation of Regular Classes" in the Multiclass PC Offering
Circular.
A beneficial owner of an interest in a Callable Class will be required to
account for a pro rata share of the income and expense attributable to the
related GIFC, as if such beneficial owner had entered directly into such GIFC.
Payments received in respect of a redemption of a Callable Class and not
immediately distributable to the Holders thereof will be invested with Freddie
Mac under the terms of the related GIFC at a rate of return guaranteed by
Freddie Mac. If a Callable Class is redeemed, so much of the Redemption Price as
is equal to the accrued interest for the period from the first day of the month
of redemption to the Redemption Date, should be treated as income earned under
the GIFC for such period. Any other income earned under the GIFC will be
retained by Freddie Mac as an administrative fee. See "Redemption and Exchange"
in this Supplement.
Under current federal income tax law, a beneficial owner of an interest in
a Callable Class will not be required to include the option premium with respect
to the related Call Right that it is deemed to receive when it purchases such
interest. Instead, such premium will be taken into account when the related Call
Right lapses, is exercised or is otherwise terminated with respect to the
beneficial owner. As indicated above, an amount equal to the option premium that
is deemed to be received by a beneficial owner would be included in the
beneficial owner's basis in the underlying Regular Class. A beneficial owner's
recovery of such basis will not occur at the same rate as its inclusion in
income of option premium.
A beneficial owner of an interest in a Callable Class will include the
option premium in income as a short-term capital gain as the related Call Right
lapses. Although it is not entirely clear whether the related Call Right would
thus be deemed to lapse as the underlying Regular Class is paid down, and if so,
at what rate, Freddie Mac intends to assume that the related Call Right lapses,
and the related premium is recognized by a beneficial owner of an interest in
the Callable Class, proportionately as principal is paid on the subject Regular
Class (whether as scheduled principal payments or prepayments) after the first
date on which the related Call Right may be exercised. There is no assurance
that the Internal Revenue Service would agree with this method of reporting
income from the lapse of the related Call Right, and furthermore, it is
understood that the Internal Revenue Service currently is examining the rules
regarding the taxation of option premiums. A beneficial owner of an interest in
a Callable Class is urged to consult its tax advisor regarding these matters.
If the related Call Right is exercised, the beneficial owner of an interest
in a Callable Class will add an amount equal to the unamortized portion of the
option premium to the amount realized from the sale of the underlying Regular
Class.
If a beneficial owner transfers its interest in a Callable Class, such
transfer will be treated as a "closing transaction" with respect to such
beneficial owner's position in the related Call Right. Accordingly, such
beneficial owner will recognize a short-term capital gain or loss equal to the
difference between the unamortized amount of option premium and the amount such
beneficial owner is deemed to pay, under the rules discussed above, to be
relieved from such beneficial owner's obligation under the related Call Right.
In general, foreign investors will not be subject to U.S. withholding tax
on amounts received or deemed to be received with respect to the call option.
The Internal Revenue Service might take the position that the interest of a
beneficial owner of a Callable Class in the underlying Regular Class and such
beneficial owner's position in the related Call Right constitute positions in a
straddle. If this contention were correct, the straddle rules of Section 1092 of
the Code would apply, with the following consequences. On the sale of an
interest in the Callable Class, a selling beneficial owner's capital gain or
loss with respect to its interest in the underlying Regular Class would be
short-term because the beneficial owner's holding period would be tolled. (As
discussed above, the beneficial owner's gain or loss with respect to the option
premium always would be short-term under the option rules, regardless of the
application of the straddle rules). In addition, the straddle rules might
require a beneficial owner to capitalize, rather than deduct, a portion of any
interest and carrying charges allocable to such beneficial owner's interest in
the Callable Class. Further, if the Internal Revenue Service were to take the
position that a beneficial owner's interest in the underlying Regular Class and
position in the related Call Right constituted a "conversion transaction" as
well as a straddle, then a portion of the gain with respect to the underlying
Regular Class or position in the Call Right might be recharacterized as ordinary
income. Beneficial owners are advised to consult their tax advisors regarding
these issues.
Call Classes. Since the price paid by a beneficial owner of a Call Class
to purchase such Class will be treated as an option premium for the related Call
Right, it will be added to the purchase price of the underlying Regular Class
(in addition to the exchange fee described under "Redemption and Exchange" in
this Supplement) if the underlying Regular Class is purchased upon exercise of
the related Call Right, and will be treated as a loss if the related Call Right
lapses. For a discussion of when the related Call Right may be deemed to lapse,
see "Callable Classes" above. Assuming that the underlying Regular Class, if
acquired, would be a capital asset in such beneficial owner's hands, then loss
recognized with respect to such lapse will be treated as a capital loss.
Any interest paid to the beneficial owner of a Call Class in connection
with an exercise of the related Call Right, as described under "Redemption and
Exchange" in this Supplement, will be treated as ordinary income.
EXCHANGES
An exchange, as described in "Modification and Combination," by a
beneficial owner of one or a combination of Regular Classes or MACR Classes for
related Classes will not be a taxable exchange. The beneficial owner will be
treated as continuing to own after the exchange the same combination of
interests in the underlying Regular Classes that it owned immediately prior to
the exchange. The exchange of the Call Class for the underlying Regular Class
will have the tax consequences discussed above under "CPCs -- Taxation of
Classes."
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
Investors should consult their legal advisors to determine whether and to
what extent any Classes constitute legal investments for such investors. An
institution under the jurisdiction of the Comptroller of the Currency, the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit Union
Administration, the Department of the Treasury or any other federal or state
agency with similar authority should review any applicable regulations, policy
statements and guidelines before purchasing or pledging any Class. See "Legal
Investment Considerations" in the Multiclass PC Offering Circular.
ERISA CONSIDERATIONS
MULTICLASS PCS AND MACR CERTIFICATES
Fiduciaries of plans subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") should review "ERISA Considerations" in the
Multiclass PC Offering Circular before acquiring a Multiclass PC or a MACR
Certificate.
CPCS
A Department of Labor regulation provides that, if an employee benefit plan
subject to ERISA acquires a "guaranteed governmental mortgage pool certificate,"
then, for purposes of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code, the plan's assets include the certificate and
all of its rights with respect to the certificate, but do not, solely by reason
of the plan's holding of the certificate, include any of the mortgages
underlying the certificate. Under this regulation, the term "guaranteed
governmental mortgage pool certificate" includes a certificate "backed by, or
evidencing an interest in, specified mortgages or participation interests
therein" if interest and principal payable on the certificate are guaranteed by
Freddie Mac. The effect of the regulation is to make clear that the sponsor
(that is, the entity that organizes and services the pool, in this case Freddie
Mac) and other persons, in providing services with respect to the assets in the
pool, would not be subject to the fiduciary responsibility provisions of Title 1
of ERISA, or the prohibited transaction provisions of Section 406 of ERISA or
Code Section 4975, merely by reason of the plan's investment in a certificate.
The Callable Classes would appear to qualify as "guaranteed governmental
mortgage pool certificates" as defined in the Department of Labor regulation.
However, the acquisition of a Call Right by the beneficial owner of a Call
Class, as well as the consequences of the exercise of such Call Right by such a
beneficial owner, might be treated under ERISA as principal transactions between
the beneficial owners of a Callable Class and the beneficial owner of the
related Call Class. Thus, in theory, the acquisition or exercise of the Call
Right could be characterized under certain circumstances as an ERISA prohibited
transaction between a plan and a "party in interest" (assuming that such plan
holds a Callable or Call Class and such "party in interest" holds the related
Call or Callable Class), unless an ERISA prohibited transaction exemption, such
as PTE 84-14 (for Transactions by Independent Qualified Professional Asset
Managers), is applicable. A Call Class may be deemed to be an option to acquire
a guaranteed governmental mortgage pool certificate rather than such a
certificate. ERISA plan fiduciaries should consult with their counsel concerning
these issues.
LIQUID ASSET CLASS
The VE Class is intended to qualify as a "liquid asset" for federal savings
associations, federal savings banks and state-chartered savings associations
whose deposits are insured by the Federal Deposit Insurance Corporation. See 12
C.F.R. sec.566.1(g)(3)(xi).
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Purchase Agreement between
Freddie Mac and the Underwriter, Freddie Mac has agreed to sell, and the
Underwriter has agreed to purchase, all of the Multiclass PCs (other than the ZU
and ZV Classes) and all of the CPCs, if any are sold and purchased.
The Underwriter proposes to offer such Securities (other than the Call
Classes) directly to the public from time to time for sale in negotiated
transactions at varying prices to be determined at the time of sale, plus
accrued interest from November 1, 1996 on the Fixed Rate and Delay Classes and
from November 15, 1996 on the Non-Delay Classes, and to offer each Call Class in
a negotiated transaction with a single purchaser at a price to be determined at
the time of sale. The Underwriter may effect such transactions by sales to or
through certain securities dealers (which may include Freddie Mac through its
Securities Sales and Trading Group). Such dealers may receive compensation in
the form of discounts, concessions or commissions from the Underwriter and/or
commissions from any purchasers for which they act as agents.
The Purchase Agreement provides that Freddie Mac will indemnify the
Underwriter against certain liabilities.
INCREASE IN SIZE
Before the Closing Date, Freddie Mac and the Underwriter may agree to
increase the size of this offering by increasing the principal amounts of one or
more of the Asset Groups. In that event, the Securities will have the same
characteristics as described in this Supplement, except that the original
principal (or notional principal) amount of each Class and Component receiving
payments from such Asset Group and, if applicable, the related Targeted Balances
will increase by the same proportion. The Terms Supplement and the Supplemental
Statement will reflect any increase in size of the transaction.
LEGAL MATTERS
The legality of the Securities will be passed upon for Freddie Mac by Maud
Mater, Esq., Senior Vice President -- General Counsel and Secretary of Freddie
Mac. Certain legal matters relating to the Securities will be passed upon for
the Underwriter by Stroock & Stroock & Lavan. The material federal income tax
consequences of the Securities will be passed upon for Freddie Mac by
Cadwalader, Wickersham & Taft.
<PAGE>
Exhibit I-Series 1477 Offering Circular Supplement Cover Page and Terms Sheet
Offering Circular Supplement Freddie
(To Offering Circular Dated January 1, 1993) Mac
$400,000,000
Federal Home Loan Mortgage Corporation
Multiclass Mortgage Participation Certificates, Series 1477
The Federal Home Loan Mortgage Corporation ("Freddie Mac") is offering its
Multiclass Mortgage Participation Certificates, Series 1477 (the "Multiclass
PCs"). The Multiclass PCs will consist of the various "Classes" listed below.
The Classes will receive principal and interest payments, in differing
proportions and at differing times, from the cash flows provided by Freddie Mac
"Gold PCs and "Gold Giant PCs" with interest rates of 7% per annum. This
Supplement sometimes refers to the Gold PCs and Gold Giant PCs that will back
the Multiclass PCs as the "PCs." Underlying the PCs are pools of fixed-rate,
first lien, residential mortgages and mortgage participations (the
"Mortgages"). See "General Information - Structure of Transaction" in this
Supplement.
Freddie Mac guarantees to each "Holder" of a Multiclass PC (i) the timely
payment of interest at the applicable "Class Coupon" and (ii) the payment of the
principal amount of the Holder's Multiclass PC as described in this Supplement.
Freddie Mac will make interest and principal payments on each monthly
"Payment Date," beginning April 15, 1993, on the Classes entitled to such
payments. See "Payments" in this Supplement.
This Series will involve the creation of an "Upper-Tier REMIC Pool" and a
"Lower-Tier REMIC Pool." Elections will be made to treat both REMIC Pools as
"real estate mortgage investment conduits" ("REMICs") pursuant to the Internal
Revenue Code. The R and RS Classes will be "Residual Classes" and, for federal
income tax purposes, will be the residual interest in the Upper-Tier and
Lower-Tier REMIC Pools, respectively. The other Classes will be "Regular
Classes" and, for federal income tax purposes, will be the regular interests in
the Upper-Tier REMIC Pool. The Residual Classes will be subject to transfer
restrictions. See "Certain Federal Income Tax Consequences" in this Supplement
and in the Multiclass PC Offering Circular.
INVESTORS SHOULD READ THIS SUPPLEMENT IN CONJUNCTION WITH THE DOCUMENTS
LISTED AT THE BOTTOM OF PAGE S-2.
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF THE MULTICLASS PCS
ARE OBLIGATIONS OF FREDDIE MAC ONLY. THE MULTICLASS PCS, INCLUDING ANY INTEREST
THEREON, ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT CONSTITUTE DEBTS OR
OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF THE UNITED
STATES OTHER THAN FREDDIE MAC. INCOME ON THE MULTICLASS PCS HAS NO EXEMPTION
UNDER FEDERAL LAW FROM FEDERAL, STATE OR LOCAL TAXATION. THE MULTICLASS PCS ARE
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE
"EXEMPTED SECURITIES" WITHIN THE MEANING OF THE SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
Weighted
Principal Average
Original Type/ Final Life at
Class Principal Other Class Interest CUSIP Payment 165%
1477 Amount(1) Type(2) Coupon Type(2) Number Date(3) PSA(4)
<S> <C> <C> <C> <C> <C> <C> <C>
A................. $18,808.652 PAC I 4.40% FIX 312914L85 July 15,2002 1.1Yrs
B................. 20,918,240 PAC I 5.00 FIX 312914L93 September 15,2007 2.5
C................. 16,185,293 PAC I 5.40 FIX 312914M27 May 15,2010 3.5
D................. 20,506,515 PAC I 5.75 FIX 312914M35 December 15, 2012 4.5
E................. 33,778,632 PAC I 6.25 FIX 312914M43 December 15, 2015 6.0
F................. 36,096,001 PAC I 6.65 FIX 312914M50 May 15, 2018 8.0
G................. 57,470,000 PAC I 7.00 FIX 312914M68 February 15, 2021 11.0
H................. 26,050,000 PAC I 7.00 FIX 312914M76 March 15, 2022 15.0
IA................. 3,430,000 AD/LIQ 7.00 FIX 312914M84 December 15, 1997 2.5
IB................. 2,250,000 AD 7.00 FIX 312914M92 June 15, 2000 6.0
IC................. 1,720,000 AD 7.00 FIX 312914N26 January 15, 2002 8.0
ID................. 11,850,000 AD 7.00 FIX 312914N34 November 15, 2009 13.1
J.................. 26,000,000 PAC I (5) FLT 312914N42 May 15, 2018 3.6
JA................. (6) NTL(PAC I) 7.00 FIX/IO 312914N59 May 15, 2018 -
K.................. (7) NTL(PAC 1) (5) INV/10 312914N67 May 15, 2018 -
MA ................ 14,330,000 PAC II 6.00 FIX 312914N75 October 15, 2022 3.5
MB................. 4,776,667 PAC II (5) FLT 312914N83 October 15, 2022 3.5
MC................. (8) NTL(PAC II) (5) INV/IO 312914N91 October 15, 2022 -
N.................. 13,026,667 PAC II 7.00 FIX 312914P24 March 15, 2023 13.0
O.................. 34,029,333 TAC (5) FLT/DLY 312914P32 March 15,2023 3.5
P.................. 14,584,000 TAC (5) INV/DLY 312914P40 March 15,2023 3.5
S.................. 24,808,000 SUP (5) FLT 312914P73 March 15, 2023 19.3
T.................. 6,290,600 SUP (5) INV 312914P81 March 15, 2023 19.3
U.................. 4,341,400 SUP (5) INV 312914P99 March 15, 2023 19.3
Z.................. 8,750,000 PAC I 7.00 FIX/Z 312914Q23 March 15, 2023 21.2
R.................. 0 NPR 0 NPR 312914P57 March 15,2023 -
RS................. 0 NPR 0 NPR 312914P65 March 15, 2023 -
(1) Subject to proportionate increase as described under "Increase in Size" in this Supplement.
(2) See "Description of Multiclass PCs--Standard Definitions and Abbreviations for Classes" on pages
7-9 of the Multiclass PC Offering Circular. The type of Class with which
the notional principal amount of a Notional Class will be reduced is indicated in
parentheses.
(3) Determined as described under "Final Payment Dates" in this Supplement.
(4) Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that section.
Prepayments will not occur at the assumed rate of 165% PSA or any other constant rate,
and the actual weighted average lives of many Classes are likely to differ from those
shown, perhaps significantly.
(5) The J, K, MB and MC Classes will bear interest based on "LIBOR," and O and P
Classes will bear interest based on "COFI" and the S, T, and U Classes will
bear interest based on the "Prime Rate," as described under "Payments--Interest" in
this Supplement.
(6) The JA Class will not receive principal payments, will have an original notional principal
amount of approximately $14,605,166 and will bear interest on its
notional principal amount at its Class Coupon of 7% per annum. The notional
principal amount of the JA Class will be reduced with reductions in the
principal amounts of certain of the Type I PAC Classes, as described under
"Payments--Interest--Notional Classes" in this Supplement.
(7) The K Class will not receive principal payments, will have an original notional
principal amount of $26,000,000 and will bear interest on its notional
principal amount based on LIBOR, as described under "Payments--Interest"
in this Supplement. The notional principal amount of the K Class will be
reduced proportionately with reductions in the principal amount of the J
Class.
(8) The MC Class will not receive principal payments, will have an original notional
principal amount of $4,776,667 and will bear interest on its notional
principal amount based on LIBOR, as described under "Payments--Interest" in this Supplement.
The notional principal amount of the MC Class will be reduced proportionately
with reductions in the principal amount of the MB Class.
</TABLE>
The Multiclass PCs are offered by Kidder, Peabody & Co. Incorporated (the
"Underwriter") from time to time in negotiated transaction at varying prices to
be determined at the time of sale, plus accrued interest from March 1, 1993 on
the Fixed Rate and Delay Classes and from March 15, 1993 on the Floating Rate
and Inverse Floating Rate Classes other than the Delay Classes. The Multiclass
PCs are offered by the Underwriter when, as and if issued, subject to delivery
by Freddie Mac and acceptance by the Underwriter, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. It is
expected that the Regular Classes (in book-entry form) will be available for
deposit at any Federal Reserve Bank, and that delivery of the Residual Classes
(in certificated form) will be made at the offices of the Underwriter, New York,
New York, on or about March 30, 1993 (the "Closing Date").
Kidder, Peabody & Co.
Incorporated
Offering Circular Supplement Dated January 26, 1993
<PAGE>
SERIES 1477 TERMS SHEET
This terms sheet contains selected information for quick reference only. It
is not a summary of the transaction. Investors should refer to the remainder of
this Supplement for further information.
Class Coupons
The Fixed Rate Classes will bear interest at the Class Coupons shown
on the cover page of this Supplement.
The Floating Rate and Inverse Floating Rate Classes will bear interest as
follows:
Class Coupon Subject to
Minimum Maximum
Class Initial Rate Class Coupon Rate Rate
J 3.525% LIBOR + 0.4% 0.4% 10.0%
K 6.475 9.6% - LIBOR 0 9.6
MB 3.625 LIBOR + 0.5% 0.5 10.0
MC 6.375 9.5% - LIBOR 0 9.5
O* 5.508 COFI + 1% 1 10.0
P* 10.48133 21% - (COFI x 2.3333333) 0 21.0
S 4.75 Prime Rate- 1.25% 0 10.0
T 13.80281 37.46478%- (Prime Rate x3.943662) 0 32.5352
U 10.0 64.28571%- (Prime Rate x 5.71429) 0 10.0
_______________
* Delay Class.
See "Payments--Interest" in this Supplement.
Notional Classes
Notional Class Reduces With
JA................. A, B, C, D, E and F (Type I PAC Classes)
K.................. J (Type I PAC Class)
MC................. MB (Type II PAC Class)
See "Payments--Interest--Notional Classes" in this Supplement.
Allocation of Principal
- Accrual Amount to IA, IB, IC and ID, in that order
- PC Principal Amount to:
1. Type I PAC Class to their Targeted Balances (structured at 90%-225%
PSA), allocated:
74.8652736482%: A 25.1347263518%: J
78.3454681648%: B 21.6545318352%: J
81.1699749248%: C 18.8300250752%: J
84.0775522755%: D 15.9224477245%: J
89.1727349525%: E 10.8272650475%: J
94.3439649765%: F 5.6560350235%: J
100%: G,H and Z in that order
2. Type II PAC Classes to their Targeted Balances (structured at 110%-200%
PSA), allocated:
MA and MB, pro rata
N
3. TAC Classes (O and P), pro rata, to their Targeted Balances
(structured at 165% PSA)
4. S, T and U, pro rata, until retired
5. O and P, pro rata, until retired
6. Type II PAC Classes as in step 2 until retired
7. Type I PAC Classes as in step 1 until H is retired
8. IA, IB, IC, ID and Z in that order, until retired
See "Payments--Principal" in this Supplement.
<PAGE>
Weighted Average Lives (in Years)*
PSA Prepayment Assumption
0% 90% 165% 225% 450%
A............................. 4.1 1.1 1.1 1.1 1.1
B............................. 9.8 2.5 2.5 2.5 2.5
C............................. 13.2 3.5 3.5 3.5 2.9
D............................. 15.6 4.5 4.5 4.5 3.3
E............................. 18.2 6.0 6.0 6.0 3.8
F............................. 20.8 8.0 8.0 8.0 4.6
G............................. 23.3 11.0 11.0 11.0 6.0
H............................. 25.1 15.0 15.0 15.0 8.1
IA............................ 2.5 2.5 2.5 2.5 2.5
IB............................ 6.0 6.0 6.0 6.0 6.0
IC............................ 8.0 8.0 8.0 8.0 8.0
ID............................ 13.1 13.1 13.1 13.1 9.8
J............................. 12.0 3.6 3.6 3.6 2.7
MA and MB..................... 26.9 13.3 3.5 3.5 2.1
N............................. 27.4 16.6 13.0 7.4 2.6
O and P....................... 28.4 21.0 3.5 3.3 1.7
S, T and U.................... 29.5 27.1 19.3 2.5 0.9
Z............................. 26.3 21.2 21.2 21.2 13.4
Underlying PCs................ 21.3 12.2 8.8 7.1 4.1
_________________
* Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at any assumed rate shown or any
other constant rate, and the actual weighted average lives of many
Classes and of the PCs are likely to differ from those shown, perhaps
significantly.
Assumed Mortgage Characteristics (as of March 1, 1993)
Approximate
Weighted Average Approximate Approximate
Approximate Remaining Term Weighted Average Weighted Average
Principal to Maturity Loan Age Per Annum
Balance (in months) (in months) Interest Rate
- ------------ ----------------- ----------------- -------------------
$120,000,000 360 0 7.65%
106,666,667 359 1 7.65
93,333,333 357 2 7.65
40,000,000 354 3 7.65
40,000,000 352 4 7.65
- -------------
$400,000,000 358* 1*
==============
- ---------------
*Weighted average by principal balance.
The actual remaining terms to maturity, loan ages and interest rates of
most of the Mortgages will differ from the weighted averages shown above,
perhaps significantly. See "General Information--The Mortgages" in this
Supplement.
<PAGE>
Exhibit II-Series 1876 Offering Circular Supplement Cover Page and Terms Sheet
Offering Circular Supplement
(To Offering Circular Dated October 1, 1995) Freddie
$605,000,000 Mac
Federal Home Loan Mortgage Corporation
Multiclass Mortgage Participation Certificates
and Modifiable and Combinable REMIC Certificates, Series 1876
The Federal Home Mortgage Corporation ("Freddie Mac") is offering its
Multiclass Mortgage Participation certificates of the above Series (the
"Multiclass PCs"). The Multiclass PCs will consist of the "Classes" listed
below. The Classes will receive payments from the cash flows provided by
the following Freddie Mac "Gold PCs" and/or "Gold Giant PCs" (the "Assets"),
having the principal amounts indicated below (each, an "Asset Group"):
Group 1 Assets: Group 3 Assets:
- -$200,000,000 of 7.0% per annum 7-year -$255,000,000 of 7.0% per annum PCs
Balloon/Reset PCs
Group 2 Assets:
- - $150,000,000 of 7.5% per annum 7-year
Balloon/Reset PCs
The Gold PCs and/or Gold Giant PCs constituting each Asset Group are
referred to as the "PCs." Underlying the PCs are pools of fixed-rate, first
lien, residential mortgages and mortgage participations (the "Mortgages"). All
of the Mortgages underlying the Group 1 and Group 2 Assets will be 7-year
Balloon/Reset Mortgages (as described in this Supplement). All of the Mortgages
underlying the Group 3 Assets will have original terms to maturity of 360 months
or less. See "General Information-Structure of Transaction" and "-The Mortgages"
in this Supplement.
Certain of the Classes of Multiclass PCs of this Series may, upon notice
and payment of an exchange fee, be exchanged for a Class or Classes (each, a
"MACR Class") of Modifiable and Combinable REMIC Certificates ("MACR
Certificates") as provided in this Supplement. Each MACR Certificate issued
in such an exchange will represent a proportionate beneficial ownership
interest in, and will be entitled to receive a proportionate amount of the cash
flow from, the related Class or Classes of Multiclass PCs. The characteristics
of the MACR classes are set forth in Appendix 1 to this Supplement. As used
in this Supplement, unless the context requires otherwise, the term
"Securities" includes Multiclass PCs and MACR Certificates and the term
"Classes" includes the Classes of Multiclass PCs and the MACR Classes. See
"Modification and Combination" in this Supplement and Appendix 1 to this
Supplement.
Freddie Mac guarantees to each "Holder" of a Security (i) the timely
payment of interest at the applicable "Class Coupon" and (ii) the payment of
the principal amount of the Holder's Security as described in this Supplement.
Freddie Mac will make interest and principal payments on each monthly
"Payment Date," beginning September 15, 1996, on the Classes entitled to such
payments. See "Payments" in this Supplement.
The Series will involve the creation of a single "REMIC Pool." An
election will be made to treat the REMIC Pool as a "real estate mortgage
investment conduit" ("REMIC") pursuant to the Internal Revenue Code. The R
Class will be a "Residual Class" and the other Classes of Multiclass PCs will
be "Regular Classes." The R Class will be subject to transfer restrictions.
See "Certain Federal Income Tax Consequences" in this Supplement and in the
Multiclass PC Offering Circular.
The risks associated with the Securities may make them unsuitable for
some investors. See page S-2 and "Prepayment and Yield Analysis" in this
Supplement.
Investors should read this Supplement in conjunction with the documents
listed at the bottom of page S-2.
The obligations of Freddie Mac under its guarantees of the Securities are
obligations of Freddie Mac only. The Securities, including any interest
thereon, are not guaranteed by the United States and do not constitute debts or
obligations of the United States or any agency or instrumentatiliy of the
United States other than Freddie Mac. Income on the Securities has no
exemption under federal law from federal, state or local taxation. The
Securities are exempt from the registration requirements of the Securities Act
of 1933 and are "exempted securities" within the meaning of the Securities
Exchange Act of 1934.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________________
Original Weighted Average
Class of Principal Principal or Class Interest CUSIP Final Life Under
MultiClass Pcs(1) Amount (2) Other Type(3) Coupon Type(3) Number Payment Date Scenario III
<S> <C> <C> <C> <C> <C> <C> <C>
FA 175,000,000 PT (6) FLT 3133T7MU0 September 15, 2003 4.5 Yrs.
SA 25,000,000 PT (6) INV 3133T7N88 September 15, 2003 4.5
FB 140,625,000 PT (6) FLT 3133T7MV8 September 15, 2003 4.4
K 9,375,000 T 0.00 PO 3133T7MX4 September 15, 2003 4.4
SB 140,625,000 NTL(PT) (6) INV/IO 3133T7N96 September 15, 2003 --
A 50,580,645 CPT 7.75% FIX 3133T7MP1 August 15, 2026 5.3
B 8,992,688 CPT 0.00 PO 3133T7MQ9 August 15, 2026 9.5
PA 38,600,000 PAC 7.00 FIX 3133T7MY2 April 15, 2016 3.0
PB 25,600,000 PAC 7.00 FIX 3133T7MZ9 October 15, 2019 5.5
PC 31,300,000 PAC 7.00 FIX 3133T7N21 January 15, 2023 8.0
PD 23,100,000 PAC 7.00 FIX 3133T7N39 November 15, 2024 10.9
PE 18,800,000 PAC 7.00 FIX 3133T7N47 February 15, 2026 15.0
PG 8,000,000 PAC 7.00 FIX 3133T7N54 August 15, 2026 21.7
C 6,300,000 SUP 7.50 FIX 3133T7MR7 August 15,2024 1.5
D 5,900,000 SUP 7.50 FIX 3133T7MS5 December 15, 2024 4.0
E 5,200,000 SUP 7.50 FIX 3133T7MT3 March 15, 2025 10.9
G 32,626,667 SUP 7.50 FIX 3133T7MW6 August 15, 2026 21.6
R 0 NPR 0.00 NPR 3133T7N70 August 15, 2026 --
___________________________________________________________________________________________________________________________________
(1) The MACR Classes are shown on Appendix 1 to this Supplement.
(2) The amount shown for the Notional Class is its original notional principal amount and does not represent principal that will
be paid: see "Payments--Interest" in this Supplement.
(3) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations for Classes" in the Multiclass PC Offering
Circular. The type of Class with which the notional principal amount of the Notion Class will be reduced is indicated in
parentheses.
(4) See "Final Payment Dates" in this Supplement.
(5) Determined as described under "Prepayment and Yield Analysis" in this Supplement, and subject to the assumptions and
qualifications in that section. Prepayments will not occur at the percentages of PSA assumed under the scenario indicated
above or any other prescribed rate, and the actual weighted average lives of any or all of the Classes are likely to differ
from those shown, perhaps significantly. See page S-5 for the PSA Prepayment Scenarios used in this Supplement.
(6) The Floating Rate and Inverse Floating Rate Classes will bear interest as described under "Terms Sheet--Class Coupons" in this
Supplement.
</TABLE>
The Securities are offered by Salomon Brothers Inc. (the "Underwriter")
from time to time in negotiated transactions at varying prices to be determined
at the time of sale, plus accrued interest from August 1, 1996 on the Fixed
Rate Classes and from August 15, 1996 on the Floating Rate and Inverse
Floating Rate Classes. The Securities are offered by the Underwriter, subject
to prior sale, when, as and if delivered to and accepted by the Underwriter
and subject to the Underwriter's right to reject any order in whole or in part.
It is expected that the Regular Classes and MACR Classes (in book-entry form)
will be available for deposit at any Federal Reserve Bank, and that delivery
of the Residual Classes (in certificated form) will be made at the offices
of the Underwriter, on or about August 30, 1996 (the "Closing Date").
Salomon Brothers Inc.
The Date of this Offering Circular Supplement is July 22, 1996
<PAGE>
TERMS SHEET
This Terms Sheet contains elected information about this Series.
Investors should refer to the remainder of this Supplement for further
information.
Modification and Combination
Holders of certain of the Regular Classes of MultiClass PCs will be
entitled, upon notice and payment of an exchange fee, to exchange all or a
portion of such Classes for proportionate interests in the related MACR Class
or Classes shown on Appendix 1 to this Supplement. The Holders of MACR Classes
will be entitled to receive payments from the related Class or Classes of
Multiclass PCs. Holders of MACR Classes will be entitled to exchange all or
any portion of such MACR Classes for proportionate interests in the related
Multiclass PCs. See "Modification and Combination" in this Supplement.
Appendix 1 shows the combinations of the Classes of Multiclass PCs and the
related MACR Classes.
Class Coupons
The Fixed Rate Classes will bear interest at the Class Coupons shown on
the cover page of this Supplement or on Appendix 1 to this Supplement.
The B, K and PI Classes will be Principal Only Classes and will not
bear interest.
The Floating Rate and Inverse Floating Rate Classes will bear interest
as follows:
Multiclass PCs
Class Coupon Subject to
Class Initial Rate* Class Coupon Minimum Rate Maximum Rate
FA 5.90% LIBOR + 0.40% 0.40% 8.0%
FB 5.93 LIBOR + 0.43% 0.43% 8.0%
SA 14.70 53.2% - (LIBOR x7) 0 53.2
SB 2.07 7.57% - LIBOR 0 7.57
MACR Certificates
Class Coupon Subject to
Class Initial Rate* Class Coupon Minimum Rate Maximum Rate
SI and SK 2.10% 7.6% - LIBOR 0% 7.6%
SJ 5.25 19.0% - (LIBOR x 2.5) 0 19.0
SL 31.05 133.55% - (LIBOR x 15) 0 113.55
__________________________
* Initial Rate will be in effect during first Accrual Period; Class Coupon
will adjust monthly thereafter.
See "Payments--Interest" in this Supplement and "Description of Multiclass
PCs--Interest Rate Indices" in the Multiclass PC Offering Circular.
Notional Classes
Original Notional
Class Principal Amount Reduces Proportionately with
Multiclass PCs SB $140,625,000 FB (Pass-Through Class)
MACR Classes SI 175,000,000 PI (Pass-Through Class)
SK 112,500,000 SJ (Pass-Through Class)
See "Payments--Interest--Notional Classes" in this Supplement.
<PAGE>
Allocation of Principal
Multiclass PCs
On each Payment Date, Freddie Mac will pay:
Pass-Through - The "Group 1 Asset Principal Amount" for that Payment Date
to FA and SA, pro rata, until retired
- The "Group 2 Asset Principal Amount" for that Payment Date
to FB and K, pro rata, until retired
- The "Group 3 Asset Principal Amount" for that Payment Date
in the following order of priority.
PAC 1. To the PAC Classes and Components, until reduced to their
"Targeted Balances" for that Payment Date, allocated as
follows:
A-1 and B-1, pro rata
PA, PB, PC, PD, PE and PG, in that order
Scheduled 2. To A-2 and B-2, pro rata, until reduced to their Targeted
Balances for that Payment Date
Support 3. Concurrently:
(a) 6.6666660448% to B-3, until retired
(b) 93.3333339552% to C, D, E and G, in that order,
until retired
Scheduled 4. To A-2 and B-2, pro rata, until retired
PAC 5. To the PAC Classes and Components, allocated as described
in step 1 but without regard to their Targeted Balances,
until retired
The Targeted Balances (shown under "Payments--Principal--Targeted Balances
Schedules" in this Supplement) were structured as follows:
Structuring Range
PAC Classes and Components 80% - 260% PSA
Scheduled Components 115% - 150% PSA
MACR Classes
On any Payment Date when payments of principal are to be allocated from
Multiclass PCs to MACR Certificates, such payments will be allocated from the
applicable Class or Classes of Multiclass PCs to the related MACR Class that is
entitled to principal payments.
See "Payments--Principal" and "Prepayment and Yield Analysis" in this
Supplement.
<PAGE>
PSA Prepayment Scenarios
This Supplement uses the following prepayment scenarios:
PSA Prepayment Scenarios*
Multiclass PCs/MACR Classes/Asset Group I II III IV V
FA and SA/PI, SI, SJ and SK/Group I 0% 100% 250% 350% 500%
FB, K and SB/SL/Group 2 0 100 270 350 500
A, B, C, D, E, G, PA, PB, PC, PD, PE, PG (Group 3) 0 75 140 300 500
__________________
* Expressed as percentages of PSA. See "Prepayment and Yield Analysis--
General--PSA Model" in this Supplement.
Component Classes
Designation Original Principal Amount Principal Type*
A-1 $14,000,000 PAC
A-2 36,580,645 SCH
-------------
$50,580,645
=============
B-1 $ 1,500,000 PAC
B-2 3,919,355 SCH
B-3 3,573,333 SUP
-------------
$ 8,992,688
=============
* See "Description of Multiclass PCs--Standard Definitions and
Abbreviations for Classes" in the Multiclass PC Offering Circular.
See "Payments--Principal--Component Classes" in this Supplement.
Weighted Average Lives (in years)*
PSA Prepayment Scenario
I II III IV V
A 20.3 12.0 5.3 2.7 1.6
B 23.7 17.0 9.5 2.2 1.3
C 27.8 20.5 1.5 0.3 0.2
D 28.1 21.6 4.0 0.8 0.4
E 28.4 22.7 10.9 1.1 0.6
FA, PI, SA, SJ and Group 1 Assets 6.8 5.6 4.5 4.0 3.3
FB, K, SL and Group 2 Assets 6.8 5.6 4.4 4.0 3.3
G 29.3 26.1 21.6 2.1 1.2
PA 12.0 3.1 3.0 3.0 2.5
PB 17.4 5.7 5.5 5.3 3.4
PC 20.6 8.3 8.0 7.1 4.4
PD 22.9 11.1 10.9 9.6 5.9
PE 24.4 15.0 15.0 13.2 8.1
PG 25.4 21.7 21.7 19.8 12.6
Group 3 Assets 21.3 12.6 9.3 5.3 3.3
___________________
* Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at any assumed rate shown or any
other constant rate, and the actual weighted average lives of any or all
of the Classes and of the Assets are likely to differ from those shown,
perhaps significantly.
<PAGE>
Assumed Mortgage Characteristics (as of August 1, 1996)
Remaining Term
to Maturity Loan Age Per Annum
Asset Group Principal Balance (in Months) (in Months) Interest Rate
1 $200,000,000 81 3 7.50%
2 150,000,000 81 3 8.0
3 255,000,000 350 8 7.55
Each Mortgage underlying the Group 1 and Group 2 Assets is a 7-year
Balloon/Reset Mortgage and provides for level monthly payments based on an
amortization schedule of up to 30 years at origination, with a lump sum payment
equal to its remaining principal balance due at maturity. The actual remaining
terms to maturity, loan ages and interest rates of most of the Mortgages differ
from those shown above, in some cases significantly. See "General
Information--The Mortgages" in this Supplement.
APPENDIX 1
AVAILABLE COMBINATIONS
<TABLE>
<CAPTION>
MULTICLASS PCS MACR CERTIFICATES
- ------------------------------------------------------------------ --------------------------------------------------
ORIGINAL
PRINCIPAL OR
NOTIONAL MAXIMUM ORIGINAL
PRINCIPAL MACR PRINCIPAL OR NOTIONAL EXCHANGE
CLASS AMOUNT(1) EXCHANGE PROPORTIONS(2) CLASS PRINCIPAL AMOUNT(1)(3) PROPORTIONS(2)
- ---------------------- ------------ ----------------------- ---- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
COMBINATION 1
A $ 56,474,000 39.2729558751% C $143,798,700 100%
B 87,324,700 60.7270441249
COMBINATION 2
PO $ 7,616,843 100% SG $ 7,616,843 100%
SC 40,623,157 (8)
COMBINATION 3
FB $ 40,623,157 84.2105244610% E $ 48,240,000 100%
PO 7,616,843 15.7894755390
SC 40,623,157 (8)
COMBINATION 4
D $ 26,113,000 100% DA $ 26,113,000 N/A
DB 26,113,000 N/A
DC 26,113,000 N/A
DD 26,113,000 N/A
DE 26,113,000 N/A
DF 26,113,000 N/A
DG 25,321,696 N/A
DH 24,576,941 N/A
DJ 23,211,555 N/A
DK 21,989,894 N/A
DL 20,890,400 N/A
DI 26,113,000 N/A
DP 26,113,000 N/A
COMBINATION 5
FQ $ 9,510,000 83.3333333333% H $ 11,412,000 100%
SQ 1,902,000 16.6666666667
COMBINATION 6
FC $ 13,287,555 77.7777745259% J $ 17,084,000 100%
SD 3,796,445 22.2222254741
COMBINATION 7
PA $ 6,277,178 100% SH $ 6,277,178 100%
SE 6,277,178 (9)
COMBINATION 8
FA $ 15,169,722 83.3333305866% G $ 18,203,667 100%
SA 3,033,945 16.6666694134
<CAPTION>
MACR CERTIFICATES
--------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
PRINCIPAL OR CLASS INTEREST CUSIP LIFE UNDER
CLASS OTHER TYPE(4) COUPON TYPE(4) NUMBER FINAL PAYMENT DATE(5) SCENARIO III(6)
- ---------------------- ------------- ------ ------- ---------- --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
COMBINATION 1
A TAC 6.75% FIX 3133T8 J W 8 November 15, 2023 4.2Yrs
B
COMBINATION 2
PO SUP (7) INV 3133T8 L 3 9 March 15, 2024 10.0
SC
COMBINATION 3
FB SUP 8.00% FIX 3133T8 K D 8 March 15, 2024 10.0
PO
SC
COMBINATION 4
D SEQ 6.00% FIX 3133T8 J Y 4 November 15, 2024 12.0
SEQ 6.50 FIX 3133T8 J Z 1 November 15, 2024 12.0
SEQ 7.00 FIX 3133T8 K 2 2 November 15, 2024 12.0
SEQ 7.25 FIX 3133T8 K 3 0 November 15, 2024 12.0
SEQ 7.50 FIX 3133T8 K 4 8 November 15, 2024 12.0
SEQ 7.75 FIX 3133T8 K 5 5 November 15, 2024 12.0
SEQ 8.25 FIX 3133T8 K 6 3 November 15, 2024 12.0
SEQ 8.50 FIX 3133T8 K 7 1 November 15, 2024 12.0
SEQ 9.00 FIX 3133T8 K 9 7 November 15, 2024 12.0
SEQ 9.50 FIX 3133T8 K A 4 November 15, 2024 12.0
SEQ 10.00 FIX 3133T8 K B 2 November 15, 2024 12.0
NTL(SEQ) 8.00 FIX/IO 3133T8 K 8 9 November 15, 2024 --
SEQ 0.00 PO 3133T8 K C 0 November 15, 2024 12.0
COMBINATION 5
FQ SUP 7.50 FIX 3133T8 K L 0 May 15, 2026 10.2
SQ
COMBINATION 6
FC SUP 7.00 FIX 3133T8 K P 1 November 15, 2026 21.8
SD
COMBINATION 7
PA SC/PT (7) INV/DLY 3133T8 L 4 7 March 15, 2023 14.8
SE
COMBINATION 8
FA SC/PT 7.50 FIX 3133T8 K K 2 August 15, 2026 20.7
SA
</TABLE>
- ---------------
(1) Subject to increase as described under "Increase in Size" in this
Supplement.
(2) Exchange proportions shown are constant proportions of the original
principal amounts of the related Classes of Multiclass PCs or MACR
Certificates. In accordance with the exchange proportions, Multiclass PCs
may be exchanged for MACR Certificates, and vice versa. In the case of
Combination 4, one or more related MACR Classes also may be exchanged for
other related MACR Classes. See "Modification and Combination" in this
Supplement for the constraints applicable to and examples of such exhanges.
(3) The amount shown for each MACR Class represents the maximum original
principal or notional principal amount of that Class, considered
individually and without regard to the amounts shown for the other Classes.
The amount shown for a Notional Class is its original notional principal
amount and does not represent principal that will be paid; see
"Payments -- Interest" in this Supplement. The aggregate original principal
amount of all the Classes shown in the table (other than the Notional
Classes) will be $271,128,545.
(4) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular. The type of Class with
which the notional principal amount of a Notional Class will be reduced is
indicated in parentheses.
(5) See "Final Payment Dates" in this Supplement.
(6) Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at the percentages of PSA assumed under
the scenario indicated above or any other prescribed rate, and the actual
weighted average lives of any or all of the MACR Classes are likely to
differ from those shown, perhaps significantly. See page S-7 of this
Supplement for the PSA Prepayment Scenarios used in this Supplement.
(7) Class Coupon is calculated as set forth under "Terms Sheet -- Class Coupons"
in this Supplement.
(8) Original notional principal amount of the SC Class being exchanged equals
5.3333325894 times the original principal amount of the PO Class being
exchanged.
(9) Original notional principal amount of the SE Class being exchanged equals
the original principal amount of the PA Class being exchanged.
<PAGE>
- ----------------------------------------------------------
- ----------------------------------------------------------
THIS SUPPLEMENT, TOGETHER WITH THE MULTICLASS PC OFFERING CIRCULAR, CONSTITUTES
AN OFFER TO SELL ONLY THE SECURITIES OFFERED HEREBY. FREDDIE MAC HAS NOT
AUTHORIZED ANY BROKER, DEALER OR SALESPERSON, OR ANYONE ELSE, TO MAKE ANY
STATEMENTS, WRITTEN OR ORAL, IN CONNECTION WITH THE OFFER, EXCEPT FOR THOSE
CONTAINED IN THIS SUPPLEMENT AND IN THE OTHER DOCUMENTS AND SOURCES OF
INFORMATION PREPARED BY FREDDIE MAC THAT ARE LISTED ON PAGE S-2 AND UNDER
"GENERAL INFORMATION -- ADDITIONAL INFORMATION." INVESTORS MUST NOT RELY ON ANY
OTHER STATEMENTS AS HAVING BEEN AUTHORIZED BY EITHER FREDDIE MAC OR THE
UNDERWRITER. THIS SUPPLEMENT AND THE MULTICLASS PC OFFERING CIRCULAR DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
BY ANYONE IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL, OR WHERE THE PERSON MAKING SUCH AN OFFER OR SOLICITATION WOULD NOT BE
QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. FREDDIE MAC MAKES NO REPRESENTATION THAT THE STATEMENTS
IN THIS SUPPLEMENT OR ANY OTHER DOCUMENT WILL BE CORRECT AT ANY TIME AFTER THE
DATE OF SUCH DOCUMENT, EVEN THOUGH DELIVERY OF THE DOCUMENT AND THE SALE OF THE
SECURITIES TAKE PLACE ON A LATER DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------------------------------------------------- ----
<S> <C>
OFFERING CIRCULAR SUPPLEMENT
Terms Sheet.......................................... S-3
General Information.................................. S-10
Multiclass PC Agreement.......................... S-10
Form of Securities............................... S-10
Holders.......................................... S-10
Structure of Transaction......................... S-10
The Mortgages.................................... S-11
Additional Information........................... S-11
Redemption and Exchange.............................. S-12
Modification and Combination......................... S-13
Payments............................................. S-15
Payment Dates; Record Dates...................... S-15
Method of Payment................................ S-15
Interest......................................... S-15
Principal........................................ S-16
Class Factors.................................... S-25
Guarantees....................................... S-25
Optional Redemption.............................. S-25
Residual Proceeds................................ S-26
Prepayment and Yield Analysis........................ S-26
General.......................................... S-26
Prepayment and Weighted Average Life
Considerations................................. S-28
Yield Considerations............................. S-38
Value of the Call Classes........................ S-45
Final Payment Dates.................................. S-45
Certain Federal Income Tax Consequences.............. S-45
General.......................................... S-45
Regular Classes.................................. S-46
Residual Classes................................. S-46
MACR Classes..................................... S-47
CPCs............................................. S-49
Exchanges........................................ S-51
Legal Investment Considerations...................... S-52
ERISA Considerations................................. S-52
Multiclass PCs and MACR Certificates............. S-52
CPCs............................................. S-52
Liquid Asset Class................................... S-52
Plan of Distribution................................. S-53
Increase in Size..................................... S-53
Legal Matters........................................ S-53
Exhibit I -- Series 1477 Offering Circular Supplement
Cover Page and Terms Sheet......................... S-54
Exhibit II -- Series 1876 Offering Circular
Supplement Cover Page and Terms Sheet.............. S-57
Appendix 1 -- Available Combinations................. A-1
MULTICLASS PC OFFERING CIRCULAR
Offering Circular Summary............................ 3
Federal Home Loan Mortgage Corporation............... 7
Availability of Information and Incorporation by
Reference.......................................... 7
Description of Multiclass PCs........................ 7
The Multiclass PC Agreement.......................... 21
Certain Federal Income Tax Consequences.............. 23
ERISA Considerations................................. 32
Legal Investment Considerations...................... 33
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
$824,480,845
FEDERAL HOME LOAN
MORTGAGE CORPORATION
MULTICLASS MORTGAGE
PARTICIPATION CERTIFICATES,
CALLABLE PASS-THROUGH CERTIFICATES
AND MODIFIABLE
AND COMBINABLE
REMIC CERTIFICATES,
SERIES 1910
[FREDDIE MAC LOGO]
BEAR, STEARNS & CO. INC.
OFFERING CIRCULAR SUPPLEMENT
DATED OCTOBER 15, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE>
OFFERING CIRCULAR DATED OCTOBER 1, 1995
FEDERAL HOME LOAN
MORTGAGE CORPORATION [FREDDIE MAC LOGO]
MULTICLASS MORTGAGE PARTICIPATION CERTIFICATES
(ISSUABLE IN SERIES)
The Federal Home Loan Mortgage Corporation ("Freddie Mac") from time to time
will offer Multiclass Mortgage Participation Certificates ("Multiclass PCs") in
"Series" by means of this Offering Circular and a separate Offering Circular
Supplement (a "Supplement") for each Series. Each Series will consist of two or
more "Classes." The Classes of each Series will receive principal and interest
payments from the cash flows provided, directly or indirectly, by Freddie Mac
"PCs." Underlying the PCs will be pools of first lien, residential mortgages and
mortgage participations that Freddie Mac has acquired ("Mortgages").
PCs include "Gold PCs," "Original PCs," "ARM PCs," "Gold Giant PCs,"
"Original Giant PCs" and "ARM Giant PCs." Gold PCs, Original PCs and ARM PCs
represent undivided interests in discrete pools consisting of Mortgages. Gold
Giant PCs, Original Giant PCs and ARM Giant PCs represent beneficial ownership
interests in discrete pools typically consisting of Gold PCs, Original PCs and
ARM PCs, respectively.
Freddie Mac guarantees to each "Holder" of a Multiclass PC (i) the timely
payment of interest at the applicable Multiclass PC interest rate ("Class
Coupon") or as otherwise described in the applicable Supplement and (ii) the
payment of the principal amount of the Holder's Multiclass PC as described in
the applicable Supplement. Freddie Mac also guarantees the payment of interest
and principal on all PCs. See "Description of Multiclass PCs -- Guarantees."
Freddie Mac will make interest and principal payments on the Classes of each
Series entitled to such payments on each "Payment Date," as described in the
applicable Supplement. Payments on the PCs underlying each Series, together with
any other assets described in the applicable Supplement, will be sufficient to
make timely payments of interest required to be paid on the Multiclass PCs of
that Series and to retire each Class of that Series on or before its "Final
Payment Date." The rate of principal payments on each Class of each Series will
depend in part on the rate of principal payments (including prepayments) on the
related Mortgages.
Each Series will be either a "Single-Tier Series" or a "Double-Tier Series."
In a Single-Tier Series, each Class will represent a beneficial ownership
interest in a single "REMIC Pool," including PCs or securities backed by PCs. In
a Double-Tier Series, each Class will represent a beneficial ownership interest
in one of two REMIC Pools, called the "Upper-Tier REMIC Pool" and the
"Lower-Tier REMIC Pool." The assets of the Upper-Tier REMIC Pool will include
one or more securities ("Mortgage Securities") representing "regular interests"
in the related Lower-Tier REMIC Pool, and the Lower-Tier REMIC Pool will include
PCs or securities backed by PCs. Any REMIC Pool may also include cash or other
eligible assets.
An election will be made to treat each REMIC Pool as a "real estate mortgage
investment conduit" ("REMIC") pursuant to the Internal Revenue Code. The
"Regular Classes" of each Series will constitute "regular interests" in a REMIC
for federal income tax purposes. A single "Residual Class" constituting the
"residual interest" in a REMIC for federal income tax purposes will be created
for each REMIC Pool. Residual Classes will be subject to transfer restrictions.
See "Certain Federal Income Tax Consequences."
Unless otherwise specified in the applicable Supplement, Regular Classes
will be sold in book-entry form only. Residual Classes will be sold in
registered, certificated form only. See "Description of Multiclass PCs -- Form
of Multiclass PCs, Holders, Minimum Principal Amounts and Transfers."
------------------------
This Offering Circular should be read in conjunction with the Supplement
applicable to each Series and the additional documents specified in that
Supplement. See "Availability of Information and Incorporation by Reference."
------------------------
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF THE MULTICLASS PCS
ARE OBLIGATIONS OF FREDDIE MAC ONLY. MULTICLASS PCS, INCLUDING ANY INTEREST
THEREON, ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT CONSTITUTE DEBTS OR
OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF THE UNITED
STATES OTHER THAN FREDDIE MAC. INCOME ON THE MULTICLASS PCS HAS NO EXEMPTION
UNDER FEDERAL LAW FROM FEDERAL, STATE OR LOCAL TAXATION. THE MULTICLASS PCS ARE
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE
"EXEMPTED SECURITIES" WITHIN THE MEANING OF THE SECURITIES EXCHANGE ACT OF 1934.
THIS OFFERING CIRCULAR MAY NOT BE USED TO CONSUMMATE SALES OF MULTICLASS PCS
UNLESS ACCOMPANIED BY THE APPLICABLE SUPPLEMENT.
<PAGE>
THIS OFFERING CIRCULAR, TOGETHER WITH THE SUPPLEMENT FOR EACH SERIES,
CONSTITUTES AN OFFER TO SELL ONLY THAT SERIES. FREDDIE MAC HAS NOT AUTHORIZED
ANY BROKER, DEALER OR SALESPERSON, OR ANYONE ELSE, TO MAKE ANY STATEMENTS,
WRITTEN OR ORAL, IN CONNECTION WITH ANY SUCH OFFER, EXCEPT FOR THOSE CONTAINED
IN THIS OFFERING CIRCULAR, IN THE APPLICABLE SUPPLEMENT AND IN THE OTHER
DOCUMENTS AND SOURCES OF INFORMATION PREPARED BY FREDDIE MAC THAT ARE SPECIFIED
IN THAT SUPPLEMENT. INVESTORS MUST NOT RELY ON ANY OTHER STATEMENTS AS HAVING
BEEN AUTHORIZED BY FREDDIE MAC. NEITHER THIS OFFERING CIRCULAR NOR ANY
SUPPLEMENT CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
MULTICLASS PCS BY ANYONE IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL, OR WHERE THE PERSON MAKING SUCH AN OFFER OR SOLICITATION
WOULD NOT BE QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT WOULD BE UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION. FREDDIE MAC MAKES NO REPRESENTATION THAT THE
STATEMENTS IN THIS OFFERING CIRCULAR, ANY SUPPLEMENT OR ANY OTHER DOCUMENT WILL
BE CORRECT AT ANY TIME AFTER THE DATE OF SUCH DOCUMENT, EVEN THOUGH DELIVERY OF
THE DOCUMENT AND THE SALE OF THE MULTICLASS PCS TAKE PLACE ON A LATER DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
Offering Circular Summary............................................................. 3
Federal Home Loan Mortgage Corporation................................................ 7
Availability of Information and Incorporation by Reference............................ 7
Description of Multiclass PCs......................................................... 7
General.......................................................................... 7
Standard Definitions and Abbreviations for Classes............................... 8
Form of Multiclass PCs, Holders, Minimum Principal Amounts and Transfers......... 11
REMIC Pool Assets................................................................ 13
Class Factors.................................................................... 15
Payments of Interest............................................................. 15
Interest Rate Indices............................................................ 15
Payments of Principal............................................................ 19
Residual Classes................................................................. 20
Guarantees....................................................................... 20
Optional Redemption.............................................................. 20
The Multiclass PC Agreement........................................................... 21
Transfer of Assets to REMIC Pool................................................. 21
Certain Matters Regarding Freddie Mac............................................ 21
Voting Under Any PC or Giant PC Agreement........................................ 22
Events of Default................................................................ 22
Rights Upon Event of Default..................................................... 22
Amendment........................................................................ 22
Governing Law.................................................................... 23
Certain Federal Income Tax Consequences............................................... 23
General.......................................................................... 23
REMIC Election................................................................... 23
Status of Multiclass PCs......................................................... 23
Taxation of Regular Classes...................................................... 24
Taxation of Residual Classes..................................................... 27
Sale or Exchange of Multiclass PCs............................................... 29
Transfers of Interests in a Residual Class....................................... 29
Treatment of Servicing Compensation.............................................. 31
Taxation of Certain Foreign Investors............................................ 31
Backup Withholding............................................................... 32
Reporting and Administrative Matters............................................. 32
ERISA Considerations.................................................................. 32
Legal Investment Considerations....................................................... 33
</TABLE>
<PAGE>
OFFERING CIRCULAR SUMMARY
The summary information below is qualified in its entirety by reference to
the information appearing elsewhere in this Offering Circular and by reference
to the information regarding each Series of Multiclass PCs contained in the
related Supplement.
SELLER AND GUARANTOR....... The Federal Home Loan Mortgage Corporation, a
shareholder-owned government-sponsored
enterprise.
THE MULTICLASS PCS......... Freddie Mac will create the Multiclass PCs of each
Series under a Multiclass Mortgage Participation
Certificate Agreement dated as of October 1,
1995, as supplemented by a Terms Supplement
relating to each Series (together, the
"Multiclass PC Agreement"). The Multiclass PCs of
each Single-Tier Series will represent beneficial
ownership interests in the related REMIC Pool
formed by Freddie Mac under the Multiclass PC
Agreement. In the case of a Double-Tier Series,
(i) the Classes issued in respect of the related
Lower-Tier REMIC Pool (the "Lower-Tier Classes")
will represent beneficial ownership interests in
that Pool, (ii) one or more Lower-Tier Classes,
representing "regular interests" in that Pool,
will constitute the Mortgage Securities for the
related Upper-Tier REMIC Pool and (iii) the
Classes issued in respect of the Upper-Tier REMIC
Pool (the "Upper-Tier Classes") will represent
beneficial ownership interests in that Pool. In a
Double-Tier Series, the Multiclass PCs include
all of the Upper-Tier Classes plus the Residual
Class issued in respect of the Lower-Tier REMIC
Pool.
REMIC POOL ASSETS.......... Various PCs or other securities created or acquired
by Freddie Mac having the characteristics
described under "Description of Multiclass
PCs -- REMIC Pool Assets" in this Offering
Circular and, as to a particular Series, in the
related Supplement. The Mortgages underlying such
PCs or other securities will be first lien,
residential mortgages, including whole mortgage
loans and/or mortgage participation interests.
PCs include Gold PCs, Original PCs, ARM PCs, Gold
Giant PCs, Original Giant PCs and ARM Giant PCs.
The Mortgages in each pool underlying a PC will
be entirely conventional Mortgages or entirely
Mortgages insured by the Federal Housing
Administration and/or partially guaranteed by the
Department of Veterans Affairs.
FORM OF MULTICLASS PCS..... Unless otherwise specified in the related
Supplement, the Regular Classes of each Series
will be issued and maintained, and may be
transferred by Holders, only on the book-entry
system of the Federal Reserve Banks. Regular
Classes maintained on such book-entry system may
be held of record only by entities eligible to
maintain book-entry accounts with a Federal
Reserve Bank. If a Series includes one or more
"Retail Classes," each such Class will be
represented by one or more certificates held by
or on behalf of The Depository Trust Company or
its successor (the "Depository"), unless
otherwise provided in the related Supplement. The
Depository will maintain each such Class through
its book-entry facilities. The Residual Class for
each REMIC Pool, and certain Regular Classes if
so provided in the related Supplement, will be
issued in registered, certificated form. Residual
Classes and such Regular Classes ("Certificated
Regular Classes") will be transferable and
exchangeable at the office of Texas Commerce Bank
National Association or its successor (the
"Registrar").
HOLDERS.................... The term "Holders" means (i) in the case
of a Regular Class maintained on the Federal
Reserve Banks' book-entry system, the entities
that appear on the book-entry records of a Federal
Reserve Bank as holders of that Class, (ii) in the
case of a Retail Class, the Depository or its
nominee and (iii) in the case of a Residual Class
or a Certificated Regular Class, the entities or
individuals that appear on the records of the
Registrar as the registered holders of that Class.
A Holder of a Multiclass PC is not necessarily the
beneficial owner of such Multiclass PC.
Beneficial owners ordinarily will hold Regular
Classes, and may hold Residual Classes, through
one or more financial intermediaries, such as
banks, brokerage firms and securities clearing
organizations. A Holder that is not also the
beneficial owner of a Multiclass PC, and each
other financial intermediary in the chain to the
beneficial owner, will be responsible for
establishing and maintaining accounts for their
customers and for remitting payments to those
accounts. See "Description of Multiclass
PCs -- Form of Multiclass PCs, Holders, Minimum
Principal Amounts and Transfers."
MINIMUM PRINCIPAL AMOUNTS
AND TRANSFERS............ Unless otherwise provided in the applicable
Supplement, (i) Regular Classes (other than
Retail Classes) will be issued and must be
maintained and transferred in minimum original
principal (or minimum original notional
principal) amounts of $1 and additional
increments of $1 and (ii) Residual Classes will
be issued and must be maintained and transferred
in minimum original principal (or minimum
original notional principal) amounts of $1,000
and additional increments of $1 or, in the case
of a Residual Class without an original principal
(or original notional principal) amount, in
minimum percentage interests of 1% in the
residual interest in the related REMIC Pool. See
"Description of Multiclass PCs -- Form of
Multiclass PCs, Holders, Minimum Principal
Amounts and Transfers."
PAYMENT DATES.............. Unless otherwise provided in the applicable
Supplement, Freddie Mac will pay principal and
interest to Holders of Multiclass PCs of each
Series entitled to such payments on the 15th of
each month specified in the related Supplement
or, if the 15th is not a "Business Day," on the
next Business Day (a "Payment Date"), beginning
on the date specified in the related Supplement.
For this purpose, "Business Day" means a day
other than (i) a Saturday or Sunday, (ii) a day
on which the Federal Reserve Bank of New York (or
other agent acting as Freddie Mac's fiscal agent)
or, as to Residual and any Certificated Regular
Classes, the Registrar is authorized or obligated
by law or executive order to remain closed, (iii)
as to any Holder of a Multiclass PC issued in
book-entry form, a day on which the Federal
Reserve Bank at which such Holder's account is
maintained is authorized or obligated by law or
executive order to remain closed, (iv) a day on
which the offices of the federal government
located in the District of Columbia generally are
closed for business or (v) a day on which the
offices of Freddie Mac are closed.
METHOD OF PAYMENT.......... Unless otherwise provided in the applicable
Supplement, a Federal Reserve Bank will credit
payments on each Payment Date to the accounts of
Holders of Regular Classes maintained on the
Federal Reserve Banks' book-entry system. Each
Holder, and each other financial intermediary in
the chain to the beneficial owner, will be
responsible for remitting payments to their
customers.
Unless otherwise provided in the
applicable Supplement, the Registrar will make
payments on a Retail Class to the Depository in
immediately available funds. The Depository will
be responsible for crediting payments to the
accounts of the appropriate Depository
participants in accordance with the Depository's
normal procedures. Each Depository participant,
and each other financial intermediary in the chain
to the beneficial owner, will be responsible for
remitting payments to their customers.
The Registrar will mail payments on a Residual
Class or a Certificated Regular Class by check to
the addresses of the Holders of such Class, as
they appear on the Registrar's records, or, if
specified in the related Supplement, by wire
transfer to such Holders, in either case not
later than the applicable Payment Date. However,
a Holder will receive (i) the final payment of
principal, if any, on a Residual Class only upon
presentation of the Holder's certificate to the
Registrar for notation of such payment and (ii)
the final payment on a Residual Class or a
Certificated Regular Class only upon surrender of
the Holder's certificate to the Registrar. See
"Description of Multiclass PCs -- Form of
Multiclass PCs, Holders, Minimum Principal
Amounts and Transfers."
INTEREST................... Interest will accrue on each Class of each Series
at its applicable Class Coupon (which may be
zero) or as otherwise described in the related
Supplement and will be paid on each Payment Date,
except for interest on any "Accrual Classes" or
"Partial Accrual Classes" contained in such
Series. Interest on each Accrual Class or Partial
Accrual Class will be paid to the extent, if any,
provided in the related Supplement. The amount of
any interest accrued and not paid on any Accrual
Class or Partial Accrual Class will be added to
the principal amount of that Class. Any accrued
interest so added will also accrue interest.
Interest payable or added to principal on a
Payment Date will accrue during the period or
periods (each, an "Accrual Period") specified in
the related Supplement. See "Description of
Multiclass PCs -- Payments of Interest."
PRINCIPAL.................. Freddie Mac will pay principal on the Multiclass
PCs of each Series on each Payment Date as
described in the related Supplement. Subject to
any allocation procedures that may apply in the
case of a Retail Class, the Holders of any Class
entitled to receive principal payments on any
Payment Date will receive such payments on a pro
rata basis. See "Description of Multiclass
PCs -- Payments of Principal."
RESIDUAL CLASSES........... Holders of each Residual Class will be entitled to
receive (i) on each Payment Date, any payments of
principal and interest specified in the related
Supplement and (ii) the proceeds of the remaining
assets, if any, of the related REMIC Pool after
all required principal and interest payments on
all Classes issued in respect of that REMIC Pool
have been made.
Each Residual Class will be subject to transfer
restrictions. See "Certain Federal Income Tax
Consequences -- Transfers of Interests in a
Residual Class."
RECORD DATE................ Each payment on the Multiclass PCs of a Series will
be made to Holders of record as of the day
specified in the related Supplement.
FINAL PAYMENT DATE......... The Final Payment Date for each Class of a Series
is the latest date by which such Class will be
retired. Final Payment Dates are calculated on
the basis of highly conservative assumptions, and
the actual retirement of any Class may occur
earlier than its Final Payment Date.
GUARANTEES................. Freddie Mac guarantees to each Holder of
a Multiclass PC (i) the timely payment of interest
at the applicable Class Coupon or as otherwise
described in the applicable Supplement and (ii)
the payment of the principal amount of the
Holder's Multiclass PC as described in the
applicable Supplement. Freddie Mac also guarantees
payment of interest and principal on all PCs. See
"Description of Multiclass PCs -- Guarantees."
OPTIONAL REDEMPTION........ Unless otherwise provided in the Supplement
relating to a Series, Freddie Mac may redeem the
outstanding Multiclass PCs of such Series (or, in
the case of a Double-Tier Series, the outstanding
Lower-Tier Classes) in whole, but not in part, on
any Payment Date when their aggregate outstanding
principal amount would be less than 1% of their
aggregate original principal amount. Upon any
such redemption of Lower-Tier Classes in a
Double-Tier Series, the redemption price of the
Mortgage Securities will be applied to retire the
outstanding Upper-Tier Classes. See "Description
of Multiclass PCs -- Optional Redemption."
CLASS FACTORS.............. On or about the first (or, if so provided in the
related Supplement, the seventh) business day of
each month, Freddie Mac will publish a Class
Factor for each Class having a principal amount.
The Class Factor for any Class 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 Payment
Date in the following month or, in the case of a
Series backed by Gold PCs or Gold Giant PCs, in
the same month. See "Description of Multiclass
PCs -- Class Factors."
REMIC ELECTION AND TAX
STATUS OF THE MULTICLASS
PCS...................... Freddie Mac will elect to treat each REMIC Pool as
a REMIC for federal income tax purposes. Regular
Classes will be "regular interests," and Residual
Classes will be "residual interests," in the
related REMICs for federal income tax purposes.
As a consequence of the REMIC election, the
Multiclass PCs will generally be treated as
"qualifying real property loans" for mutual
savings banks and domestic building and loan
associations, "regular or residual interests in a
REMIC" for domestic building and loan
associations, "real estate assets" for real
estate investment trusts and, except for Residual
Classes, as "qualified mortgages" for other
REMICs. See "Certain Federal Income Tax
Consequences -- Status of Multiclass PCs."
SPECIAL TAX CONSIDERATIONS APPLY TO RESIDUAL
CLASSES. THE TAXATION OF A RESIDUAL CLASS CAN
PRODUCE A SIGNIFICANTLY LESS FAVORABLE AFTER-TAX
RETURN THAN IF (i) THE RESIDUAL CLASS WERE
TAXABLE AS A DEBT INSTRUMENT OR (ii) NO PORTION
OF THE TAXABLE INCOME ON THE RESIDUAL CLASS WERE
TREATED AS "EXCESS INCLUSIONS." IN CERTAIN
PERIODS, TAXABLE INCOME AND THE RESULTING TAX
LIABILITY ON A RESIDUAL CLASS MAY EXCEED PAYMENTS
RECEIVED ON THAT CLASS. SEE "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- TAXATION OF RESIDUAL
CLASSES." IN ADDITION, A SUBSTANTIAL TAX MAY BE
IMPOSED ON CERTAIN TRANSFERORS OF A RESIDUAL
CLASS AND CERTAIN BENEFICIAL OWNERS OF A RESIDUAL
CLASS THAT ARE "PASS-THRU ENTITIES." SEE "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- TRANSFERS OF
INTERESTS IN A RESIDUAL CLASS." INVESTORS SHOULD
NOT PURCHASE RESIDUAL CLASSES BEFORE CONSULTING
THEIR TAX ADVISORS.
LEGAL INVESTMENT
CONSIDERATIONS........... See "Legal Investment Considerations." Fiduciaries
of ERISA plans should review "ERISA
Considerations."
<PAGE>
FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a shareholder-owned government-sponsored enterprise created
on July 24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act,
Title III of the Emergency Home Finance Act of 1970, as amended, 12 U.S.C.
sec.sec. 1451-1459 (the "Freddie Mac Act"). Freddie Mac's statutory mission is
(i) to provide stability in the secondary market for home mortgages, (ii) to
respond appropriately to the private capital market, (iii) to provide ongoing
assistance to the secondary market for residential mortgages (including
activities relating to mortgages on housing for low- and moderate-income
families involving a reasonable economic return that may be less than the return
earned on other activities) and (iv) to promote access to mortgage credit
throughout the United States (including central cities, rural areas and other
underserved areas) by increasing the liquidity of mortgage investments and
improving the distribution of investment capital available for residential
mortgage financing. Neither the United States nor any agency or instrumentality
of the United States other than Freddie Mac is obligated, either directly or
indirectly, to fund the mortgage purchase or financing activities of Freddie
Mac.
The principal activity of Freddie Mac consists of the purchase of first
lien, conventional residential mortgages, including both whole loans and
participation interests in such mortgages. Freddie Mac finances mortgage
purchases principally by sales of guaranteed mortgage-related securities.
Mortgages retained by Freddie Mac are financed with debt, cash temporarily held
pending disbursement to securities holders and equity capital. Freddie Mac also
engages in transactions, such as the issuance of Multiclass PCs, involving the
purchase and resecuritization of its outstanding guaranteed mortgage-related
securities.
AVAILABILITY OF INFORMATION AND INCORPORATION BY REFERENCE
Freddie Mac prepares an annual Information Statement that describes Freddie
Mac, its business and operations and contains Freddie Mac's audited financial
statements. From time to time Freddie Mac prepares Information Statement
Supplements that include unaudited financial data and other information
concerning its business and operations. Freddie Mac periodically prepares "PC
Offering Circulars" for Gold PCs, Original PCs and ARM PCs and a "Giant PC
Offering Circular" for Gold Giant PCs, Original Giant PCs and ARM Giant PCs.
These Offering Circulars describe the general characteristics of such
securities, the related mortgages and other matters. Each describes the
agreement under which such securities are created and sold (a "PC Agreement" in
the case of the Gold PCs, Original PCs and ARM PCs; a "Giant PC Agreement" in
the case of Gold Giant PCs, Original Giant PCs and ARM Giant PCs). The
Supplement for each Series of Multiclass PCs will incorporate by reference the
current Information Statement, the applicable PC Offering Circular and Giant PC
Offering Circular and any applicable supplements to those documents. Investors
can obtain any of these documents, the Multiclass PC Agreement (including the
Terms Supplement for any Series) and any other documents prepared and made
available by Freddie Mac by writing or calling the Investor Inquiry Department
at Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside
Washington, D.C. metropolitan area, phone 800/336-FMPC; within Washington, D.C.
metropolitan area, phone 703/759-8160).
DESCRIPTION OF MULTICLASS PCS
GENERAL
Freddie Mac will offer Multiclass PCs from time to time in Series by means
of this Offering Circular and a Supplement relating to each Series. Each Series
of Multiclass PCs will consist of two or more Classes.
Each Class will represent a beneficial ownership interest in the REMIC
Pool, or in one of the two REMIC Pools, for the related Series. In the case of a
Single-Tier Series, the Multiclass PCs will represent beneficial ownership
interests in a single REMIC Pool, consisting of PCs or securities backed,
directly or indirectly, by PCs and, if so provided in the related Supplement,
cash or other eligible assets. In the case of a Double-Tier Series, (i) the
Lower-Tier Classes will represent beneficial ownership interests in the
Lower-Tier REMIC Pool, consisting of PCs or securities backed, directly or
indirectly, by PCs, (ii) one or more Lower-Tier Classes, representing "regular
interests" in that Pool, will constitute the Mortgage Securities for the related
Upper-Tier REMIC Pool and (iii) the Upper-Tier Classes will represent beneficial
ownership interests in the Upper-Tier REMIC Pool. Either REMIC Pool in a
Double-Tier Series may, if so provided in the related Supplement, also include
cash or other eligible assets. Each Single-Tier Series will include a single
Residual Class, and each Double-Tier Series will include two Residual Classes
(one for each REMIC Pool).
Each Series of Multiclass PCs will be created under the Multiclass PC
Agreement, including the Terms Supplement for that Series. Holders and anyone
having a beneficial interest in Multiclass PCs of any Series should refer to the
Multiclass PC Agreement for a complete description of their rights and
obligations and the rights and obligations of Freddie Mac. Holders and
beneficial owners of Multiclass PCs will acquire their Multiclass PCs subject to
all terms and conditions of the Multiclass PC Agreement.
STANDARD DEFINITIONS AND ABBREVIATIONS FOR CLASSES
Classes of Multiclass PCs fall into different categories. The following
chart identifies and generally defines most categories. The first column of the
chart shows Freddie Mac's standard abbreviation for each category. The cover
page of each Supplement will identify the categories of Classes of the related
Series by means of one or more of these abbreviations.
<TABLE>
<CAPTION>
FREDDIE
MAC
STANDARD CATEGORY
ABBREVIATION OF CLASS DEFINITION
- ------------- --------------- --------------------------------------------------------------------
<S> <C> <C>
PRINCIPAL TYPES
AD Accretion Classes that are designed to receive principal payments from
Directed accretions on specified Accrual or Partial Accrual Classes. These
Classes also may receive principal payments from principal paid on
the underlying PCs or other REMIC Pool assets.
AFC Available Classes that may receive as principal, in addition to other amounts,
Funds a portion of the funds received as interest on the underlying PCs or
other REMIC Pool assets, to the extent that such funds remain
available after accrued interest due on the same or related Classes
has been paid.
CPT Component Classes consisting of "Components." The Components of a Component
Class may have different principal and/or interest payment
characteristics but together constitute a single Class. Each
Component of a Component Class may be identified as falling into one
or more of the categories in this chart.
NPR No Payment Residual Classes that are designed to receive no payments of
Residual principal.
NSJ Non-Sticky Classes whose principal payment priorities change temporarily upon
Jump the occurrence of one or more "trigger" events. A Non-Sticky Jump
Class "jumps" to its new priority on each Payment Date when the
trigger condition is met and reverts to its original priority (does
not "stick" to the new priority) on each Payment Date when the
trigger condition is not met.
NTL Notional Classes having only a notional principal amount. A notional
principal amount is the amount used as a reference to calculate the
amount of interest due on an Interest Only Class that is not
entitled to any principal.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FREDDIE
MAC
STANDARD CATEGORY
ABBREVIATION OF CLASS DEFINITION
- ------------- --------------- --------------------------------------------------------------------
<C> <S> <C>
PAC PAC (or Planned Classes that are designed to receive principal payments using a
Amortization predetermined schedule derived by assuming two constant prepayment
Class) rates for the underlying Mortgages. A PAC schedule generally will
reflect a "structuring range" at least 30% PSA (as will be defined
in each applicable Supplement) both above and below the Prepayment
Assumption (as defined under "Certain Federal Income Tax
Consequences -- Taxation of Regular Classes -- Original Issue
Discount" in this Offering Circular) for the related Series. The PAC
Classes in any Series may include two or more "Types." The PAC Class
or Classes within any Type generally have a single structuring
range. The different Types have different structuring ranges and/or
different principal payment priorities. In cases where there is more
than one Type, the PAC Classes may be assigned such designations as
Type I PAC Classes, Type II PAC Classes and so forth (standard
abbreviations: PAC I, PAC II and so forth).
PT Pass-Through Classes which either individually or together with other Classes
receive all or substantially all of the principal payments on the
underlying PCs or other REMIC Pool assets (or designated portion
thereof) and that are not designated as Strip or Sequential Pay
Classes.
SCH Scheduled Classes that are designed to receive principal payments using a
predetermined schedule, but that are not designated as PAC or TAC
Classes. Scheduled Classes may include, among others, the following
types of Classes: (i) Classes that are designed to receive principal
payments using two predetermined schedules, each of which is derived
using either a single constant prepayment rate or two constant
prepayment rates for the underlying Mortgages ("High/Low Scheduled
Classes"); (ii) Classes that are designed to receive principal
payments using a predetermined schedule (typically based on a
percentage of the remaining principal balance of the underlying
REMIC Pool assets) such that they will be retired by the last date
of such schedule under all Mortgage prepayment scenarios, including
a scenario in which no prepayments occur ("Absolute Maturity
Scheduled Classes"); (iii) Classes that are designed to receive
principal payments using a predetermined schedule derived by
assuming two constant prepayment rates for the underlying Mortgages,
which schedule reflects a "structuring range" that is less than 30%
PSA above and/or less than 30% PSA below the Prepayment Assumption
("Limited Range Scheduled Classes") and (iv) Classes consisting of
PAC and TAC Components, PAC and Scheduled Components or Scheduled
and TAC Components ("Component Scheduled Classes").
SEQ Sequential Classes that receive principal payments in a prescribed sequence,
Pay that do not have predetermined schedules and that, in most cases,
receive payments of principal continuously from the first Payment
Date on which they receive principal until they are retired.
Sequential Pay Classes may receive principal payments concurrently
with one or more other Sequential Pay Classes. A single Class that
receives principal payments before, after or concurrently with all
other Classes in the same Series may be identified as a Sequential
Pay Class.
SJ Sticky Jump Classes whose principal payment priorities change permanently upon
the occurrence of one or more "trigger" events. A Sticky Jump Class
"jumps" to its new priority on the first Payment Date when the
trigger condition is met and retains ("sticks" to) that priority
until retired.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FREDDIE
MAC
STANDARD CATEGORY
ABBREVIATION OF CLASS DEFINITION
- ------------- --------------- --------------------------------------------------------------------
<C> <S> <C>
STP Strip Classes that receive a constant proportion, or "strip," of the
principal payments on the underlying PCs or other REMIC Pool assets
(or designated portion thereof).
SUP Support (or Classes that receive principal payments on any Payment Date only if
Companion) scheduled payments have been made on specified PAC, TAC and/or
Scheduled Classes.
TAC TAC (or Classes that are designed to receive principal payments using a
Targeted predetermined schedule derived by assuming a single constant
Amortization prepayment rate for the underlying Mortgages. The TAC Classes in any
Class) Series may include two or more "Types." The different Types have
different principal payment priorities and/or have schedules that
are derived from different assumed prepayment rates. In cases where
there is more than one Type, the TAC Classes may be assigned such
designations as Type I TAC Classes, Type II TAC Classes and so forth
(standard abbreviations: TAC I, TAC II and so forth).
XAC Index Classes whose principal payment allocations are based on the value
Allocation of an index.
Class
INTEREST TYPES
AFC Available Classes whose entitlement to be paid accrued interest is subject to
Funds the availability of funds received as interest and/or principal
payments on the underlying PCs or other REMIC Pool assets. In the
event such funds are insufficient, the amount of the deficiency may,
if so provided in the applicable Supplement, be carried forward to
subsequent Payment Dates (and may itself accrue interest) until
sufficient funds are available to provide for the payment of the
deficiency. Any deficiency that remains unpaid after the underlying
PCs or other REMIC Pool assets are retired will not be owing or paid
and will not be covered by Freddie Mac's guarantees.
ARB Ascending Classes that have predetermined Class Coupons that increase or
Rate decrease one or more times on dates determined before issuance.
DLY Delay A Floating Rate or Inverse Floating Rate Class for which there is a
delay, typically of approximately 15 days, between the end of its
Accrual Period and the related Payment Date.
EXE Excess Classes that receive any principal and interest paid on the
underlying PCs or other REMIC Pool assets in excess of the amount of
the prescribed principal and interest required to be paid on all
Classes in the Series. Excess Classes sometimes have specified
principal amounts but no specified Class Coupon.
FIX Fixed Rate Classes with Class Coupons that are fixed throughout the life of the
Class.
FLT Floating Rate Classes with Class Coupons that are reset periodically based on an
index and that vary directly with changes in the index.
IDC Index Classes with Class Coupons that are reset periodically based on the
Differential difference (or other specified relationship) between two or more
designated indices.
INV Inverse Classes with Class Coupons that are reset periodically based on an
Floating Rate index and that vary inversely with changes in the index.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FREDDIE
MAC
STANDARD CATEGORY
ABBREVIATION OF CLASS DEFINITION
- ------------- --------------- --------------------------------------------------------------------
<S> <C> <C>
IO Interest Only Classes that receive some or all of the interest payments made on the
underlying PCs or other REMIC Pool assets and little or no principal.
Interest Only Classes have either a nominal or a notional principal
amount. A nominal principal amount represents actual principal that will
be paid on the Class. It is referred to as nominal since it is extremely
small compared to other Classes. A notional principal amount is the amount
used as a reference to calculate the amount of interest due on an Interest
Only Class that is not entitled to any principal.
NPR No Payment Residual Classes that are designed to receive no payments of
Residual interest.
PO Principal Only Classes that do not receive any interest.
PZ Partial Accrual Classes that accrete a part of their interest, which is added to the
outstanding principal balance, and simultaneously receive payments
of the remainder as interest.
W WAC (or Classes whose Class Coupons represent a blended interest rate that
Weighted may change from period to period. WAC Classes may consist of
Average Components, some of which have different interest rates.
Coupon)
Z Accrual Classes that accrete all of their interest, which is added to the
outstanding principal balance. This accretion may continue until the
Class begins receiving principal payments, until some other event
has occurred or until the Class is retired.
OTHER TYPES
LIQ Liquid Asset Classes intended to qualify as "liquid assets" for certain savings
institutions. Liquid Asset Classes have Final Payment Dates not
later than five years from their dates of issuance.
RTL Retail Classes designated for sale to retail investors. Retail Classes
frequently are sold in small "units" or other increments and may
receive principal payments in accordance with special priorities and
allocation procedures.
SC Structured Classes that receive payments from one or more previously issued
Collateral Regular Classes.
</TABLE>
FORM OF MULTICLASS PCS, HOLDERS, MINIMUM PRINCIPAL AMOUNTS AND TRANSFERS
Unless otherwise provided in the applicable Supplement, Freddie Mac will
sell Regular Classes (other than Retail Classes and Certificated Regular
Classes) only in book-entry form through the Federal Reserve Banks' book-entry
system. Freddie Mac's fiscal agent for such Regular Classes will be the Federal
Reserve Banks. The Fiscal Agency Agreement between Freddie Mac and the Federal
Reserve Bank of New York, acting on behalf of the Federal Reserve Banks, makes
generally applicable to such Regular Classes (i) the Freddie Mac book-entry
regulations (1 C.F.R. Part 462), (ii) the procedures, insofar as applicable,
established from time to time by regulations of the U.S. Department of the
Treasury governing obligations of the U.S. Department of the Treasury, as now
contained in Treasury Department Circular No. 300, and (iii) such other
procedures as may be agreed upon from time to time by Freddie Mac and a Federal
Reserve Bank. These regulations and procedures relate primarily to the
registration, transfer and pledge of Freddie Mac's book-entry securities. A copy
of Circular No. 300 may be obtained upon request from any Federal Reserve Bank,
the U.S. Department of the Treasury or Freddie Mac. The accounts of Holders on
the Federal Reserve Banks' book-entry system are governed by applicable
operating circulars and letters of the Federal Reserve Bank.
Unless otherwise provided in the applicable Supplement, Regular Classes
(other than Retail Classes and Certificated Regular Classes) will be issued and
must be maintained and transferred on the book-entry system of the Federal
Reserve Banks in minimum original principal (or minimum original notional
principal) amounts of $1 and additional increments of $1. Transfers of such
Regular Classes will also be subject to any applicable Federal Reserve Bank
minimum wire transfer requirements.
A Regular Class in book-entry form (other than a Retail Class) may be held
of record only by entities eligible to maintain book-entry accounts with a
Federal Reserve Bank. A Federal Reserve Bank's book-entry records will reflect
Holders' aggregate holdings of such a Regular Class by account.
If a Series includes one or more Retail Classes, each such Class will be
represented by one or more certificates registered in the name of the Depository
or its nominee, unless otherwise provided in the related Supplement. The
Depository will maintain each such Class through its book-entry facilities.
If a Series includes one or more Certificated Regular Classes, each such
Class will be issued in registered, certificated form in minimum original
principal amounts (or minimum original notional principal amounts) of $1 and
additional increments of $1, unless otherwise provided in the applicable
Supplement.
Unless otherwise provided in the applicable Supplement, Residual Classes
will be issued only in certificated form in minimum original principal (or
minimum original notional principal) amounts of $1,000 and additional increments
of $1 or, in the case of a Residual Class without an original principal (or
original notional principal) amount, in minimum percentage interests of 1% in
the residual interest in the related REMIC Pool.
Residual Classes and Certificated Regular Classes will be transferable and
exchangeable at the offices of the Registrar. A service charge may be imposed
for any exchange or registration of transfer of an interest in a Residual Class
or a Certificated Regular Class, and Freddie Mac may require payment of a sum
sufficient to cover any tax or other governmental charge.
Each Class of Multiclass PCs is assigned a unique nine-character
designation (a "CUSIP Number") used, among other things, to identify such Class.
The term "Holders" means (i) in the case of a Regular Class maintained on
the Federal Reserve Banks' book-entry system, the entities that appear on the
book-entry records of a Federal Reserve Bank as holders of that Class, (ii) in
the case of a Retail Class, the Depository or its nominee and (iii) in the case
of a Residual Class or a Certificated Regular Class, the entities or individuals
that appear on the records of the Registrar as the registered holders of that
Class.
A Holder of a Multiclass PC is not necessarily the beneficial owner of such
Multiclass PC. Beneficial owners ordinarily will hold Regular Classes, and may
hold Residual Classes, through one or more financial intermediaries, such as
banks, brokerage firms and securities clearing organizations. For example, an
investor may hold an interest in a Regular Class through a brokerage firm which,
in turn, holds such interest through an entity eligible to maintain book-entry
accounts with a Federal Reserve Bank. In that case, the beneficial owner of such
interest would be the investor and the entity that appears as the holder on the
records of a Federal Reserve Bank would be the Holder. A Holder that is not also
the beneficial owner of a Multiclass PC, and each other financial intermediary
in the chain between the Holder and the beneficial owner, will be responsible
for establishing and maintaining accounts for their customers. The rights of the
beneficial owner of a Multiclass PC with respect to Freddie Mac and (in the case
of a Regular Class maintained on the Federal Reserve Banks' book-entry system) a
Federal Reserve Bank may be exercised only through the Holder of the Multiclass
PC. Neither Freddie Mac nor any Federal Reserve Bank will have a direct
obligation to a beneficial owner of a Multiclass PC that is not also the Holder
of the Multiclass PC. A Federal Reserve Bank will act only upon the instructions
of the Holder in recording transfers of a Regular Class maintained on the
Federal Reserve Banks' book-entry system.
Freddie Mac, the Registrar and the Federal Reserve Banks, or any agent
of Freddie Mac, the Registrar or the Federal Reserve Banks, may treat the Holder
as the absolute owner of a Multiclass PC for the purpose of receiving payments
of principal or interest and for all other purposes, and neither Freddie Mac,
the Registrar or the Federal Reserve Banks, nor any agent of Freddie Mac, the
Registrar or the Federal Reserve Banks, will be affected by any notice to the
contrary.
A Federal Reserve Bank will credit payments to Holders of a Regular Class
maintained on the Federal Reserve Banks' book-entry system on each applicable
Payment Date. Holders of a Regular Class on the books and records of a Federal
Reserve Bank on the applicable Record Date will be entitled to any payments on
the Regular Class made on the related Payment Date. The Multiclass PC Agreement
provides that in the event of a principal or interest payment error, Freddie
Mac, in its sole discretion, may effect corrections by the adjustment of
payments to be made on future Payment Dates or in such other manner as it deems
appropriate.
Unless otherwise provided in the applicable Supplement, payments on a
Retail Class will be made by the Registrar to the Depository in immediately
available funds. The Depository will be responsible for crediting the payment to
the accounts of the appropriate Depository participants in accordance with the
Depository's normal procedures. Each Depository participant and each other
financial intermediary will be responsible for remitting payments to the
beneficial owners of the Retail Class that it represents.
Payments on a Residual Class or a Certificated Regular Class will be made
by check mailed by the Registrar to the addresses of the Holders, as they appear
on the register maintained by the Registrar, or, if specified in the related
Supplement, by wire transfer to such Holders, in either case not later than the
applicable Payment Date. However, a Holder will receive (i) the final payment of
principal, if any, on a Residual Class only upon presentation of the Holder's
certificate to the Registrar for notation of such payment and (ii) the final
payment on a Residual Class or a Certificated Regular Class only upon
presentation and surrender of the Holder's certificate to the Registrar.
REMIC POOL ASSETS
Each REMIC Pool will include any one or more of the following types of
securities:
(i) Freddie Mac Mortgage Participation Certificates, which may be:
- "Gold PCs," which represent interests in fixed-rate Mortgages and for
which the period from the first day of their month of issuance to
their initial Payment Date is approximately 45 days;
- "Original PCs," which represent interests in fixed-rate Mortgages and
for which the period from the first day of their month of issuance to
their initial Payment Date is approximately 75 days; or
- "ARM PCs," which represent interests in adjustable rate Mortgages and
for which the period from the first day of their month of issuance to
their initial Payment Date is approximately 75 days.
(ii) Freddie Mac Giant Mortgage Participation Certificates, which may be:
- "Gold Giant PCs," which represent beneficial ownership interests in
discrete pools consisting of specified Gold PCs and, in some cases,
other Gold Giant PCs;
- "Original Giant PCs," which represent beneficial ownership interests
in discrete pools consisting of specified Original PCs and, in some
cases, other Original Giant PCs; or
- "ARM Giant PCs," which represent beneficial ownership interests in
discrete pools consisting of specified ARM PCs and, in some cases,
other ARM Giant PCs.
(iii) Securities representing "regular interests" in a REMIC, including, in
the case of an Upper-Tier REMIC Pool, the Mortgage Securities
representing "regular interests" in the related Lower-Tier REMIC
Pool.
(iv) Debt obligations ("Funding Notes") representing "regular interests" in
a REMIC, which Funding Notes are secured by PCs and provide for the
receipt by Freddie Mac of payments on such PCs in amounts needed to
amortize the principal amounts of, and pay accrued interest on, such
Funding Notes.
(v) Any other types of securities which are eligible for inclusion in a
REMIC and whose payments are derived from PCs.
Each REMIC Pool may also include cash or other eligible assets. The Supplement
relating to each Series will contain more specific information regarding the
assets of the REMIC Pool or Pools for such Series.
Freddie Mac may, under certain circumstances, substitute other eligible
assets for those originally included in a REMIC Pool. Freddie Mac will make any
such substitution in accordance with applicable laws and regulations in effect
at the time of substitution and only upon receipt of an opinion of counsel that
such substitution will not cause such REMIC Pool to fail to be classified as a
REMIC for federal income tax purposes. The initial rate of principal payments on
the Multiclass PCs of the related Series may be faster or slower than if the
applicable REMIC Pool had originally included the substitute assets.
In the case of a Series backed by Gold PCs and/or Gold Giant PCs, some of
the PCs may be "Converted Gold PCs." Converted Gold PCs are Gold PCs that are
issued under an exchange program offered by Freddie Mac that allows investors to
convert Original PCs and Original Giant PCs into Gold PCs. In their initial
months after conversion, Converted Gold PCs may exhibit slightly different
principal payment behavior than would otherwise identical Gold PCs that are
originally issued as such.
Unless otherwise provided in the applicable Supplement, up to 10% of the
PCs in or underlying any REMIC Pool may have pool numbers or legends denoting
that the underlying Mortgages include any one of the following: "Relocation
Mortgages," "Cooperative Share Mortgages," "Extended Buydown Mortgages,"
"Biweekly Mortgages" or "Newly Originated Assumable Mortgages;" but such PCs, in
the aggregate, may not constitute more than 15% of the PCs by principal amount.
The applicable PC Offering Circulars describe these types of Mortgages and the
characteristics that distinguish them from other Mortgages.
The following diagrams illustrate the structures for typical Single-Tier
and Double-Tier Series. Any particular Series may have a different structure, as
described in the related Supplement.
SINGLE-TIER
------------------------------
HOLDERS OF MULTICLASS PCS
------------------------------
Regular Classes Residual Class
------------------------------
REMIC POOL
------------------------------
------------------------------
ELIGIBLE ASSETS
(E.G., GOLD PCS AND
GOLD GIANT PCS)
------------------------------
------------------------------
MORTGAGES
------------------------------
DOUBLE-TIER
------------------------------------
HOLDERS OF MULTICLASS PCS
------------------------------------
Regular Classes of Residual Class of Residual Class of
Upper-Tier REMIC Pool Upper-Tier REMIC Pool Lower-Tier REMIC Pool
------------------------------------
UPPER-TIER REMIC POOL
------------------------------------
Mortgage Securities
(Regular Interests in
Lower-Tier REMIC Pool)
------------------------------------
LOWER-TIER REMIC POOL
------------------------------------
------------------------------------
ELIGIBLE ASSETS
(E.G. GOLD PCS AND
GOLD GIANT PCS)
------------------------------------
------------------------------------
MORTGAGES
------------------------------------
<PAGE>
CLASS FACTORS
On or about the first (or, if so provided in the related Supplement, the
seventh) business day of each month, Freddie Mac will publish the Class Factor
for each Class of outstanding Multiclass PCs having a principal amount. 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 Payment Date in the following month or, in the
case of a Series backed by Gold PCs or Gold Giant PCs, in the same month.
Freddie Mac will also publish a Class Factor for each Interest Only Class having
a notional principal amount. Such a Class Factor will reflect the remaining
notional principal amount of the Interest Only Class in an analogous manner.
PAYMENTS OF INTEREST
Unless otherwise provided in the related Supplement, interest will accrue
on each Regular Class during each applicable Accrual Period at the applicable
Class Coupon specified in or determined as specified in that Supplement.
Interest will be calculated on the basis of a 360-day year of twelve 30-day
months. Interest on a Class other than an Accrual Class or Partial Accrual Class
will be paid on the Payment Dates specified in the related Supplement. Interest
accrued on an Accrual Class or Partial Accrual Class will be payable only to the
extent provided in the related Supplement, and the amount of any interest
accrued and not paid will be added to the principal amount of that Class. Any
accrued interest so added will accrue interest.
Unless otherwise provided in the related Supplement, interest in respect of
each Residual Class will be paid on each Payment Date either (i) at the
applicable Class Coupon or (ii) in an amount equal to the amount received as
interest payments on the PCs or other securities in the related REMIC Pool on
that Payment Date, less the aggregate amount of interest payable on (or added to
the principal amount of) the related Regular Classes on that Payment Date.
Unless otherwise provided in the applicable Supplement, the Accrual Period
relating to any Payment Date will be:
- for Fixed Rate and Delay Classes in a Series backed by Gold PCs
and/or Gold Giant PCs, the calendar month preceding the month of the
Payment Date;
- for Fixed Rate and Delay Classes in a Series backed by PCs other
than Gold PCs and/or Gold Giant PCs, the period from the 15th of the second
month preceding the month of the Payment Date to the 15th of the month
preceding the month of the Payment Date; or
- for Floating Rate and Inverse Floating Rate Classes that are not
Delay Classes, the period from the 15th of the month preceding the month of
the Payment Date to the 15th of the month of the Payment Date.
INTEREST RATE INDICES
Unless otherwise provided in the related Supplement, each Floating Rate and
Inverse Floating Rate Class will bear interest during each Accrual Period for
such Class by reference to one of the following indices: (i) "LIBOR," the
arithmetic mean of the London interbank offered quotations for Eurodollar
deposits with a maturity of one month, three months, one year or some other
maturity, as specified in the related Supplement; (ii) "COFI," the weighted
average cost of funds for member savings institutions of the Eleventh Federal
Home Loan Bank District; (iii) a "Treasury Index," the auction average
(investment) yield on three-month or six-month U.S. Treasury bills or the weekly
average yield on U.S. Treasury securities adjusted to a constant maturity of
one, three, five, seven, ten or thirty years or to some other constant maturity,
in each case as specified in the related Supplement; or (iv) the "Prime Rate,"
the prime lending rate of major banks as published in The Wall Street Journal.
Classes bearing interest by reference to these indices are called "LIBOR
Classes," "COFI Classes," "Treasury Index Classes" and "Prime Rate Classes,"
respectively.
Absent manifest error, Freddie Mac's determination of the applicable
interest rate index levels and its calculation of the Class Coupons of the
Floating Rate and Inverse Floating Rate Classes for each Accrual Period will be
final and binding. Investors can get the rates for the current and preceding
Accrual Periods by writing or calling Freddie Mac's Investor Inquiry Department
at the address or phone numbers shown under "Availability of Information and
Incorporation by Reference."
Determination of LIBOR
Unless otherwise provided in the applicable Supplement, Freddie Mac will
calculate the Class Coupons of LIBOR Classes for each Accrual Period (after the
first) on the second business day before the Accrual Period begins (a "Floating
Rate Adjustment Date"). On each Floating Rate Adjustment Date, Freddie Mac will
determine the applicable LIBOR on the basis of the offered quotations of the
Reference Banks (as defined below), as such quotations are provided to Freddie
Mac as of 11:00 a.m. (London time) on such Floating Rate Adjustment Date. For
this purpose, "business day" means a day on which banks are open for dealing in
foreign currency and exchange in London, New York City and Washington, D.C.;
"Reference Banks" means four leading banks engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established place
of business in London, (ii) whose quotations appear on the Reuters Screen LIBO
Page on the Floating Rate Adjustment Date in question and (iii) which have been
designated as such by Freddie Mac and are able and willing to provide such
quotations to Freddie Mac on each Floating Rate Adjustment Date; and "Reuters
Screen LIBO Page" means the display designated as page "LIBO" on the Reuters
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered quotations
of major banks). If any Reference Bank designated by Freddie Mac should be
removed from the Reuters Screen LIBO Page or in any other way fails to meet the
qualifications of a Reference Bank, Freddie Mac may, in its sole discretion,
designate an alternative Reference Bank.
On each Floating Rate Adjustment Date, Freddie Mac will determine LIBOR for
the next Accrual Period as follows:
(i) If on any Floating Rate Adjustment Date two or more of the
Reference Banks provide offered quotations of the applicable maturity,
LIBOR for the next Accrual Period will be the arithmetic mean of such
offered quotations (rounding such arithmetic mean upwards, if necessary, to
the nearest whole multiple of 1/16%).
(ii) If on any Floating Rate Adjustment Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Accrual Period will be whichever is the higher of (x) LIBOR as determined
on the previous Floating Rate Adjustment Date or (y) the Reserve Interest
Rate. The "Reserve Interest Rate" will be the rate per annum which Freddie
Mac determines to be either (A) the arithmetic mean (rounding such
arithmetic mean upwards, if necessary, to the nearest whole multiple of
1/16%) of the Eurodollar lending rates of the applicable maturity that the
New York City banks selected by Freddie Mac are quoting, on the relevant
Floating Rate Adjustment Date, to the principal London offices of leading
banks in the London interbank market or (B) in the event that Freddie Mac
can determine no such arithmetic mean, the lowest Eurodollar lending rate
of the applicable maturity that the New York City banks selected by Freddie
Mac are quoting on such Floating Rate Adjustment Date to leading European
banks.
(iii) If on any Floating Rate Adjustment Date Freddie Mac is required
but is unable to determine the Reserve Interest Rate in the manner provided
in paragraph (ii) above, LIBOR for the next Accrual Period will be LIBOR as
determined on the previous Floating Rate Adjustment Date, or, in the case
of the first Floating Rate Adjustment Date, the level of LIBOR used to
calculate the initial Class Coupon of the particular LIBOR Class.
Determination of COFI
Unless otherwise provided in the applicable Supplement, Freddie Mac
will calculate the Class Coupons of COFI Classes for each Accrual Period (after
the first) on the related Floating Rate Adjustment Date (for Classes that are
not also Delay Classes) or on the second business day of such Accrual Period
(for Delay Classes), by reference to COFI as published most recently by the
Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco"). COFI is
currently published by the FHLB of San Francisco on or about its last working
day of each month and is designed to represent the monthly weighted average cost
of funds for savings institutions in the Eleventh District (which consists of
Arizona, California and Nevada) for the month prior to the month of publication.
COFI is computed by the FHLB of San Francisco for each month by dividing the
cost of funds (interest paid during the month by Eleventh District savings
institutions on savings, advances and other borrowings) by the average of the
total amount of these funds outstanding at the end of that month and the prior
month and annualizing and adjusting the result to reflect the actual number of
days in the particular month. If necessary, before these calculations are made,
the FHLB of San Francisco adjusts the component figures to neutralize the effect
of events such as member institutions leaving the Eleventh District or acquiring
institutions outside the Eleventh District. COFI has been reported each month
since August 1981.
COFI is intended to reflect the interest costs paid on all types of funds
held by Eleventh District member savings associations and savings banks. COFI is
weighted to reflect the relative amount of each type of funds held at the end of
the relevant month. There are three major components of funds of Eleventh
District member institutions: (i) savings deposits, (ii) Federal Home Loan Bank
advances and (iii) all other borrowings, such as reverse repurchase agreements
and mortgage-backed bonds. Unlike most other interest rate measures, COFI does
not necessarily reflect current market rates, since the component funds
represent a variety of terms to maturity whose costs may react in different ways
to changing conditions. The FHLB of San Francisco periodically prepares
percentage breakdowns of the types of funds held by Eleventh District member
institutions. Such breakdowns can be obtained from the FHLB of San Francisco.
A number of factors affect the performance of COFI which may cause it to
move in a manner different from indices tied to specific interest rates, such as
LIBOR or any Treasury Index. Because of the various terms to maturity of the
liabilities upon which COFI is based, COFI may not necessarily reflect the
average prevailing market interest rates on new liabilities of similar
maturities. Additionally, COFI may not necessarily move in the same direction as
market interest rates at all times, since as longer term deposits or borrowings
mature and are renewed at prevailing market interest rates, COFI is influenced
by the differential between the prior and the new rates on those deposits or
borrowings. Moreover, as stated above, COFI is designed to represent the average
cost of funds for Eleventh District savings institutions for the month prior to
the month in which COFI is published. Because COFI is based on a regional and
not a national cost of funds, it may not behave as would a nationally based
index. In addition, the movement of COFI, as compared to other indices tied to
specific interest rates, may be affected by changes instituted by the FHLB of
San Francisco in the method used to calculate COFI. Investors can order an
informational brochure explaining COFI by writing or calling the FHLB of San
Francisco's Marketing Department, P.O. Box 7948, San Francisco, California
94120, phone 415/616-2610. The current level of COFI can be obtained by calling
the FHLB of San Francisco at 415/616-2600.
The failure by the FHLB of San Francisco to publish COFI for a period of 65
calendar days will constitute an "Alternative Rate Event." Upon the occurrence
of an Alternative Rate Event, Freddie Mac will calculate the Class Coupons of
the COFI Classes for the subsequent Accrual Periods by using, in place of COFI,
(i) the replacement index, if any, published or designated by the FHLB of San
Francisco or (ii) if no replacement index is so published or designated, an
alternative index selected by Freddie Mac that has performed, or that Freddie
Mac expects to perform, in a manner substantially similar to COFI. At the time
an alternative index is first selected by Freddie Mac, Freddie Mac will
determine the average number of basis points, if any, by which the alternative
index differed from COFI for such period as Freddie Mac, in its sole discretion,
reasonably determines to reflect fairly the long-term difference between COFI
and the alternative index, and will adjust the alternative index by such
average. Freddie Mac will select a particular index as the alternative index
only if it receives an opinion of counsel that the selection of such index will
not cause the related REMIC Pool or Pools to lose their classification as REMICs
for federal income tax purposes.
If at any time after the occurrence of an Alternative Rate Event, the FHLB
of San Francisco resumes publication of COFI, the Class Coupons of the COFI
Classes for each subsequent Accrual Period will be calculated by reference to
COFI.
<PAGE>
Determination of the Treasury Index
Unless otherwise provided in the applicable Supplement, Freddie Mac will
calculate the Class Coupons of Treasury Index Classes for each Accrual Period
(after the first) on the fourth business day before the Accrual Period begins
(an "Index Adjustment Date"). On each Index Adjustment Date, Freddie Mac will
determine the applicable Treasury Index, which will be either (i) the auction
average (investment) yield, expressed as a per annum rate, on three-month or
six-month U.S. Treasury bills as made available by the U.S. Department of the
Treasury in the most recent edition of its Public Debt News that is available to
Freddie Mac or (ii) the weekly average yield, expressed as a per annum rate, on
U.S. Treasury securities adjusted to a constant maturity of one, three, five,
seven or ten years or to some other constant maturity (as specified in the
applicable Supplement) as published by the Federal Reserve Board in the most
recent edition of Federal Reserve Statistical Release No. H.15 (519) that is
available to Freddie Mac. The Public Debt News is made available by the U.S.
Department of the Treasury on the day of the applicable auction. Investors can
obtain it by contacting the U.S. Department of the Treasury's Bureau of Public
Debt. Statistical Release No. H.15 (519) is published on Monday or Tuesday of
each week. Investors can order it from the Publications Department at the Board
of Governors of the Federal Reserve System, 21st and C Streets, N.W., M.S. 138,
Washington, D.C. 20551. Freddie Mac considers a new value for the Treasury Index
to have been made available on the day following the date it is released.
The applicable auction average (investment) yield for a given week is the
yield resulting from the auction of three-month or six-month U.S. Treasury bills
held that week.
The weekly average yield reflects the average yields of the five calendar
days ending on Friday of the previous week. Yields on Treasury securities at
"constant maturity" are estimated from the Treasury's daily yield curve. This
curve, which relates the yield on a security to its time to maturity, is based
on the closing market bid yields on actively traded Treasury securities in the
over-the-counter market. These market yields are calculated from composites of
quotations reported by five leading U.S. Government securities dealers to the
Federal Reserve Bank of New York. This method permits estimation of the yield
for a given maturity even if no security with that exact maturity is
outstanding.
In the event that the applicable Treasury Index becomes unavailable,
Freddie Mac will designate an alternative index based upon comparable
information and methodology. At the time an alternative index is first selected
by Freddie Mac, Freddie Mac will determine the average number of basis points,
if any, by which the alternative index differed from the applicable Treasury
Index for such period as Freddie Mac, in its sole discretion, reasonably
determines to reflect fairly the long-term difference between the applicable
Treasury Index and the alternative index, and will adjust the alternative index
by such average. Freddie Mac will select a particular index as the alternative
index only if it receives an opinion of counsel that the selection of such
alternative index will not cause the related REMIC Pool or Pools to lose their
classification as REMICs for federal income tax purposes.
If at any time after the applicable Treasury Index becomes unavailable, it
again becomes available, the Class Coupons for the related Treasury Index
Classes for each subsequent Accrual Period will be calculated by reference to
the applicable Treasury Index.
Determination of the Prime Rate
Unless otherwise provided in the applicable Supplement, on each
Floating Rate Adjustment Date, Freddie Mac will calculate the Class Coupons of
Prime Rate Classes for the next Accrual Period by reference to the rate
published as the "Prime Rate" in the "Money Rates" section or other comparable
section of The Wall Street Journal on such Floating Rate Adjustment Date. The
rate published in The Wall Street Journal currently represents the rate posted
by 75% of the 30 largest commercial banks in the United States. In the event 75%
of the largest banks do not post the same rate, and The Wall Street Journal
publishes a prime rate range, then the average of that range, as determined by
Freddie Mac, will be the Prime Rate. In the event The Wall Street Journal no
longer publishes a "Prime Rate" entry, Freddie Mac will designate a new
methodology for determining the Prime Rate based on comparable data. Freddie Mac
will select a particular methodology as the alternative methodology only if it
receives an opinion of counsel that the selection of such methodology will not
cause the related REMIC Pool or Pools to lose their classification as REMICs for
federal income tax purposes.
If at any time after the Prime Rate becomes unavailable in The Wall Street
Journal, it again becomes available, the Class Coupons for the Prime Rate
Classes for each subsequent Accrual Period will be calculated by reference to
the Prime Rate published in The Wall Street Journal.
Historical Values of Indices
Listed below are selected historical values for LIBOR, COFI and the
Ten-Year Treasury Index. These values are presented for illustrative purposes
only and do not purport to be representative of subsequent levels of any Index.
<TABLE>
<CAPTION>
LIBOR TEN-YEAR
YEAR-MONTH (ONE MONTH)(1) COFI(2) TREASURY(3)
------------------------------------------- -------------- ------- -----------
<S> <C> <C> <C>
1985-January............................... 10.217% 11.16%
-June................................. 9.565 10.43
1986-January............................... 8.770 7.45
-June................................. 8.374 7.07
1987-January............................... 7.396 7.15
-June................................. 7.274 8.28
1988-January............................... 7.3750% 7.615 8.39
-June................................. 7.6250 7.618 8.94
1989-January............................... 9.1875 8.125 8.97
-June................................. 9.6875 8.923 8.14
1990-January............................... 8.5000 8.369 8.36
-June................................. 8.3125 8.086 8.51
1991-January............................... 7.6250 7.858 8.04
-June................................. 5.9375 7.155 8.31
1992-January............................... 4.3125 6.002 7.25
-June................................. 4.0000 5.258 7.20
1993-January............................... 3.3125 4.360 6.46
-June................................. 3.2500 4.050 5.89
1994-January............................... 3.2500 3.710 5.74
-June................................. 4.3750 3.804 7.17
1995-January............................... 6.0000 4.747 7.78
-February............................. 6.1250 4.925 7.36
-March................................ 6.1250 5.007 7.16
-April................................ 6.1250 5.064 7.03
-May.................................. 6.0625 5.141 6.49
-June................................. 6.0625 5.179 6.17
-July................................. 6.0625 5.144 6.46
</TABLE>
-----------------------------
(1) Value reported in The Wall Street Journal on the first
business day of the applicable month.
(2) Value reported for the applicable month by the FHLB of San
Francisco.
(3) Value for the week ended on the last Friday of the applicable
month, as published in Federal Reserve Statistical Release No.
H.15 (519).
PAYMENTS OF PRINCIPAL
On each Payment Date for a Series of Multiclass PCs, Freddie Mac will pay
principal in the manner described in the related Supplement to the Holders of
each Class on which principal is then due.
Unless otherwise provided in the related Supplement, the total amount of
principal required to be paid on the Classes of any Series on a Payment Date
will equal the sum of (i) the interest, if any, that has accrued on any Accrual
Classes and Partial Accrual Classes of that Series during the applicable
interest accrual period and that is not payable as interest on such Payment Date
and (ii) the amount of principal payments required to be made on that Payment
Date on the underlying PCs.
Subject to any allocation procedures that may apply in the case of Retail
Classes, the Holders of Multiclass PCs of any Class entitled to receive
principal payments on any Payment Date will receive such payments on a pro rata
basis.
<PAGE>
RESIDUAL CLASSES
Holders of each Residual Class will be entitled to receive (i) on each
Payment Date, any payments of principal and interest specified in the related
Supplement and (ii) the proceeds of the remaining assets, if any, of the related
REMIC Pool after all required principal and interest payments on all Classes
issued in respect of such REMIC Pool have been made.
Residual Classes will be subject to certain transfer restrictions,
including certain restrictions on the ownership of such Classes by foreign
persons. See "Certain Federal Income Tax Consequences -- Transfers of Interests
in a Residual Class."
Freddie Mac will furnish Holders of Residual Classes the information it
deems necessary or appropriate to enable them to prepare any reports required
under the Internal Revenue Code or applicable Treasury regulations. Freddie Mac
does not intend to hold any Residual Class for its account, and applicable law
may not permit Freddie Mac to perform tax administrative functions for the REMIC
Pools. Accordingly, the Holders of a Residual Class may have certain tax
administrative obligations (for which Freddie Mac will act as attorney-in-fact
and agent). See "Certain Federal Income Tax Consequences."
GUARANTEES
Freddie Mac guarantees to each Holder of a Multiclass PC (i) the timely
payment of interest at the applicable Class Coupon or as otherwise described in
the applicable Supplement and (ii) the payment of the principal amount of the
Holder's Multiclass PC, as described in the applicable Supplement.
Freddie Mac also guarantees the payment of interest and principal on all
PCs, as described in the applicable PC Offering Circulars and in the Giant PC
Offering Circular. In each case, Freddie Mac guarantees the timely payment of
interest. For Gold PCs, Original PCs and ARM PCs, Freddie Mac guarantees the
full payment of principal on the underlying Mortgages and, in the case of Gold
PCs only, the timely payment of scheduled principal on such Mortgages,
calculated as described in the applicable PC Offering Circular. For Gold Giant
PCs, Original Giant PCs and ARM Giant PCs, Freddie Mac guarantees the payment of
the principal amount thereof as payments are made on the underlying PCs and the
reduction of the entire principal amount outstanding by (i) the Payment Date
occurring in the month of the final payment date in the case of a Gold Giant PC
and (ii) the Payment Date in the month following the month of the final payment
date in the case of an ARM Giant PC or Original Giant PC. See the discussions of
Freddie Mac's guarantees and final payment dates in the applicable PC Offering
Circulars and in the Giant PC Offering Circular.
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF MULTICLASS PCS AND
PCS ARE OBLIGATIONS OF FREDDIE MAC ONLY. MULTICLASS PCS AND PCS, INCLUDING ANY
INTEREST THEREON, ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT CONSTITUTE
DEBTS OR OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF
THE UNITED STATES OTHER THAN FREDDIE MAC.
OPTIONAL REDEMPTION
Unless otherwise provided in the applicable Supplement, Freddie Mac may at
its option redeem the outstanding Classes of each Series (or, in the case of a
Double-Tier Series, the outstanding Lower-Tier Classes) in whole, but not in
part, on any Payment Date when the aggregate outstanding principal amount of
such Classes, after giving effect to principal payments to be made on such
Payment Date, would be less than 1% of the aggregate original principal amount
of such Classes. Freddie Mac will give notice of any optional redemption to the
Holders of outstanding Classes of Multiclass PCs not less than 30 or more than
60 days before the date of redemption. Any optional redemption will be at a
redemption price equal to 100% of the unpaid principal amount of the Classes
redeemed, plus accrued and unpaid interest for the Accrual Period relating to
the applicable Payment Date.
In order to effect an optional redemption, Freddie Mac will adopt a
plan of complete liquidation meeting the requirements of a "qualified
liquidation" under Section 860F(a)(4) of the Internal Revenue Code. Pursuant to
the plan, Freddie Mac will liquidate all of the PCs and any other assets in the
REMIC Pool (or, in the case of a Double-Tier Series, the Lower-Tier REMIC Pool)
at fair market value as determined by Freddie Mac, and apply the net proceeds of
liquidation (together with funds contributed by Freddie Mac if the net proceeds
are insufficient) to pay the redemption price. Upon any redemption of Lower-Tier
Classes in a Double-Tier Series, the redemption price of the Mortgage Securities
will be applied as principal and interest on the outstanding Upper-Tier Classes,
resulting in the retirement of those Classes. Following any redemption, any
remaining proceeds from the liquidation of the PCs in the REMIC Pool (or, in the
case of a Double-Tier Series, the Lower-Tier REMIC Pool), net of liquidation
expenses, will be distributed pro rata to the Holders of the related Residual
Class upon surrender of their certificates to the Registrar.
All decisions as to the making of an optional redemption, including the
timing of any optional redemption, will be at Freddie Mac's sole discretion.
Freddie Mac will be under no obligation to any Holder to make an optional
redemption, even if redemption would be in the Holder's interest. PCs are not
subject to redemption by Freddie Mac.
THE MULTICLASS PC AGREEMENT
The following summary describes certain provisions of the Multiclass PC
Agreement not otherwise summarized in this Offering Circular. This summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the more complete provisions of the Multiclass PC Agreement and
any applicable PC Agreement or Giant PC Agreement. The receipt and acceptance of
a Multiclass PC by or on behalf of a Holder, without any signature or further
manifestation of assent, constitutes the unconditional acceptance by the Holder
and all others having a beneficial interest in such Multiclass PC of all the
terms and provisions of the Multiclass PC Agreement (including the related Terms
Supplement), and the agreement of Freddie Mac, such Holder and such others that
those terms and provisions will be binding, operative and effective among
Freddie Mac, such Holder and such others. The sale of a Multiclass PC by Freddie
Mac pursuant to the Multiclass PC Agreement constitutes the sale, transfer and
assignment by Freddie Mac to the Holder of a beneficial ownership interest in
the related REMIC Pool.
TRANSFER OF ASSETS TO REMIC POOL
The assets in each REMIC Pool will be identified to that Pool. The PCs in
any REMIC Pool will be held in Freddie Mac's name on the books of a Federal
Reserve Bank. Other assets will be held by Freddie Mac or its custodian or other
agent for the benefit of the Holders of each related Series of Multiclass PCs
pursuant to the Multiclass PC Agreement. Freddie Mac has the limited right to
substitute PCs for PCs of the same type originally placed in a REMIC Pool.
CERTAIN MATTERS REGARDING FREDDIE MAC
The Multiclass PC Agreement provides that neither Freddie Mac nor any
director, officer, employee or agent of Freddie Mac will be under any liability
to the Holders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Multiclass PC Agreement or for errors in
judgment. However, neither Freddie Mac nor any such person will be protected
against any liability imposed by reason of willful misfeasance, bad faith or
gross negligence or by reason of reckless disregard of obligations and duties.
In addition, the Multiclass PC Agreement provides that Freddie Mac is not
under any obligation to appear in, prosecute, or defend any legal action that is
not incidental to its responsibilities under the Multiclass PC Agreement and
that in its opinion may involve it in any expense or liability. However, Freddie
Mac may in its discretion undertake any such legal action that it may deem
necessary or desirable in the interests of the Holders. In such event, the legal
expenses and costs of such action will be expenses and costs of Freddie Mac.
Multiclass PCs of any particular Class held or acquired by Freddie Mac from
time to time will have an equal and proportionate benefit to Multiclass PCs of
the same Class held by other Holders, without preference, priority or
distinction.
The Multiclass PC Agreement will be binding upon and inure to the benefit
of any successor to Freddie Mac.
<PAGE>
VOTING UNDER ANY PC OR GIANT PC AGREEMENT
To the extent set forth in each PC Agreement and the Giant PC Agreement,
the record holders of PCs representing a specified percentage of the remaining
unpaid principal balance of any affected PCs may take certain actions, including
termination of certain obligations and duties of Freddie Mac with respect
thereto, if an "event of default" under the applicable PC or Giant PC Agreement
has occurred and is continuing. The Multiclass PC Agreement provides that
Holders of Multiclass PCs may, upon the occurrence of an event of default with
respect to a PC directly or indirectly backing the related Series, take any such
action rather than Freddie Mac. For this purpose, the Holders of Multiclass PCs
will be deemed the holders of the affected PC, in proportion to the outstanding
principal amounts of their Multiclass PCs.
As set forth in each PC Agreement and the Giant PC Agreement, the holders
of PCs owning a majority of the remaining unpaid principal balance of any
affected PCs may consent to certain amendments to the PC Agreement or Giant PC
Agreement. The Multiclass PC Agreement provides that Freddie Mac may consent to
such an amendment as to any PC directly or indirectly backing a Series of
Multiclass PCs, so long as such amendment would not adversely affect in any
material respect the interests of the Holders of Classes of that Series. If the
amendment would have such effect, Freddie Mac may consent to it only with the
written consent of Holders of Multiclass PCs of each Class so affected
representing not less than 50% of the outstanding principal amount (or notional
principal amount) of that Class. However, Freddie Mac may consent to any
amendment to a PC Agreement or the Giant PC Agreement without the consent of
Holders of Multiclass PCs if such amendment relates to the modification of
Freddie Mac's procedures for calculating payments or passing full or partial
prepayments through on PCs directly or indirectly backing REMIC Pools formed
after September 1995; this amendment may affect PCs issued before, on or after
October 1, 1995. See the sections of the applicable PC Offering Circular or
Circulars and the Giant PC Offering Circular regarding amendment of the PC
Agreement and Giant PC Agreement, respectively.
EVENTS OF DEFAULT
"Events of Default" under the Multiclass PC Agreement will consist of (i)
any failure by Freddie Mac to pay to Holders of any Class any required payment
that continues unremedied for 30 days; (ii) any failure by Freddie Mac to
perform in any material respect any other covenant or agreement in the
Multiclass PC Agreement, which failure continues unremedied for 60 days after
the giving of notice of such failure to Freddie Mac by the Holders of any
affected Class representing not less than 60% of the outstanding principal
amount (or notional principal amount) of such Class; and (iii) certain events of
bankruptcy, insolvency or similar proceedings involving Freddie Mac.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Multiclass PC Agreement remains
unremedied, the Holders of any Class representing not less than 50% of the
outstanding principal amount (or notional principal amount) of such Class may,
in writing, remove Freddie Mac and nominate a successor to Freddie Mac. That
nominee will be deemed appointed as successor to Freddie Mac (except as to its
guarantee obligation) unless, within 10 days after such nomination, Freddie Mac
objects, in which case Freddie Mac may petition any court of competent
jurisdiction for the appointment of a successor or any Holder who has been a
bona fide Holder for at least six months may, on behalf of such Holder and all
others similarly situated, petition any such court for appointment of a
successor to Freddie Mac. The court may, upon any prescribed notice, appoint a
successor to Freddie Mac.
AMENDMENT
Freddie Mac may amend the Multiclass PC Agreement, without the consent
of any Holder or Holders, (i) to cure any ambiguity, to correct or supplement
any provision which may be inconsistent with any other provision, or to make any
other provisions with respect to matters or questions arising under the
Multiclass PC Agreement that are not inconsistent with the other provisions of
the Multiclass PC Agreement, provided that any such amendment shall not
adversely affect in any material respect the interest of any Holder; or (ii) to
permit Freddie Mac to take any necessary or helpful action to maintain the
qualification of any REMIC Pool as a REMIC under the Internal Revenue Code or to
avoid the imposition of any state or federal tax on a REMIC Pool.
Freddie Mac may also amend the Multiclass PC Agreement in any other respect
with the consent of the Holders of each affected Class representing not less
than 50% of the outstanding principal amount (or notional principal amount) of
such Class. However, without the consent of a Holder, Freddie Mac may not amend
the Multiclass PC Agreement to impair or affect the right of such Holder to
receive payment of principal and interest (including any payment under Freddie
Mac's guarantee) due such Holder, on or after the due date of such payment, or
to institute suit for the enforcement of any such payment on or after such date.
GOVERNING LAW
The Multiclass PC Agreement will be construed in accordance with and
governed by the laws of the United States. Insofar as there may be no applicable
precedent, and insofar as to do so would not frustrate the purposes of the
Freddie Mac Act or any provision of the Multiclass PC Agreement or the
transactions governed thereby, the local laws of the State of New York will be
deemed reflective of the laws of the United States.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following generally describes the anticipated material federal income
tax consequences of purchasing, owning and disposing of Multiclass PCs. It does
not address special rules which may apply to particular types of investors. The
authorities on which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. Investors should consult their own tax advisors regarding
Multiclass PCs.
REMIC ELECTION
Freddie Mac will elect to treat each REMIC Pool as a REMIC under the
Internal Revenue Code (the "Code"). Assuming (i) such election, (ii) compliance
with the Multiclass PC Agreement and (iii) compliance with changes in the law,
each REMIC Pool will qualify as a REMIC. In such case, the REMIC Pool generally
will not be subject to tax, the related Regular Classes will be "regular
interests" in a REMIC and the related Residual Class will be the "residual
interest" in a REMIC.
STATUS OF MULTICLASS PCS
Multiclass PCs will constitute:
- "qualifying real property loans" under Code Section 593(d)(1);
- assets described in Code Section 7701(a)(19)(C); and
- "real estate assets" under Code Section 856(c)(5)(A)
to the extent the assets of the related REMIC Pool are so treated. Interest on
the Multiclass PCs will be "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 the income of the REMIC Pool is so
treated. If at all times 95% or more of the assets or income of the related
REMIC Pool qualifies for any of the foregoing treatments, the Multiclass PCs
(and income thereon) will qualify for the corresponding status in their
entirety. In determining the tax status of an Upper-Tier REMIC Pool, however,
Freddie Mac will apply the 95% test assuming the Lower-Tier Classes have the
same characteristics as the Lower-Tier REMIC Pool. Freddie Mac anticipates that
the Multiclass PCs will qualify for the foregoing treatments in their entirety.
Regular Classes will be "qualified mortgages" under Code Section 860G(a)(3) for
another REMIC.
<PAGE>
TAXATION OF REGULAR CLASSES
General
The Regular Classes will be taxed as newly originated debt instruments for
federal income tax purposes. Interest, original issue discount and market
discount accrued on a Regular Class will constitute ordinary income to the
beneficial owner (the "Owner"). Each Owner of a Regular Class must account for
interest income on the accrual method.
Original Issue Discount
The REMIC Pool may issue certain Regular Classes with "original issue
discount." An Owner must include original issue discount in income as it
accrues, without regard to the timing of payments. In the absence of guidance
which applies specifically to REMIC regular interests, Freddie Mac will report
original issue discount, if any, to the Internal Revenue Service and the Holders
of the Regular Classes based on regulations under Code Sections 1271 through
1275 (the "OID Regulations"). The OID Regulations apply to debt instruments
issued on or after April 4, 1994, but may be relied upon for debt instruments
issued after December 21, 1992.
The total amount of original issue discount on a Regular Class is the
excess of its "stated redemption price" over its "issue price." The issue price
is the price at which a substantial portion of the Regular Class is first sold
to the public. The issue price generally includes any pre-issuance accrued
interest unless the Owner excludes such amount from the issue price and treats a
portion of the stated interest payable on the first Payment Date as a return of
that accrued interest rather than as an amount payable under the instrument. In
general, the stated redemption price is the sum of all payments except for
interest actually payable based on a single fixed rate, certain variable rates,
or certain combinations of fixed and variable rates. Interest based on certain
variable rates or certain combinations of fixed and variable rates which would
otherwise be excluded from the stated redemption price will be included in the
stated redemption price if the excess, if any, of the issue price of the Regular
Class over the principal amount of the Regular Class is more than 0.015
multiplied by the product of the principal amount and the weighted average
maturity (as defined below) or, if the weighted average maturity of the Regular
Class is more than ten years, 15% of the principal amount. If the interval
between the issue date and the first Payment Date exceeds the interval between
subsequent Payment Dates, a portion of the interest payments in all periods is
included in the stated redemption price, unless a special rule, described below,
applies. The portion included in the stated redemption price is equal to the
difference between (i) the stated interest rate for subsequent periods and (ii)
the effective rate of interest for the long first accrual period.
Freddie Mac intends to report income from Interest Only Classes based on
the assumption that the stated redemption price is the sum of all payments
determined under the Prepayment Assumption (as defined below). As a result, such
Classes would be issued with original issue discount. The Internal Revenue
Service might contend, however, that in the case of certain fixed rate Interest
Only Classes with a nominal principal amount, the stated redemption price is the
principal amount. If such a position prevailed, the rules described below under
"Premium" would apply.
Under a de minimis rule, original issue discount on a Regular Class will be
considered zero and all interest payments will be excluded from the stated
redemption price if the amount of the original issue discount is less than 0.25%
of the Class's stated redemption price multiplied by the Class's weighted
average maturity. The weighted average maturity of a Regular Class is computed
based on the number of full years (i.e., rounding down partial years) each
distribution of principal is scheduled to be outstanding. The schedule of such
distributions likely should be determined in accordance with the assumed rate of
prepayment of the Mortgages used in pricing the Regular Classes (the "Prepayment
Assumption"), which will be set forth in the related Supplement.
The OID Regulations provide a special application of this de minimis
rule for certain debt instruments where the interest payable for the first
period or periods is at a rate less than that which applies in all other
periods. In such cases, the OID Regulations provide that the stated redemption
price is equal to the issue price of the Regular Class plus the greater of (i)
the interest foregone during the first period or periods and (ii) the excess, if
any, of the debt instrument's stated principal amount over its issue price.
The Owner of an interest in a Regular Class generally must include in
income the original issue discount accrued for each day on which the Owner holds
such interest, including the date of purchase, but excluding the date of
disposition. The original issue discount accruing on an interest in a Regular
Class in any period equals:
PV End + Dist - PV Beg
Where:
PV End = present value of all remaining distributions to be made as of the
end of the accrual period;
Dist = distributions made during the accrual period includable in stated
redemption price; and
PV Beg = present value of all remaining distributions as of the beginning
of the accrual period.
The present value of the remaining distributions is calculated based on (i) the
original yield to maturity of the Regular Class, (ii) events (including actual
prepayments) that have occurred prior to the end of the period and (iii) the
Prepayment Assumption. For these purposes, the original yield to maturity of an
interest in a Regular Class will be calculated based on its issue price and
assuming that such interest will be prepaid in all periods in accordance with
the Prepayment Assumption. The original issue discount accruing during any
accrual period will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day.
The daily portions of original issue discount generally will increase if
prepayments on the underlying Mortgages exceed the Prepayment Assumption and
decrease if prepayments are slower than the Prepayment Assumption (changes in
the rate of prepayments having the opposite effect in the case of an Interest
Only Class). If the relative principal payment priorities of the Classes of a
Series change (e.g., for Sticky Jump Classes), any increase or decrease in the
present value of the remaining payments to be made on any such Class will affect
the computation of original issue discount for the period in which the change in
payment priority occurs.
If original issue discount accruing during any accrual period, computed as
described above, is negative for any such period, the Owner will be entitled to
offset such amount only against future positive original issue discount accruing
from such Class, and Freddie Mac intends to report income to the Internal
Revenue Service in all cases in this manner. Although not entirely free from
doubt, such an Owner may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
Owner is entitled, assuming no further prepayments of the Mortgages (or,
perhaps, assuming prepayments at a rate equal to the Prepayment Assumption).
While the issue is not free from doubt, all or a portion of such loss may be
treated as a capital loss if the Regular Class is a capital asset in the hands
of the Owner.
An initial Owner of interests in two or more Regular Classes issued in
respect of the same REMIC Pool should be aware that the OID Regulations may
treat such interests as a single debt instrument for purposes of the original
issue discount provisions.
If a subsequent Owner of an interest in a Regular Class acquires such
interest for a price greater than its "adjusted issue price," but less than its
remaining stated redemption price, the daily portion for any day is reduced by
an amount equal to the product of (i) such daily portion and (ii) a fraction,
the numerator of which is the amount by which the price exceeds the adjusted
issue price and the denominator of which is the sum of the daily portions for
such Regular Class interest for all days on and after the date of purchase. The
adjusted issue price of an interest in a Regular Class on any given day is equal
to its issue price, increased by all original issue discount previously
includible with respect to such interest and reduced by the amount of all
previous distributions with respect to such interest included in such interest's
stated redemption price at maturity.
Market Discount
The market discount rules may also apply to an Owner of an interest in a
Regular Class. Market discount equals the excess of (a) either (i) the stated
redemption price (less any prior distributions included in the stated redemption
price) or (ii) in the case of a Regular Class having original issue discount,
the adjusted issue price over (b) such Owner's basis in the Regular Class
interest. Such Owner generally must recognize accrued market discount as
ordinary income to the extent of any distributions includable in the stated
redemption price.
The Conference Committee Report accompanying the Tax Reform Act of 1986
(the "Committee Report") provides that, until the Treasury Department issues
regulations, market discount would accrue (a) on the basis of a constant
interest rate (similar to the method described above for accruing original issue
discount) or (b) alternatively, either (i) in the case of a Regular Class issued
without original issue discount, in the ratio of stated interest distributable
in the relevant period to the total stated interest remaining to be distributed
from the beginning of such period (computed taking into account the Prepayment
Assumption) or (ii) in the case of a Regular Class issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the total remaining original issue discount at the beginning of such
period. Such Owner also generally must treat a portion of any gain on a sale or
exchange as ordinary income to the extent of the accrued, but unrecognized,
market discount to the date of disposition under one of the foregoing methods.
Alternatively, an Owner may elect to include market discount in income currently
as it accrues on all market discount instruments acquired by such Owner in that
taxable year or thereafter. An Owner may revoke such an election only with the
consent of the Internal Revenue Service.
In addition, the deduction for a portion of an Owner's interest expense on
any indebtedness that the Owner incurs or maintains in order to purchase or
carry an interest in a Regular Class purchased with market discount may be
required to be deferred. The deferred portion would not exceed the portion of
market discount that accrues but is not taken into income currently. 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.
Market discount with respect to a Regular Class will be considered to be
zero if such market discount is de minimis under a rule similar to that
described above under "Original Issue Discount." Owners should consult their own
tax advisors regarding the application of the market discount rules as well as
the advisability of making any election with respect to market discount.
Premium
An interest in a Regular Class, other than an Interest Only Class, an
Accrual Class and certain other Classes whose stated interest is partially or
entirely included in its stated redemption price, that is purchased at a cost
(net of accrued interest) greater than its principal amount generally is
considered to be purchased at a premium. The Owner may elect under Code Section
171 to amortize such premium under the constant interest method, using the
Prepayment Assumption. Such premium is an offset to interest income from an
interest in a Regular Class, rather than a separate interest deduction. In
addition, the Committee Report indicates Congress intended that the methods for
determining the accrual of market discount described above which are
alternatives to accrual on the basis of a constant interest rate also will apply
for purposes of amortizing bond premium on obligations such as Regular Classes.
An election made by an Owner would generally apply to all its debt instruments,
unless the election is revoked with the Internal Revenue Service's consent. If
an Owner's election to amortize bond premium was effective as of October 22,
1986, however, such election will apply to obligations issued after September
27, 1985 only if the Owner so chooses.
Constant Yield Election
The OID Regulations allow an Owner to elect to include in gross income all
interest that accrues on a debt instrument by using the constant yield method.
For purposes of this election, interest includes stated interest, original issue
discount and market discount, as adjusted by any premium. This election is
available with respect to debt instruments acquired on or after April 4, 1994.
<PAGE>
Retail Classes
For purposes of the original issue and market discount rules, a payment in
full of an interest in a Retail Class that is subject to payment in units or
other increments, rather than on a pro rata basis with other interests in such
Retail Class, will be treated as a prepayment.
Floating Rate and Inverse Floating Rate Classes
Based on the OID Regulations, the rules relating to original issue discount
generally will apply to a Floating Rate or Inverse Floating Rate Class by
assuming that the variable rate is a fixed rate that reflects the overall yield
that is reasonably expected for such Class. Freddie Mac also intends to apply
the rules of the Code relating to market discount and premium based on this
assumption. The rules will apply to certain Floating Rate or Inverse Floating
Rate Classes, however, by assuming that the variable rate is a fixed rate equal
to the value of the variable rate as of the date of the applicable Supplement.
The Supplement will identify those Classes as to which the assumption described
in the preceding sentence applies.
TAXATION OF RESIDUAL CLASSES
Taxation of REMIC Income
REMIC taxable income is determined under the accrual method of accounting
in the same manner as the taxable income of an individual, with certain
modifications. The REMIC Pool's gross income includes interest, original issue
discount income and market discount income, if any, reduced by amortization of
any premium, on the assets in the REMIC Pool and income from the amortization of
any premium on the Regular Classes. In this regard, the REMIC Pool will elect to
take all such items into account by accruing interest based on a constant yield.
Deductions include interest and original issue discount expense on the Regular
Classes, servicing fees on the REMIC Pool Assets and other administrative
expenses. An Owner of an interest in a Residual Class (a "Residual Owner") will
take into account, as ordinary income or loss, the Residual Owner's allocable
share of taxable income or net loss of the REMIC Pool.
A Residual Owner may not amortize the cost of its Residual Class interest.
Taxable income of the REMIC Pool, however, will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool's basis in its assets.
Such recovery of basis by the REMIC Pool will have the effect of amortization of
the issue price of the Residual Class over its life. The period of time over
which such issue price is effectively amortized, however, may be longer than the
economic life of the Residual Class.
A subsequent Residual Owner must report on its federal income tax returns
amounts of taxable income or net loss equal to that which an original Residual
Owner must report. Adjustments to reduce (or increase) the income of a
subsequent Residual Owner that purchased such an interest at a price greater
than (or less than) the adjusted issue price of such interest apparently are not
permitted or required.
THE TAXATION OF A RESIDUAL OWNER IS BASED ON THE INCOME AND EXPENSE OF THE
REMIC POOL, AND NOT ON DISTRIBUTIONS TO THE RESIDUAL OWNERS. THIS METHOD OF
TAXATION CAN PRODUCE A SIGNIFICANTLY LESS FAVORABLE AFTER-TAX RETURN FOR A
RESIDUAL CLASS THAN WOULD BE THE CASE IF (i) THE RESIDUAL CLASS WERE TAXABLE AS
A DEBT INSTRUMENT OR (ii) NO PORTION OF THE TAXABLE INCOME ON THE RESIDUAL CLASS
IN EACH PERIOD WERE TREATED AS "EXCESS INCLUSIONS" (AS DEFINED BELOW). IN
CERTAIN PERIODS, TAXABLE INCOME AND THE RESULTING TAX LIABILITY ON AN INTEREST
IN THE UPPER-TIER RESIDUAL CLASS IN A DOUBLE-TIER SERIES OR THE RESIDUAL CLASS
IN A SINGLE-TIER SERIES MAY EXCEED ANY PAYMENTS RECEIVED ON THAT CLASS. THIS MAY
OCCUR BECAUSE THE YIELD OF THE MORTGAGE SECURITIES IN A DOUBLE-TIER SERIES, AND
THE REMIC POOL ASSETS IN A SINGLE-TIER SERIES, TYPICALLY WILL EXCEED THE AVERAGE
YIELD OF THE REGULAR CLASSES IN EARLIER PERIODS. IN ADDITION, A SUBSTANTIAL TAX
MAY BE IMPOSED ON CERTAIN TRANSFERORS OF AN INTEREST IN A RESIDUAL CLASS AND
CERTAIN RESIDUAL OWNERS THAT ARE "PASS-THRU" ENTITIES. SEE "TRANSFERS OF
INTERESTS IN A RESIDUAL CLASS." INVESTORS SHOULD CONSULT THEIR TAX ADVISORS
BEFORE PURCHASING AN INTEREST IN A RESIDUAL CLASS.
Losses
A Residual Owner may recognize a net loss of the REMIC Pool only to the
extent of the adjusted basis of its interest in the Residual Class. A Residual
Owner that is a U.S. person (as defined below), however, may carry over any
disallowed loss to offset any taxable income generated by the same REMIC Pool.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. In the case of a Double-Tier Series, the OID
Regulations provide, and Freddie Mac intends to report assuming, that the
Mortgage Securities will be treated as a single debt instrument for purposes of
the original issue discount provisions. As previously discussed, the timing of
recognition of negative original issue discount, if any, on a Regular Class is
uncertain; as a result, the timing of recognition of the related REMIC taxable
income is also uncertain. Although not entirely free from doubt, the related
REMIC taxable income may be recognized when the adjusted issue price of such
Regular Class would exceed the maximum amount of future payments with respect to
such Regular Class, assuming no further prepayments of the Mortgages (or,
perhaps, assuming prepayments at a rate equal to the Prepayment Assumption).
Market Discount. In respect of Mortgages that have market discount, such
market discount would be recognized in the same fashion as if it were original
issue discount.
Premium. The election to amortize premium under Code Section 171 will not
be available for premium on Mortgages that are obligations of individuals
originated on or prior to September 27, 1985. Premium on such Mortgages may be
deductible, if in accordance with a reasonable method. The allocation of such
premium pro rata among principal payments or on the basis of a constant interest
rate should be considered a reasonable method.
Excess Inclusions
A portion of the REMIC taxable income of each Residual Owner will be
subject to federal income tax in all events. That portion, referred to as the
"excess inclusion," is equal to the excess of REMIC taxable income for the
calendar quarter over the daily accruals for such period. The daily accruals are
equal to the product of (i) 120% of the federal long-term rate (based on
quarterly compounding) under Code Section 1274(d) determined for the month in
which the Residual Class is issued and (ii) the adjusted issue price of such
interest at the beginning of such quarter. The federal long-term rate for the
month of issuance of a Residual Class is published by the Internal Revenue
Service on or about the 20th of the preceding month. The adjusted issue price of
an interest in a Residual Class at the beginning of a quarter is the issue price
of the interest, plus the amount of the daily accruals of REMIC income
attributable to such interest for all prior quarters, decreased (but not below
zero) by any prior distributions. The Internal Revenue Service has authority to
promulgate regulations providing that if the aggregate value of the Residual
Class is not considered to be "significant," then a Residual Owner's entire
share of REMIC taxable income will be treated as an excess inclusion. This
authority has not been exercised.
"Excess inclusions" may not be offset by unrelated losses or loss
carryforwards of a Residual Owner. Thrift institutions, however, are permitted
to use losses to offset their excess inclusion income from a Residual Class if
such Class has "significant value." The regulations under Code Sections 860A
through 860G (the "REMIC Regulations") provide that a REMIC residual interest
has significant value if, as of the pricing date or the closing date, (i) the
issue price of such interest equals at least 2% of the aggregate of the issue
prices of all interests in the REMIC and (ii) the anticipated weighted average
life of such REMIC residual interest is at least 20% of the anticipated weighted
average life of the REMIC.
A Residual Owner's excess inclusion is treated as unrelated business
taxable income for an organization subject to the tax on unrelated business
income. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, regulated investment company or certain other
pass-through entities are Residual Owners, a portion of distributions made by
such entities would constitute excess inclusions.
Legislation has been introduced with respect to the relationship
between excess inclusions and the alternative minimum tax. Such legislation
generally would be effective for taxable years beginning after December 31,
1986. This legislation provides that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. No prediction can be made
whether such legislation will be enacted.
Prohibited Transactions
Income from certain transactions, called prohibited transactions, will not
be part of the calculation of income or loss includable in the federal income
tax returns of Residual Owners, but rather will be taxed directly to the REMIC
Pool at a 100% rate. Because of Freddie Mac's guarantee, in the event such tax
is imposed on a REMIC Pool, payments of principal and interest on the Multiclass
PCs will not be affected.
SALE OR EXCHANGE OF MULTICLASS PCS
An Owner generally will recognize gain or loss upon sale or exchange of a
Multiclass PC equal to the difference between the amount received and the
Owner's adjusted basis in the Multiclass PC. The adjusted basis in a Multiclass
PC generally will equal the cost of the Multiclass PC, increased by income
previously included, and reduced (but not below zero) by previous distributions
and by any amortized premium, in the case of an interest in a Regular Class, or
net losses allowed as a deduction, in the case of an interest in a Residual
Class.
Except as described below, any gain or loss on the sale or exchange of a
Multiclass PC held as a capital asset will be capital gain or loss and will be
long-term or short-term depending on whether 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; and (ii)
in the case of an interest in a Regular Class, (a) to the extent of any accrued,
but unrecognized, market discount or (b) to the extent income recognized by the
Owner is less than the income that would have been recognized if the yield on
such interest were 110% of the applicable federal rate under Code Section
1274(d).
Whether the termination of the REMIC will be treated as a sale or exchange
of a Residual Owner's interest is not clear. If it is, the Residual Owner will
recognize a loss at that time equal to the amount of the Owner's remaining
adjusted basis in such interest.
Except as provided in Treasury regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of an interest in a Residual Class where
the seller of the interest, during the period beginning six months before the
sale or disposition of the interest and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091 with respect to) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Class.
TRANSFERS OF INTERESTS IN A RESIDUAL CLASS
Disqualified Organizations
A transfer of an interest in a Residual Class to a "disqualified
organization" (as defined below) may result in a tax equal to the product of (i)
the present value of the total anticipated future excess inclusions with respect
to such interest and (ii) the highest corporate marginal federal income tax
rate. Such a tax generally would be imposed on the transferor of the interest in
the Residual Class, except that if the transfer is through an agent for a
disqualified organization, the agent is liable. A transferor is not liable for
such tax if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false.
A "pass-thru entity" (as defined below) is subject to tax (at the highest
corporate marginal federal income tax rate) on excess inclusions to the extent
disqualified organizations hold interests in the pass-thru entity. However, such
tax will not apply if the pass-thru entity receives an affidavit that the record
holder is not a disqualified organization and does not have actual knowledge
that the affidavit is false.
For these purposes, (i) "disqualified organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, certain organizations that are exempt from taxation under the Code
(including tax on excess inclusions) and certain corporations operating on a
cooperative basis and (ii) "pass-thru entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as
maybe provided in Treasury regulations, any person holding an interest in a
pass-thru entity as a nominee for another will, with respect to such interest,
be treated as a pass-thru entity.
The Multiclass PC Agreement provides that any attempted transfer of a
beneficial or record interest in a Residual Class will be null and void unless
(i) the proposed transferee provides to Freddie Mac (a) an affidavit that such
transferee is not a disqualified organization and is not purchasing such
interest on behalf of a disqualified organization and (b) if requested by
Freddie Mac, an opinion of counsel to the effect that the proposed transfer will
not cause such Residual Class interest to be held by a disqualified
organization; or (ii) Freddie Mac consents to such transfer.
Legislation has been introduced that would treat all partners in any "large
partnership" as "disqualified organizations," thus subjecting such a partnership
to tax on all of its excess inclusions at the highest corporate rate. The
legislation would also disallow 70% of any large partnership's miscellaneous
itemized deductions, including the deductions for servicing compensation
relating to the PCs in a REMIC Pool, although the remaining deductions would not
be subject to the 2% floor at the partner level. A "large partnership" generally
includes a partnership having 250 or more partners during any taxable year. This
legislation would be effective for taxable years ending on or after December 31,
1993. No prediction can be made whether such legislation will be enacted.
Additional Transfer Restrictions
Under the REMIC Regulations, a transfer of a noneconomic residual interest
is disregarded for all federal income tax purposes if a significant purpose of
the transfer is to impede the assessment or collection of tax. Such a purpose
exists if, at the time of the transfer, the transferor knew or should have known
that the transferee would be unwilling or unable to pay taxes on its share of
the taxable income of the REMIC. A transferor will be presumed to lack such
knowledge (or reason to know) if, after a reasonable investigation, the
transferor finds that the transferee historically paid its debts as they came
due, and finds no significant evidence that the transferee would not continue to
do so, and the transferee represents to the transferor that (i) the transferee
understands that it might incur tax liabilities in excess of any cash received
with respect to the residual interest and (ii) the transferee intends to pay the
taxes associated with owning the residual interest as they come due. The scope
of due diligence required under this rule is uncertain. A residual interest in a
REMIC (including a residual interest with significant value at issuance) is a
noneconomic residual interest unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs and (ii) the transferor reasonably expects that for
each anticipated excess inclusion the transferee will receive distributions from
the REMIC at or after the time at which taxes accrue on the anticipated excess
inclusion in an amount sufficient to satisfy the taxes accrued.
The REMIC Regulations provide that any transfer of a residual interest
(whether or not a noneconomic residual interest) to a non-U.S. person is
disregarded for all federal tax purposes if the residual interest has "tax
avoidance potential." A residual interest has tax avoidance potential under the
REMIC Regulations unless, at the time of transfer, the transferor reasonably
expects that:
(i) for each excess inclusion, the REMIC will distribute on the
residual interest an amount that will equal at least 30% of the
excess inclusion, and
(ii) the transferee will receive each such distribution from the REMIC
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.
<PAGE>
The reasonable expectation requirement will be satisfied if the above test would
be met assuming that the Mortgages underlying the REMIC's assets were to prepay
at each rate between 50 percent and 200 percent of the Prepayment Assumption.
The REMIC Regulations also provide that a transfer from a non-U.S. person to a
U.S. person or to a non-U.S. person engaged in a United States trade or business
is disregarded if the transfer has "the effect of allowing the transferor to
avoid tax on accrued excess inclusions."
With respect to a Residual Class that has been held at any time by a
non-U.S. person, Freddie Mac (or its agent) will be entitled to withhold (and to
pay to the Internal Revenue Service) any portion of any payment on such Residual
Class that Freddie Mac reasonably determines is required to be withheld. If
Freddie Mac (or its agent) reasonably determines that a more accurate
determination of the amount required to be withheld from a distribution can be
made within a reasonable period after the scheduled date for such distribution,
it may hold such distribution in trust for the Owners of any such Residual
Class, until it can make the more accurate determination.
Certain restrictions will be imposed on transfers of the interests in the
Residual Classes, including the requirement that no transfer to a non-U.S.
person (or, for certain Residual Classes, to any person) will be permitted
without Freddie Mac's written consent. These restrictions, together with those
imposed under the REMIC Regulations, may have the practical effect of rendering
the interests in certain Residual Classes non-transferable.
The term "non-U.S. person" means any person that is not a "U.S. person." A
U.S. person is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
Miscellaneous
If the equity interest in a non-U.S. person investor is held in whole or in
part by a U.S. person, such investor or U.S. person should consult its own tax
advisors regarding any tax consequences to such U.S. person of the investor's
purchase of an interest in a Residual Class.
The federal income tax consequences of any consideration paid to a
transferee on a transfer of an interest in a Residual Class are unclear. The
preamble to the REMIC Regulations indicates that the Internal Revenue Service is
considering the tax treatment of these types of residual interests. A transferee
of such an interest should consult its tax advisors.
TREATMENT OF SERVICING COMPENSATION
An Owner that is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed 2% of
the Owner's adjusted gross income, and such Owner may not be able to deduct such
fees and expenses to any extent in computing such Owner's alternative minimum
tax liability. Such deductions will include servicing, guarantee and
administrative fees paid to the servicer of the Mortgages or to Freddie Mac.
These deductions will be allocated entirely to the Residual Owners in the case
of REMIC Pools with multiple classes of interests that pay their principal
amounts sequentially. As a result, the REMIC Pool will report additional taxable
income to Residual Owners in an amount equal to their allocable share of such
deductions, and individuals, estates, or trusts holding an interest in such
Residual Class may have taxable income in excess of the cash received. In the
case of a "Single-class REMIC" as defined in applicable Treasury regulations,
such deductions will be allocated proportionately among the Regular and Residual
Classes.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Classes
Interest, including original issue discount, distributable to the
Owner of a Regular Class interest that is a non-U.S. person not engaged in a
U.S. trade or business will be considered "portfolio interest" and, therefore,
will not be subject to the 30% United States withholding tax provided that such
non-U.S. person provides an appropriate statement, signed under penalties of
perjury, identifying the Owner and stating, among other things, that the Owner
of the Regular Class interest is a non-U.S. person. If such statement is not
provided, 30% withholding will apply unless an income tax treaty reduces or
eliminates such tax. If the interest is effectively connected with the conduct
of a trade or business within the United States by a non-U.S. person, such
non-U.S. person will be subject to United States federal income tax at regular
rates. Owners of Regular Class interests that are non-U.S. persons should
consult their own tax advisors.
Residual Classes
A distribution to a Residual Owner that is a non-U.S. person will not be
subject to the 30% withholding tax provided that (i) the conditions described in
the preceding paragraph are met and (ii) the distribution does not constitute an
"excess inclusion" (but only, in the case of a Single-Tier Series or the
Lower-Tier REMIC Pool in a Double-Tier Series, to the extent the Mortgages were
originated after July 18, 1984). Excess inclusions are subject to a 30%
withholding tax in all events when distributions are made (or when the interest
in the Residual Class is disposed of). The Code grants the Treasury Department
authority to issue regulations requiring withholding earlier if necessary to
prevent avoidance of tax. The preamble to the REMIC Regulations indicates that
the Internal Revenue Service is considering this issue. Residual Owners that are
non-U.S. persons should consult their own tax advisors.
BACKUP WITHHOLDING
Distributions made on the Multiclass PCs and proceeds from the sale of
Multiclass PCs to or through certain brokers may be subject to a "backup"
withholding tax of 31% (20% for payments prior to January 1, 1993) of
"reportable payments" (including interest accruals, original issue discount,
and, under certain circumstances, distributions in reduction of principal
amount) unless, in general, the Owner of the Multiclass PCs complies with
certain procedures or is an exempt recipient. Any amounts so withheld from
distributions on the Multiclass PCs would be refunded by the Internal Revenue
Service or allowed as a credit against the Owner's federal income tax.
REPORTING AND ADMINISTRATIVE MATTERS
Reports will be made to the Internal Revenue Service and to Holders of
record of Multiclass PCs that are not excepted from the reporting requirements.
Freddie Mac will prepare, sign and file federal income tax returns for each
REMIC Pool. To the extent allowable, Freddie Mac will also act as the tax
matters partner for each REMIC Pool. Each Residual Owner, by the acceptance of
its interest in a Residual Class, agrees that Freddie Mac will act as the
Owner's fiduciary in the performance of any duties required of the Owner in the
event that the Owner is the tax matters partner.
A Residual Owner is required to treat items on its returns consistently
with their treatment on the REMIC Pool's return, unless the Owner owns 100% of
the Residual Class for the entire calendar year or the Owner either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Internal
Revenue Service may assess a deficiency resulting from a failure to comply with
the consistency requirement without instituting an administrative proceeding at
the REMIC level. Any person that holds a Residual Class interest as a nominee
for another person may be required to furnish the REMIC Pool, in a manner to be
provided in Treasury regulations, the name and address of such other person and
other information.
ERISA CONSIDERATIONS
A Department of Labor regulation provides that, if an employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), acquires a "guaranteed governmental mortgage pool certificate," then,
for purposes of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code, the plan's assets include the certificate and
all of its rights with respect to the certificate, but do not, solely by reason
of the plan's holding of the certificate, include any of the mortgages
underlying the certificate. Under this regulation, the term "guaranteed
governmental mortgage pool certificate" includes a certificate "backed by, or
evidencing an interest in, specified mortgages or participation interests
therein" if interest and principal payable on the certificate are guaranteed by
Freddie Mac. The effect of the regulation is to make clear that the sponsor
(that is, the entity that organizes and services the pool, in this case Freddie
Mac) and other persons, in providing services with respect to the assets in the
pool, would not be subject to the fiduciary responsibility provisions of Title I
of ERISA, or the prohibited transaction provisions of Section 406 of ERISA or
Code Section 4975, merely by reason of the plan's investment in a certificate.
At the time this Labor Department regulation was issued, certificates similar to
Multiclass PCs were not in existence. However, Freddie Mac has been advised by
its special counsel, Cadwalader, Wickersham & Taft, that the Multiclass PCs
should qualify as "guaranteed governmental mortgage pool certificates."
The purchase of an interest in a Residual Class by a plan may give rise to
"unrelated business taxable income" as described in Code Sections 511 through
515 and Section 860E. See "Certain Federal Income Tax Consequences -- Taxation
of Residual Classes -- Excess Inclusions."
LEGAL INVESTMENT CONSIDERATIONS
Investors should consult their own legal advisors in determining whether
and to what extent Multiclass PCs constitute legal investments for such
investors and whether and to what extent Multiclass PCs can be used as
collateral for various types of borrowings. In addition, financial institutions
should consult their legal advisors or regulators in determining the appropriate
treatment of Multiclass PCs under any applicable risk-based capital or similar
rules. Institutions whose investment activities are subject to legal investment
laws and regulations or to review by regulatory authorities may be subject to
restrictions on investments in certain Classes of Multiclass PCs or in
Multiclass PCs generally. An institution under the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration, the Department of the
Treasury or any other federal or state agency with similar authority should
review any applicable regulations, policy statements and guidelines before
purchasing or pledging the Multiclass PCs of any Class. Depository institutions
should review and consider the applicability of the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on Securities
Activities, as revised, which, among other things, sets forth guidelines for
investing in certain types of mortgage-related securities, including Multiclass
PCs.
<PAGE>
ANNEX 1
POOLED CERTIFICATE CURRENT INFORMATION
The table in this Annex 1 sets forth information for each of the Pooled
Certificates concerning such Pooled Certificates and the related Mortgage Loans.
The table and the descriptions of the Pooled Certificates herein are subject to
and qualified by reference to the information with respect to the provisions of
the Underlying Agreements and Underlying Prospectuses and the other prospectuses
related to the Pooled Certificates. The information set forth in the table and
elsewhere herein has been derived from FNMA and FHLMC, but such information has
not been independently verified by the Depositor or the Underwriter. This
information comprises all material information on the subject that the Depositor
and the Underwriter possess or can acquire without unreasonable expense or
effort.
The Depositor has sold a 43.93% percentage interest in the Pooled FNMA
Certificates to the Trustee and the Depositor has sold a 100.00% percentage
interest in the Pooled FHLMC Certificates to the Trustee.
"Weighted average" numbers are calculated based on the loan balances as of
December 1, 1996.
The Issue Date for the Pooled FNMA Certificates was January 28, 1994 and
the Issue Date for the Pooled FHLMC Certificates was November 29, 1996.
The following is a description of each item reported in the following
table. The table should be read in conjunction with these descriptions and the
additional information contained in Exhibit I and Exhibit II.
1. Shelf and Series. These first two columns indicate, collectively, and
the "shelf" name and series designation of each Underling Series. For
the full name of each Pooled Certificate, see "Description of the
Pooled Certificates - General".
2. Certif Type. NTL/INV indicates that the Pooled FHLMC Certificates have
a notional principal balance and bear interest at rates that are based
on an index (in this case, LIBOR) and that vary inversely with changes
in the index. FTL indicates that the Pooled FNMA Certificates bear
interest at rates that are based on an index (in this case, LIBOR) and
that vary directly with changes in the index.
3. Coupon. This column indicates the November interest rates in the case
of the Pooled FNMA Certificates and the December interest rate in the
case of the Pooled FHLMC Certificates.
4. Class Original Balance. This column lists the principal balance of the
Pooled FNMA Certificates and the December notional principal balance
of the Pooled FHLMC Certificates as of the related Issue Date.
5. Class Percentage in Trust. This is the percentage which the respective
Pooled Certificates constitute of its class.
6. Class Current Balance. This column shows the December principal
balance of the Pooled FNMA Certificates and the December notional
principal balance of the Pooled FHLMC Certificates.
7. Original Mortgage Loan Balance. This is the original aggregate
scheduled principal balance of the Mortgage Loans underlying each
Pooled Certificate.
8. Current Mortgage Loan Balance. This is the aggregate scheduled
principal balance of the Mortgage Loans underlying each Pooled
Certificate as of December 1, 1996.
9. WAC. Under this heading is the current weighted average of the note
rates on the Mortgage Loans underlying each Pooled Certificate.
10. CNWAC. Under this heading is the current weighted average of the net
rates (that is, note rate less any servicing fee and any other
administrative fees) on the Mortgage Loans underlying each Pooled
Certificate.
11. WAM. Under this heading is the current weighted average of the
remaining terms to maturity of the Mortgage Loans underlying each
Pooled Certificate (in months).
12. WALA/CAGE. Under this heading is the weighted average months since
origination for the Mortgage Loans underlying each Pooled Certificate.
<PAGE>
<TABLE>
<CAPTION>
Class Class Original Current
Series/ Cerif Current Original Class % Current Mortgage Mortgage WALA/
Shelf Class Type Coupon(1) Balance In Trust Balance Loan Balance Loan Balance WAC CNWAC WAM CAGE
- ----- ------- ----- --------- -------- -------- ------- ------------ ------------ --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC 1910 - SC NTL/INV 2.9125 40,623,157(2) 100.00% 40,623,157(2) 500,000,001 498,954,727 8.516 8.000 357 2
FNMA 94-6F FLT 7.40625 150,000,000 43.93% 61,948,523 150,000,000 150,000,000 8.336 7.846 295 57
(1) November coupon for Pooled FNMA Certificates and December coupon for Pooled FHLMC Certificates
(2) The Pooled FHLMC Certificates have a notional principal balance.
</TABLE>
<PAGE>
[This Page Intentionally Left Blank]
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS MORTGAGE SECURITIES INC.
SELLER
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), which may be sold from time to time in one or more Series on
terms determined at the time of sale and described in the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of
one or more trust funds (each a "Trust Fund"). As specified in the related
Prospectus Supplement, a Trust Fund for a Series of Certificates will include
certain mortgage-related assets (the "Mortgage Assets") consisting of (i) first
lien mortgage loans or partici- pations therein secured by one- to four-family
residential properties ("Single Family Loans"), (ii) first lien mortgage loans
or participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by security
interests or similar liens on shares in cooperative housing corporations and the
related proprietary leases or occupancy agreements ("Cooperative Loans"), (iv)
con- ditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing ("Contracts"), (v)
mortgage pass-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") or other government agencies or government-sponsored agencies or (vi)
privately issued mortgage-backed securities ("Private Mortgage-Backed
Securities"). If specified in the related Prospectus Supplement, certain
Certificates will evidence the entire beneficial ownership interest in a Trust
Fund which will contain a beneficial ownership interest in another Trust Fund
which will contain the Mortgage Assets. The Mortgage Assets will be acquired by
Bear Stearns Mortgage Securities Inc. (the "Seller") from one or more
institutions which may be affiliates of the Seller (each, a "Lender") and
conveyed by the Seller to the related Trust Fund. A Trust Fund also may include
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other assets to the extent
described in the related Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Certificates
of such Series. One or more classes of Certificates of a Series may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other classes of Certificates of such Series or after the
occurrence of specified events or may be required to absorb one or more types of
losses prior to one or more other classes of Certificates, in each case as
specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Certificates of a Series will be made only from the assets of the related Trust
Fund.
The Certificates will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality or by any other person. Unless otherwise
specified in the related Prospectus Supplement, the only obligations of the
Seller with respect to a Series of Certificates will be to obtain certain
representations and warranties from the Lenders or other third parties and to
assign to the trustee (the "Trustee") for the related Series of Certificates the
Seller's rights with respect to such representations and warranties. The
principal obligations of one or more master servicers (each, a "Master
Servicer") named in the Prospectus Supplement with respect to the related Series
of Certificates will be limited to its or their contractual servicing
obligations, including any obligation to advance delinquent payments on the
Mortgage Assets in the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by
the rate of payment of principal (including prepayments) on the Mortgage Assets
in the related Trust Fund and the timing of receipt of such payments as
described herein and in the related Prospectus Supplement. A Trust Fund may be
subject to early termination under the circumstances described herein and in the
related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made
to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences." (cover continued on next page)
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Certificates
of any Series and there can be no assurance that a secondary market for any
Certificates will develop. This Prospectus may not be used to consummate sales
of a Series of Certificates unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. All
Certificates will be distributed by, or sold by underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is October 10, 1996.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series
to be offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates; (ii) the rate of interest (the "Pass-Through Rate") or method of
determining the amount of interest, if any, to be passed through to each such
class; (iii) the aggregate principal amount, if any, relating to each such
class; (iv) the distribution dates (each a "Distribution Date") for interest and
principal payments and, if applicable, the initial and final scheduled
Distribution Dates for each class; (v) if applicable, the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class of
Certificates; (vi) information as to the nature and extent of subordination with
respect to any class of Certificates that is subordinate to any other class;
(vii) information as to the assets comprising the Trust Fund, including the
general characteristics of the Mortgage Assets included therein and, if
applicable, the amount and source of any reserve fund (a "Reserve Account"), and
the insurance, letters of credit, guarantees, or other instruments or agreements
included in the Trust Fund; (viii) the circumstances, if any, under which the
Trust Fund may be subject to early termination; (ix) additional information with
respect to the plan of distribution of such Certificates; (x) whether one or
more REMIC elections will be made and designation of the regular interests and
residual interests; (xi) information as to the Trustee; and (xii) information as
to the Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of Certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street - Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center - 13th Floor, New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, with respect to
a series of Certificates subsequent to the date of this Prospectus and the
related Prospectus Supplement and prior to the termination of the offering of
such series of Certificates shall be deemed to be incorporated by reference in
this Prospectus as supplemented by the related Prospectus Supplement. If so
specified in any such documents, such document shall also be deemed to be
incorporated by reference in the Registration Statement of which this Prospectus
forms a part.
Any statement contained herein or in a Prospectus Supplement for a
series of Certificates or in a document incorporated or deemed to be
incorporated by reference herein or therein shall be deemed to be modified or
superseded for purposes of this Prospectus and such Prospectus Supplement and,
if applicable, the Registration Statement to the extent that a statement
contained herein or therein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein or therein modifies or
supersedes such statement, except to the extent that such subsequently filed
document expressly states otherwise. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or the related Prospectus Supplement or, if
applicable, the Registration Statement.
The Depositor will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, Bear Stearns Mortgage Securities Inc., 245
Park Avenue, New York, New York 10167. Telephone requests for such copies should
be directed to the President at (212) 272-2000.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Certificateholders. See "Description of the
Certificates--Reports to Certificateholders."
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement which will be prepared in connection with each Series of
Certificates.
Title of Securities.................... Mortgage Pass-Through Certificates
(Issuable in Series).
Seller................................. Bear Stearns Mortgage Securities
Inc., a Delaware corporation and
a wholly-owned subsidiary of Bear
Stearns Mortgage Capital
Corporation. See "The Seller."
Trustee................................ The Trustee for each Series of
Certificates will be specified in the
related Prospectus Supplement.
Master Servicer........................ One or more entities named as a Master
Servicer in the related Prospectus
Supplement, which may be an affiliate
of the Seller. See "The Pooling and
Servicing Agreement--Certain Matters
Regarding the Master Servicer and the
Seller."
Trust Fund Assets...................... A Trust Fund for a Series of
Certificates will include the Mortgage
Assets consisting of (i) a pool (a
"Mortgage Pool") of Single Family
Loans, Multifamily Loans, Cooperative
Loans or Contracts (collectively, the
"Mortgage Loans"), (ii) Agency
Securities or (iii) Private Mortgage-
Backed Securities, together with
payments in respect of such Mortgage
Assets and certain other accounts,
obligations or agreements, in each
case as specified in the related
Prospectus Supplement.
A. Single Family, Cooperative
and Multi-family Loans............. Unless otherwise specified in the
related Prospectus Supplement, Single
Family Loans will be secured by
first mortgage liens on one- to
four-family residential properties.
Unless otherwise specified in the
related Prospectus Supplement,
Cooperative Loans will be
secured by security interests
in shares issued by private,
nonprofit, cooperative housing
housing corporations ("Cooperatives")
and in the related proprietary leases
or occupancy agreements granting
exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings. Single Family Loans and
Cooperative Loans may be conventional
loans (i.e., loans that are not
insured or guaranteed by any
governmental agency), insured by the
Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans
Administration ("VA") as specified in
the related Prospectus Supplement.
Unless otherwise specified in the
related Prospectus Supplement, Single
Family Loans and Cooperative Loans
will all have individual principal
balances at origination of not less
than $25,000 and not more than
$1,000,000, and original terms to
stated maturity of 15 to 40 years.
Multifamily Loans will be secured by
first mortgage liens on rental
apartment buildings or projects
containing five or more residential
units, including apartment buildings
owned by Cooperatives. Such loans may
be conventional loans or insured by
the FHA, as specified in the related
Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, Multifamily
Loans will all have individual
principal balances at origination of
not less than $25,000 and original
terms to stated maturity of not more
than 40 years.
The payment terms of the Mortgage
Loans to be included in a Trust Fund
will be described in the related
Prospectus Supplement and may
include any of the following features
or combinations thereof or other
features described in the related
Prospectus Supplement:
(a) Interest may be payable t a fixed
rate, a rate adjustable from time
to time in relation to an index,
a rate that is fixed for a period
of time or under certain
circumstances and is followed by
an adjustable rate, a rate that
otherwise varies from time to
time, or a rate that is
convertible from an adjustable
rate to a fixed rate. Changes to
an adjustable rate may be subject
to periodic limitations, maximum
rates, minimum rates or a
combination of such limitations.
Accrued interest may be deferred
and added to the principal of a
Mortgage Loan for such periods
and under such circumstances as
may be specified in the related
Prospectus Supplement. Mortgage
Loans may provide for the payment
of interest at a rate lower than
the specified interest rate on the
Mortgage Loan (the "Mortgage
Rate") for a period of time or for
the life of the Mortgage Loan, and
the amount of any difference may
be contributed from funds
supplied by the seller of the
Mortgaged Property or another
source ("Buydown Loans") or may
be treated as accrued interest and
added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a
level debt service basis to fully
amortize, the Mortgage Loan over
its term, may be calculated on the
basis of an assumed amortization
schedule that is significantly
longer than the original term to
maturity or on an interest rate
that is different from the
interest rate on the Mortgage Loan
or may not be amortized during
all or a portion of the original
term. Payment of all or a
substantial portion of the
principal may be due on maturity
("balloon" payments). Principal
may include interest that has
has been deferred and added to
the principal balance of the
the Mortgage Loan.
(c) Payments of principal and interest
may be fixed for the life of the
Mortgage Loan, may increase over
a specified period of time or may
or may change from period to
period. Mortgage Loans may
include limits on periodic
increases or decreases in the
amount of monthly payments and
may include maximum or minimum
amounts of monthly payments.
(d) Prepayments of principal may be
subject to a prepayment fee, which
may be fixed for the life of the
Mortgage Loan or may decline over
time, and may be prohibited for
the life of the Mortgage Loan or
for certain periods ("lockout
periods"). Certain Mortgage
Loans may permit prepayments after
expiration of the applicable
lockout period and may require the
payment of a prepayment fee in
connection with any such
subsequent prepayment. Other
Mortgage Loans may permit
prepayments without payment of a
fee unless the prepayment occurs
during specified time periods.
The Mortgage Loans may include
due-on-sale clauses which permit
the mortgagee to demand payment of
the entire Mortgage Loan in
connection with the sale or
certain transfers of the related
Mortgaged Property. Other
Mortgage Loans may be assumable
by persons meeting the then
applicable underwriting standards
of the Lender.
Certain Mortgage Loans may be
originated or acquired in
connection with employee
relocation programs. The
real property constituting
security for repayment of a
Mortgage Loan may be located
in any one of the fifty
states or the District of
Columbia. Unless otherwise
specified in the related
Prospectus Supplement, all of
the Mortgage Loans will be
covered by standard hazard
insurance policies insuring
against losses due to fire
and various other causes. The
Mortgage Loans will be
covered by primary mortgage
insurance policies to the extent
provided in the related
Prospectus Supplement. All
Mortgage Loans will have been
purchased by the Seller,
either directly or through an
affiliate, from Lenders.
B. Contracts............................... Contracts will consist of
conditional sales and
installment sales or loan
agreements secured by new or
used Manufactured Homes (as
defined herein). Contracts
may be conventional loans,
insured by the FHA or
partially guaranteed by the
VA, as specified in the
related Prospectus
Supplement. Unless otherwise
specified in the related
Prospectus Supplement, each
Contract will be fully amortizing
and will bear interest at a fixed
accrual percentage rate
("APR"). Unless otherwise
specified in the related
Prospectus Supplement,
Contracts will all have
individual principal balances
at origination of not less
than $10,000 and not more
than $1,000,000 and original
terms to stated maturity of 5 to
30 years.
C. Agency Securities....................... The Agency Securities will
consist of (i) fully modified
pass-through mortgage-backed
certificates guaranteed as to
timely payment of principal
and interest by the
Government National Mortgage
Association ("GNMA Certificates"),
(ii) Guaranteed Mortgage
Pass-Through Certificates
issued and guaranteed as to
timely payment of principal
and interest by the Federal
National Mortgage Association
("FNMA Certificates"), (iii)
Mortgage Participation
Certificates issued and
guaranteed as to timely
payment of interest and,
unless otherwise specified in
the related Prospectus
Supplement, ultimate payment
of principal by the Federal
Home Loan Mortgage
Corporation ("FHLMC
Certificates"), (iv) 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, unless
otherwise specified in the
Prospectus Supplement,
guaranteed to the same extent
as the underlying securities,
(v) 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
(vi) a combination of such Agency
Securities. All GNMA
Certificates will be backed
by the full faith and credit of
the United States. No FNMA
or FHLMC Certificates will be
backed, directly or indirectly,
by the full faith and credit of
the United States. The Agency
Securities may consist of pass-
through securities issued under
the GNMA I Program, the GNMA II
Program, FHLMC's Cash or
Guarantor Program or another
program specified in the
Prospectus Supplement. The
payment characteristics of
the Mortgage Loans underlying
the Agency Securities will be
described in the related
Prospectus Supplement.
D. Private Mortgage-Backed
Securities................................Private Mortgage-Backed
Securities may include (i)
mortgage participations or
pass-through certificates
representing beneficial interests
in certain Mortgage Loans or (ii)
Collateralized Mortgage
Obligations ("CMOs") secured
by such Mortgage Loans. Private
MortgageBacked Securities may
include 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. Although individual
Mortgage Loans underlying a
Private Mortgage-Backed Security
may be insured or guaranteed by
the United States or an agency or
instrumentality thereof, they need
not be, and the Private
Mortgage-Backed Securities
themselves will not be so insured
or guaranteed. See "The Trust
Fund--Private Mortgage-Backed
Securities." Unless otherwise
specified in the Prospectus
Supplement relating to a Series of
Certificates, payments on the
Private Mortgage-Backed Securities
will be distributed directly to
the Trustee as registered owner of
such Private Mortgage-Backed
Securities. See "The Trust
Fund--Private Mortgage-Backed
Securities."
The related Prospectus Supplement
for a Series will specify (i) the
aggregate approximate principal
amount and type of any Private
Mortgage-Backed Securities to be
included in the Trust Fund for
such Series; (ii) certain
characteristics of the Mortgage
Loans which comprise the
underlying assets for the
Private Mortgage-Backed
Securities including to the
extent available (A) the
payment features of such Mortgage
Loans, (B) the approximate
aggregate principal amount, if
known, of the underlying Mortgage
Loans which are insured or
guaranteed by a governmental
entity, (C) the servicing fee
or range of servicing fees
with respect to the Mortgage
Loans, and (D) the minimum
and maximum stated maturities of
the Mortgage Loans at origination;
(iii) the maximum original term-
to-stated maturity of the Private
Mortgage-Backed Securities;
(iv) the weighted average
term-to-stated maturity of
the Private Mortgage-Backed
Securities; (v) the pass-through
or certificate rate or ranges
thereof for the Private Mortgage-
Backed Securities; (vi) the
weighted average pass-through or
certificate rate of the
Private Mortgage-Backed
Securities; (vii) the issuer
of the Private Mortgage-Backed
Securities (the "PMBS Issuer"),
the servicer of the Private
Mortgage-Backed Securities (the
"PMBS Servicer") and the trustee
of the Private Mortgage-Backed
Securities (the "PMBS Trustee");
(viii) certain characteristics of
credit support, if any, such as
reserve funds, insurance policies,
letters of credit, financial
guaranty insurance policies or
third party guarantees, relating
to the Mortgage Loans underlying
the Private Mortgage-Backed
Securities, or to such Private
Mortgage-Backed Securities
themselves; (ix) the terms on
which underlying Mortgage
Loans for such Private
Mortgage-Backed Securities
may, or are required to, be
repurchased prior to stated
maturity; and (x) the terms
on which substitute Mortgage
Loans may be delivered to
replace those initially
deposited with the PMBS
Trustee. See "The Trust Fund."
E. Pre-Funding and
Capitalized Interest
Accounts................................ If specified in the related
Prospectus Supplement, a
Trust Fund will include one or
more segregated trust accounts
(each, a "Pre-Funding Account")
established and maintained with
the Trustee for the related
Series. If so specified, on the
closing date for such Series, a
portion of the proceeds of the
sale of the Certificates of
such Series (such amount, the
"Pre-Funded Amount") will be
deposited in the Pre-Funding
Account and may be used to
purchase additional Primary
Assets during the period of time,
not to exceed six months,
specified in the related
Prospectus Supplement (the
"Pre-Funding Period"). The
Primary Assets to be so purchased
will be required to have certain
characteristics specified in the
related Prospectus Supplement. If
any Pre-Funded Amount remains on
deposit in the Pre-Funding
Account at the end of the Pre-
Funding Period, such amount will
be applied in the manner specified
in the related Prospectus
Supplement to prepay the
Certificates of the applicable
Series. The amount initially
deposited in a pre-funding
account for a Series of
Certificates will not exceed fifty
percent of the aggregate principal
amount of such Series of
Certificates.
If a Pre-Funding Account is
established, one or more
segregated trust accounts (each, a
"Capitalized Interest Account")
may be established and maintained
with the Trustee for the related
Series. On the closing date for
such Series, a portion of the
proceeds of the sale of the
Certificates of such Series will
be deposited in the Capitalized
Interest Account and used to fund
the excess, if any, of (x) the
sum of (i) the amount of interest
accrued on the Certificates of
such Series and (ii) if specified
in the related Prospectus
Supplement, certain fees or
expenses during the Pre-Funding
Period such as trustee fees and
credit enhancement fees, over (y)
the amount of interest available
therefor from the Primary Assets
in the Trust Fund. Any amounts on
deposit in the Capitalized
Interest Account at the end of the
Pre-Funding Period that are not
necessary for such purposes will
be distributed to the person
specified in the related
Prospectus Supplement.
Description of the
Certificates............................. Each Certificate will represent a
beneficial ownership interest in
a Trust Fund created by the Seller
pursuant to a Pooling and
Servicing Agreement (each, an
"Agreement") among the Seller, the
Master Servicer(s) and the Trustee
for the related Series. The
Certificates of any Series may be
issued in one or more classes as
specified in the related
Prospectus Supplement. A Series of
Certificates may include one or
more classes of senior
Certificates (collectively, the
"Senior Certificates") which
receive certain preferential
treatment specified in the related
Prospectus Supplement with
respect to one or more classes of
subordinate Certificates
(collectively, the "Subordinated
Certificates"). Certain Series or
classes of Certificates may be
covered by insurance policies,
cash accounts, letters of credit,
financial guaranty insurance
policies, third party guarantees
or other forms of credit
enhancement as described herein
and in the related Prospectus
Supplement.
One or more classes of
Certificates of each Series (i)
may be entitled to receive
distributions allocable only to
principal, only to interest or to
any combination thereof; (ii) may
be entitled to receive
distributions only of prepayments
of principal throughout the
lives of the Certificates or
during specified periods; (iii)
may be subordinated in the right
to receive distributions of
scheduled payments of principal,
prepayments of principal, interest
or any combination thereof to one
or more other classes of
Certificates of such Series
throughout the lives of the
Certificates or during specified
periods or may be subordinated
with respect to certain losses or
delinquencies; (iv) may be
entitled to receive such
distributions only after the
occurrence of events specified
in the Prospectus Supplement; (v)
may be entitled to receive
distributions in accordance with a
schedule or formula or on the
basis of collections from
designated portions of the
assets in the related Trust
Fund; (vi) as to Certificates
entitled to distributions
allocable to interest, may be
entitled to receive interest
at a fixed rate or a rate that is
subject to change from time to
time; and (vii) as to Certificates
entitled to distributions
allocable to interest, may be
entitled to distributions
allocable to interest only
after the occurrence of
events specified in the Prospectus
Supplement and may accrue interest
until such events occur, in each
case as specified in the
Prospectus Supplement. The
timing and amounts of such
distributions may vary among
classes, over time, or otherwise
as specified in the related
Prospectus Supplement.
Distributions on the
Certificates.............................. Distributions on the
Certificates entitled thereto
will be made monthly,
quarterly, semi-annually or
at such other intervals and on
such other Distribution Dates
specified in the Prospectus
Supplement solely out of the
payments received in respect
of the assets of the related
Trust Fund or other assets
pledged for the benefit of
the Certificates as specified in
the related Prospectus
Supplement. The amount
allocable to payments of
principal and interest on any
Distribution Date will be
determined as specified in
the Prospectus Supplement.
Unless otherwise specified in the
Prospectus Supplement, all
distributions will be made
pro rata to Certificateholders
of the class entitled thereto,
and the aggregate original
principal balance of the
Certificates will equal the
aggregate distributions
allocable to principal that
such Certificates will be
entitled to receive. If
specified in the Prospectus
Supplement, the Certificates
will have an aggregate
original principal balance
equal to the aggregate unpaid
principal balance of the
Mortgage Assets as of a date
specified in the related
Prospectus Supplement related
to the creation of the Trust
Fund (the "Cut-off Date") and
will bear interest in the
aggregate at a rate equal to
the interest rate borne by
the underlying Mortgage Loans,
Agency Securities or Private
Mortgage-Backed Securities,
net of the aggregate
servicing fees and any other
amounts specified in the
Prospectus Supplement. If
specified in the Prospectus
Supplement, the aggregate original
principal balance of the
Certificates and interest rates
on the classes of Certificates
will be determined based on the
cash flow on the Mortgage
Assets. The Pass-Through
Rate at which interest will be
passed through to holders of
Certificates entitled thereto
may be a fixed rate or a rate
that is subject to change
from time to time from the time
and for the periods, in each
case as specified in the
Prospectus Supplement. Any
such rate may be calculated
on a loan-by-loan, weighted
average or other basis, in
each case as described in the
Prospectus Supplement.
Credit Enhancement ......................... The assets in a Trust Fund or
the Certificates of one or
more classes in the related
Series may have the benefit
of one or more types of credit
enhancement described in the
related Prospectus Supplement.
The protection against losses
afforded by any such credit
support will be limited. Such
credit enhancement may include
one or more of the following
types:
A. Subordination.......................... The rights of the holders of
the Subordinated Certificates
of a Series to receive
distributions with respect to
the assets in the related
Trust Fund will be
subordinated to such rights
of the holders of the Senior
Certificates of the same
Series to the extent
described in the related Prospectus
Supplement. This subordination
is intended to enhance the
likelihood of regular receipt
by holders of Senior
Certificates of the full
amount of payments which such
holders would be entitled to
receive if there had been no
losses or delinquencies. The
protection afforded to the
holders of Senior Certificates
of a Series by means of the
subordination feature may be
accomplished by (i) the
preferential right of such
holders to receive, prior to
any distribution being made
in respect of the related
Subordinated Certificates,
the amounts of principal and
interest due them on each
Distribution Date out of the
funds available for
distribution on such date in
the related Certificate
Account and, to the extent
described in the related
Prospectus Supplement, by the
right of such holders to
receive future distributions
on the assets in the related
Trust Fund that would
otherwise have been payable
to the Subordinated
Certificateholders;
(ii) reducing the ownership
interest of the related
subordinated Certificates;
(iii) a combination of
clauses (i) and (ii) above; or (iv)
as otherwise described in the
related Prospectus
Supplement. The protection
afforded to the holders of
Senior Certificates of a
Series by means of the
subordination feature also
may be accomplished by allocating
certain types of losses or
delinquencies to the
Subordinated Certificates to
the extent described in the
related Prospectus
Supplement.
If so specified in the related
Prospectus Supplement, the
same class of Certificates
may be Senior Certificates with
respect to certain types of
payments or certain types of
losses or delinquencies and
Subordinated Certificates
with respect to other types of
payments or types of losses
or delinquencies. If so
specified in the related
Prospectus Supplement,
subordination may apply only
in the event of certain types
of losses not covered by
other forms of credit support,
such as hazard losses not covered
by standard hazard insurance
policies or losses due to the
bankruptcy of the borrower.
If specified in the Prospectus
Supplement, a reserve fund
may be established and
maintained by the deposit
therein of distributions
allocable to the holders of
Subordinated Certificates
until a specified level is
reached. The related
Prospectus Supplement will
set forth information concerning
the amount of subordination
of a class or classes of
Subordinated Certificates in
a Series, the circumstances in
which such subordination will
be applicable, the manner, if
any, in which the amount of
subordination will decrease
over time, the manner of
funding the related reserve
fund, if any, and the
conditions under which
amounts in any such reserve fund
will be used to make
distributions to holders of Senior
Certificates or released from
the related Trust Fund.
B. Reserve Accounts....................... One or more Reserve Accounts
may be established and
maintained for each Series.
The related Prospectus
Supplement will specify
whether or not any such
Reserve Account will be
included in the corpus of the
Trust Fund for such Series
and will also specify the manner
of funding the related
Reserve Account and the conditions
under which the amounts in
any such Reserve Account will be
used to make distributions to
holders of Certificates of a
particular class or released
from the related Trust Fund.
C. Pool Insurance Policy.................. A mortgage pool insurance
policy or policies (the "Pool
Insurance Policy") may be
obtained and maintained for
each Series pertaining to
Single Family Loans,
Cooperative Loans or
Contracts, limited in scope,
covering defaults on the
related Single Family Loans,
Cooperative Loans or Contracts
in an initial amount equal
to a specified percentage of
the aggregate principal balance
of all Single Family Loans,
Cooperative Loans or
Contracts included in the Mortgage
Pool as of the Cut-off Date or
such other date as is
specified in the related
Prospectus Supplement.
D. Special Hazard Insurance
Policy................................. In the case of Single Family
Loans, Cooperative Loans or
Contracts, certain physical
risks that are not otherwise
insured against by standard
hazard insurance policies may
be covered by a special
hazard insurance policy or policies
(the "Special Hazard Insurance
Policy"). Unless otherwise
specified in the related
Prospectus Supplement, each
Special Hazard Insurance
Policy will be limited in
scope and will cover losses in an
initial amount equal to the
greatest of (i) a specified
percentage of the aggregate
principal balance of the Single
Family Loans, Cooperative Loans
or Contracts as of the related
Cut-off Date, (ii) twice the unpaid
principal balance as of the related
Cut-off Date of the largest Single
Family Loan, Cooperative Loan
or Contract in the related Mortgage
Pool, or (iii) the aggregate
principal balance of Single Family
Loans, Cooperative Loans or
Contracts as of the Cut-off
Date secured by property in any
single zip code concentration.
E. Bankruptcy Bond........................ A bankruptcy bond or bonds
(the "Bankruptcy Bond") may
be obtained covering certain
losses resulting from action
which may be taken by a
bankruptcy court in connection
with a Single Family Loan,
Cooperative Loan or Contract.
The level of coverage of each
Bankruptcy Bond will be
specified in the related
Prospectus Supplement.
F. FHA Insurance and VA
Guarantee.............................. All or a portion of the
Mortgage Loans in a Mortgage
Pool may be insured by FHA
insurance and all or a
portion of the Single Family Loans
or Contracts in a Mortgage Pool
may be partially guaranteed
by the VA.
G. Other Arrangements..................... Other arrangements as
described in the related
Prospectus Supplement
including, but not limited
to, one or more letters of
credit, financial guaranty
insurance policies or third
party guarantees, interest
rate or other swap
agreements, caps, collars or
floors, may be used to
provide coverage for certain
risks of defaults or losses.
These arrangements may be in
addition to or in
substitution for any forms of
credit support described in
the Prospectus. Any such
arrangement must be
acceptable to each nationally
recognized rating agency that rates
the related Series of
Certificates (the "Rating Agency").
H. Cross Support........................ If specified in the
Prospectus Supplement, the beneficial
ownership of separate groups
of assets or separate Trust
Funds may be evidenced by
separate classes of the
related Series of
Certificates. In such case,
credit support may be
provided by a cross-support feature
which requires that
distributions be made with
respect to certain
Certificates evidencing
beneficial ownership of one
or more asset groups or Trust
Funds prior to distributions
to other Certificates
evidencing a beneficial
ownership interest in other
asset groups or Trust Funds.
If specified in the
Prospectus Supplement, the coverage
provided by one or more forms
of credit support may apply
concurrently to two or more
separate Trust Funds, without
priority among such Trust
Funds, until the credit
support is exhausted. If
applicable, the Prospectus
Supplement will identify the
asset groups or Trust Funds
to which such credit support
relates and the manner of
determining the amount of the
coverage provided thereby and
of the application of such
coverage to the identified
asset groups or Trust Funds.
Advances................................. Unless otherwise specified in
the related Prospectus
Supplement, each Master
Servicer and, if applicable,
each mortgage servicing
institution that services a
Mortgage Loan in a Mortgage
Pool on behalf of a Master
Servicer (a "Sub-Servicer")
will be obligated to advance
amounts corresponding to
delinquent principal and
interest payments on such
Mortgage Loan until the date
on which the related
Mortgaged Property is sold at a
foreclosure sale or the
related Mortgage Loan is
otherwise liquidated. Any
such obligation to make advances
may be limited to amounts due
holders of Senior
Certificates of the related Series,
to amounts deemed to be
recoverable from late
payments or liquidation proceeds,
for specified periods or any
combination thereof, or as
otherwise specified in the
related Prospectus
Supplement. See "Description of the
Certificates--Advances."
Advances will be reimbursable
to the extent described
herein and in the related
Prospectus Supplement.
Optional Termination..................... The Master Servicer, the
holders of the residual
interests in a REMIC, or any
other entity specified in the
related Prospectus Supplement
may have the option to effect
early retirement of a Series
of Certificates through the
purchase of the Mortgage
Assets and other assets in
the related Trust Fund under the
circumstances and in the
manner described in "The
Pooling and Servicing
Agreement--Termination;
Optional Termination."
Legal Investment......................... Unless otherwise specified in
the related Prospectus
Supplement, each class of
Certificates offered hereby
and by the related Prospectus
Supplement 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 certain types
of institutional investors to
the extent provided in SMMEA,
subject, in any case, to any
other regulations which may
govern investments by such
institutional investors. See
"Legal Investment."
Institutions whose investment
activities are subject to
legal investment laws and
regulations or to review by
certain regulatory
authorities may be subject to
restrictions on investment in
the Certificates. Any such
institution should consult
its own legal advisors in
determining whether and to
what extent there may be
restrictions on its ability
to invest in the Certificates.
See "Legal Investment" herein.
Certain Federal Income Tax
Consequences. . . . . . . . . ........... The federal income tax
consequences of the purchase,
ownership and disposition of
the Certificates of each
series will depend on whether
an election is made to treat
the corresponding Trust Fund
(or certain assets of the
Trust Fund) as a "real estate
mortgage investment conduit"
("REMIC") under the Internal
Revenue Code of 1986, as
amended (the "Code").
REMIC. If an election is to
be made to treat the Trust
Fund for a series of
Certificates as a REMIC for
federal income tax purposes,
the related Prospectus
Supplement will specify which
class or classes thereof will
be designated as regular
interests in the REMIC
("REMIC Regular Certificates") and
which class of Certificates
will be designated as the
residual interest in the
REMIC ("REMIC Residual Certifi-
cates").
For federal income tax
purposes, REMIC Regular
Certificates generally will
be treated as debt obligations
of the Trust Fund with
payment terms equivalent to the
terms of such Certificates.
Holders of REMIC Regular
Certificates will be required
to report income with respect
to such Certificates under an
accrual method, regardless of
their normal tax accounting
method. Original issue
discount, if any, on REMIC
Regular Certifi- cates will be
includible in the income of
the Holders thereof as it
accrues, in advance of
receipt of the cash
attributable thereto, which
rate of accrual will be
determined based on a reason-
able assumed prepayment rate.
The REMIC Residual Certificates
generally will not be treated as
evidences of indebtedness for
federal income tax purposes, but
instead, as representing
rights to the taxable income or
net loss of the REMIC.
Each holder of a REMIC
Residual Certificate will be
required to take into account
separately its pro rata por-
tion of the REMIC's taxable
income or loss. Certain
income of a REMIC (referred
to as "excess inclusions")
gener- ally may not be offset by
such a holder's net operating
loss carryovers or other
deduc- tions, and in the case of a
tax-exempt holder of a REMIC
Residual Certificate will be
treated as "unrelated
business taxable income". In certain
situations, particularly in
the early years of a REMIC,
holders of a REMIC Residual
Certificate may have taxable
income, and possibly tax
liabilities with respect to
such income, in excess of
cash distributed to them.
"DISQUALIFIED ORGANIZATIONS",
AS DEFINED IN "CERTAIN
FEDERAL INCOME TAX
CONSEQUENCES--REMIC RESIDUAL
CERTIFICATES--TAX ON DISPOSITION OF
REMIC RESIDUAL CERTIFICATES;
RESTRICTION ON TRANSFER;
HOLDING BY PASS- THROUGH
ENTITIES," ARE PROHIBITED
FROM ACQUIRING OR HOLDING ANY
BENEFICIAL INTEREST IN THE
REMIC RESIDUAL CERTIFICATES.
In certain cases, a transfer
of a REMIC Residual
Certificate will not be
effective for Federal income
tax purposes. See "Certain
Federal Income Tax
Consequences-Transfers of
REMIC Residual Certificates"
and "-Foreign Investors" herein.
GRANTOR TRUST. If no
election is to be made to treat the
Trust Fund for a series of
Certificates ("Non-REMIC
Certificates") as a REMIC,
the Trust Fund will be
classified as a grantor trust for
federal income tax purposes
and not as an association
taxable as a corporation.
Holders of Non- REMIC
Certificates will be treated
for such purposes, subject to
the possible application of
the stripped bond rules, as
owners of undivided interests
in the related Mortgage Loans
and generally will be
required to report as income
their pro rata share of the
entire gross income
(including amounts paid as
reasonable servicing
compensation) from the
Mortgage Loan and will be
entitled, subject to certain
limitations, to deduct their
pro rata share of expenses of
the Trust Fund.
Investors are advised to
consult their tax advisors
and to review "Certain Federal
Income Tax Consequences"
herein and, if applicable, in
the related Prospectus
Supplement.
ERISA Considerations . . . . . .......... A fiduciary of any employee
benefit plan or other
retirement plan or
arrangement subject to the Employee
Retirement Income Security
Act of 1974, as amended
("ERISA"), or Section 4975 of
the Code should carefully
review with its legal
advisors whether the purchase,
holding or disposition of
Certificates could give rise
to a prohibited transaction
under ERISA or the Code or
subject the assets of the
Trust Fund to the fiduciary
investment standards of
ERISA. See "ERISA
Considerations."
<PAGE>
THE TRUST FUND
A Trust Fund for a Series of Certificates will include the Mortgage Assets
consisting of (A) a Mortgage Pool* comprised of (i) Single Family Loans, (ii)
Multifamily Loans, (iii) Cooperative Loans or (iv) Contracts, (B) Agency
Securities, or (C) Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
*
Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interest, as described below, in a single Trust Fund
consisting primarily of the Mortgage Loans in such Mortgage Pool. Similarly, the
term "Pass-Through Rate" will refer to the Pass-Through Rate borne by the
Certificates of one specific Series and the term "Trust Fund" will refer to one
specific Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire beneficial
ownership interest in a Trust Fund which will contain a beneficial ownership
interest in another Trust Fund which will contain the Mortgage Assets. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Assets of
any Trust Fund will consist of Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities but not a combination thereof.
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from the Lenders and conveyed by the Seller to the related
Trust Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program--Underwriting Standards."
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series will be attached to the Agreement
delivered to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS--GENERAL
The real property and Manufactured Homes, as the case may be, which secure
repayment of the Mortgage Loans (the "Mortgaged Properties") may be located in
any one of the fifty states or the District of Columbia, Guam, Puerto Rico or
any other territory of the United States. Certain Mortgage Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the Prospectus Supplement and described below. Mortgage Loans with
certain Loan-to-Value Ratios (as defined herein) and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
or bi-weekly. Unless otherwise specified in the related Prospectus Supplement,
all of the monthly-pay Mortgage Loans in a Mortgage Pool will have payments due
on the first day of each month. The payment terms of the Mortgage Loans to be
included in a Trust Fund will be described in the related Prospectus Supplement
and may include any of the following features or combination thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for
period of time or under certain circumstances and is followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the Mortgage
Rate for a period of time or for the life of the Mortgage Loan, and the
amount of any difference may be contributed from funds supplied by the
seller of the Mortgaged Property or another source or may be treated as
accrued interest added to the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments. Certain Mortgage Loans sometimes called graduated payment
mortgage loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of a portion of the interest due monthly during such period,
and recoup the deferred interest through negative amortization whereby
the difference between the scheduled payment of interest and the amount
of interest actually accrued is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
growing equity mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal. Other Mortgage Loans sometimes
referred to as reverse mortgages may provide for monthly payments to
the borrowers with interest and principal payable when the borrowers
move or die. Reverse mortgages typically are made to older persons who
have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers
of the related Mortgaged Property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards
of the Lender.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the Seller,
with respect to the Mortgage Loans contained in the related Mortgage Pool,
including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., one- to
four-family houses, vacation and second homes, Manufactured Homes, multifamily
apartments or other real property), (iii) the original terms to maturity of the
Mortgage Loans, (iv) the largest original principal balance and the smallest
original principal balance of any of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of any of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the Mortgage Rates or APR's or range of
Mortgage Rates or APR's borne by the Mortgage Loans, and (viii) the geographical
distribution of the Mortgage Loans on a state-by-state basis. If specific
information respecting the Mortgage Loans is not known to the Seller at the time
the related Certificates are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, the "Collateral
Value" of a Mortgaged Property, other than with respect to Contracts and certain
Mortgage Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "Refinance Loan"), is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
Mortgage Loan and (b) the sales price for such property. Unless otherwise
specified in the related Prospectus Supplement, in the case of Refinance Loans,
the Collateral Value of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Collateral Value is no greater than the sum of a fixed percentage of
the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. Unless otherwise
specified in the related Prospectus Supplement, the Collateral Value of a used
Manufactured Home is the least of the sales price, appraised value, and National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building resulting
in an oversupply of rental housing stock or a decrease in employment reducing
the demand for rental units in an area; federal, state or local regulations and
controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness to tenants of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the holders of the Certificates of the related Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Pooling and Servicing Agreement." With respect to Mortgage Loans
serviced by a Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Seller with respect to a Series of Certificates will be to
obtain certain representations and warranties from the Lenders or other third
parties and to assign to the Trustee for such Series of Certificates the
Seller's rights with respect to such representations and warranties. See "The
Pooling and Servicing Agreement--Assignment of Mortgage Assets." The obligations
of each Master Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Agreement
(including its obligation to enforce the obligations of the Sub-Servicers,
Lenders or other third parties as more fully described herein under "Mortgage
Loan Program -- Representations by Lenders; Repurchases" and "The Pooling and
Servicing Agreement--Sub-Servicing by Lenders," "--Assignment of Mortgage
Assets") and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Certificates--Advances." The
obligations of a Master Servicer to make advances may be subject to limitations,
to the extent provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, the Single Family Loans may include
loans or participations therein secured by mortgages or deeds of trust on
condominium units in condominium buildings together with such condominium unit's
appurtenant interest in the common elements of the condominium building. Unless
otherwise specified, the Cooperative Loans will be secured by security interests
in or similar liens on stock, shares or membership certificates issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. Single Family Loans and Cooperative Loans may be
conventional loans (i.e., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, Single Family Loans and Cooperative Loans
will all have individual principal balances at origination of not less than
$25,000 and not more than $1,000,000, and original terms to stated maturity of
15 to 40 years.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. Such loans may be conventional loans or FHA-insured loans, as specified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Multifamily Loans will all have original terms to stated
maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by Cooperatives. The Cooperative owns all the
apartment units in the building and all common areas. The Cooperative is owned
by tenant-stockholders who, through ownership of stock, shares or membership
certificates in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific apartments or units.
Generally, a tenantstockholder of a Cooperative must make a monthly payment to
the Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its mortgage loan, real property taxes, maintenance
expenses and other capital or ordinary expenses. Those payments are in addition
to any payments of principal and interest the tenant-stockholder must make on
any loans to the tenant-stockholder secured by its shares in the Cooperative.
The Cooperative will be directly responsible for building management and, in
most cases, payment of real estate taxes and hazard and liability insurance. A
Cooperative's ability to meet debt service obligations on a Multifamily Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR. Unless
otherwise specified in the related Prospectus Supplement, Contracts will all
have individual principal balances at origination of not less than $10,000 and
not more than $1,000,000 and original terms to stated maturity of 5 to 40 years.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust Fund, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related Trust Fund; and the original maturities of
the Contracts and the last maturity date of any Contract.
AGENCY SECURITIES
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 FHA under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the 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 Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
The GNMA 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.
Federal National Mortgage Association. 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 stockholderowned 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 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.
Federal Home Loan Mortgage Corporation. 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"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. 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 (a "FHLMC Certificate group"). FHLMC Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, 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. 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, interest rates on the mortgage loans underlying
a FHLMC Certificate may exceed the pass-through rate on the FHLMC Certificate by
50 to 100 basis points. 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
will 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 governmentsponsored 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 will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by 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 Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of Mortgage
Loans, or (b) collateralized mortgage obligations secured by Mortgage Loans.
Private Mortgage-Backed Securities will have been issued pursuant to a PMBS
agreement (the "PMBS Agreement"). The seller/servicer of the underlying Mortgage
Loans will have entered into the PMBS Agreement with the PMBS Trustee under the
PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
Mortgage Loans underlying such Private Mortgage-Backed Security. Mortgage Loans
underlying a Private Mortgage-Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub- servicers who may be subject to the
supervision of the PMBS Servicer. Unless otherwise described in the Prospectus
Supplement, 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.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, 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 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. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer 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 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 he 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.
Underlying Loans. The Mortgage Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such Mortgage Loans
may be secured by single family property, multifamily property, Manufactured
Homes or by an assignment of the proprietary lease or occupancy agreement
relating to a specific dwelling within a Cooperative and the related shares
issued by such Cooperative. Except as otherwise specified in the related
Prospectus Supplement, (i) no Mortgage Loan will have had a Loanto-Value Ratio
at origination in excess of 95%, (ii) each Single Family Loan secured by a
Mortgaged Property having a Loan-toValue Ratio in excess of 80% at origination
will be covered by a primary mortgage insurance policy until the principal
balance is reduced to 80%, (iii) each Mortgage Loan will have had an original
term to stated maturity of not less than 5 years and not more than 40 years,
(iv) no Mortgage Loan that was more than 30 days delinquent more than once in
the past 12 months and will not be delinquent as of the Cut-off Date as to the
payment of principal or interest will have been eligible for inclusion in the
assets under the related PMBS Agreement, (v) each Mortgage Loan (other than a
Cooperative Loan) will be required to be covered by a standard hazard insurance
policy (which may be a blanket policy), and (vi) each Mortgage Loan (other than
a Cooperative Loan or a Contract secured by a Manufactured Home) will be covered
by a title insurance policy.
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 underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify (i) the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of the
Mortgage Loans which comprise the underlying assets for the Private
Mortgage-Backed Securities including to the extent available (A) the payment
features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, and (D) the minimum and maximum stated maturities
of the underlying Mortgage Loans at origination, (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities, (iv) the
weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Mortgage Loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying Mortgage Loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which Mortgage Loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee to
be incomplete. The period during which such substitution will be permitted
generally will be indicated in the related Prospectus Supplement. The related
Prospectus Supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the Trust
Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the sale of
the Certificates of each Series to repay short-term loans incurred to finance
the purchase of the Mortgage Assets related to such Certificates, to acquire
certain of the Mortgage Assets to be deposited in the related trust Fund, and/or
to pay other expenses connected with pooling Mortgage Assets and issuing
Certificates. Any amounts remaining after such payments may be used for general
corporate purposes. The Seller expects to sell Certificates in Series from time
to time.
THE SELLER
Bear Stearns Mortgage Securities Inc., the Seller, is a Delaware
corporation organized on October 17, 1991 for the purpose of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller maintains
its principal office at 245 Park Avenue, New York, New York 10167. Its telephone
number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Seller, either directly
or through affiliates, from Lenders. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans so acquired by the Seller will have
been originated in accordance with the underwriting criteria specified below
under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Seller or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders or
manufactured home lenders generally during the period of origination. As to any
Mortgage Loan insured by the FHA or partially guaranteed by the VA, the Lender
will represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Mortgaged Property as collateral. In general, a prospective borrower
applying for a Single Family Loan or a Cooperative Loan or for financing secured
by a Manufactured Home is required to fill out a detailed application designed
to provide to the underwriting officer pertinent credit information. As part of
the description of the borrower's financial condition, the borrower generally is
required to provide a current list of assets and liabilities and a statement of
income and expenses, as well as an authorization to apply for a credit report
which summarizes the borrower's credit history with local merchants and lenders
and any record of bankruptcy. In most cases, an employment verification is
obtained from an independent source (typically the borrower's employer) which
verification reports the length of employment with that organization, the
current salary, and whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts. Underwriting
standards which pertain to the creditworthiness of borrowers seeking Multifamily
Loans will be described in the related Prospectus Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to Cooperative Loans, the appraisal is based
on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a comparable
Manufactured Home. With respect to a Multifamily Loan, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis, was
used. An appraisal employing the income approach to value analyzes a multifamily
project's cashflow, expenses, capitalization and other operational information
in determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts, once
all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a leasehold
interest in a real property, the title to which is held by a third party lessor,
the Lender will represent and warrant, among other things, that the remaining
term of the lease and any sublease is at least five years longer than the
remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase.
QUALIFICATIONS OF LENDERS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will be required to satisfy the qualifications set forth herein. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Unless otherwise
specified in the Prospectus Supplement, each Lender must be a seller/servicer
approved by either FNMA or FHLMC, and each Lender must be a mortgagee approved
by the HUD or an institution the deposit accounts in which are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or
Agreement, each Lender will have made representations and warranties in respect
of the Mortgage Loans sold by such Lender and evidenced by a Series of
Certificates. Such representations and warranties generally include, among other
things: (i) 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 Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first 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
Agreement) and that the Mortgaged Property was free from damage and was in good
repair; (iv) that there were no delinquent tax or assessment liens against the
Mortgaged Property, (v) that no required payment on a Mortgage Loan was more
than thirty days delinquent; and (vi) that each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable state and federal laws
and regulations in all material respects.
Unless otherwise specified in the related Prospectus Supplement, all of the
representations and warranties of a Lender in respect of a Mortgage Loan will
have been made as of the date on which such Lender sold the Mortgage Loan to the
Seller or one of its affiliates. A substantial period of time may have elapsed
between such date and the date of initial issuance of the Series of Certificates
evidencing an interest in such Mortgage Loan. Since the representations and
warranties of a Lender do not address events that may occur following the sale
of a Mortgage Loan by such Lender, its repurchase obligation described below
will not arise if the relevant event that would otherwise have given rise to
such an obligation with respect to a Mortgage Loan occurs after the date of sale
of such Mortgage Loan by such Lender to the Seller or its affiliates. If the
Master Servicer is also a Lender with respect to a particular Series, such
representations will be in addition to the representations and warranties, if
any, made by the Master Servicer in its capacity as a Master Servicer.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or the Trustee, if the Master Servicer is the Lender, will promptly
notify the relevant Lender of any breach of any representation or warranty made
by it in respect of a Mortgage Loan which materially and adversely affects the
interests of the Certificateholders in such Mortgage Loan. Unless otherwise
specified in the related Prospectus Supplement, if such Lender cannot cure such
breach within 60 days after notice from the Master Servicer or the Trustee, as
the case may be, then such Lender will be obligated to repurchase such Mortgage
Loan from the Trust Fund at a price (the "Purchase Price") equal to the unpaid
principal balance thereof as of the date of the repurchase plus accrued interest
thereon to the first day of the month following the month of repurchase at the
Mortgage Rate (less any amount payable as related servicing compensation if the
Lender is the Master Servicer) or such other price as may be described in the
related Prospectus Supplement. Except in those cases in which the Master
Servicer is the Lender, the Master Servicer will be required under the
applicable Agreement to enforce this obligation for the benefit of the Trustee
and the holders of the Certificates, following the practices it would employ in
its good faith business judgment were it the owner of such Mortgage Loan. This
repurchase obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by a Lender. Certain
rights of substitution for defective Mortgage Loans may be provided with respect
to a Series in the related Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer is
the Lender) will be obligated to purchase a Mortgage Loan if a Lender defaults
on its obligation to do so, and no assurance can be given that Lenders will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under "The Pooling and Servicing Agreement--Assignment of Mortgage
Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Certificateholders. In such cases, the third party will
be obligated to purchase a Mortgage Loan upon a breach of such representations
and warranties, and the Lender will not be obligated to purchase a Mortgage Loan
if the third party defaults on its obligation to do so.
The Lender and any third party which conveyed the Mortgage Loans to the
Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the Mortgage
Loans. Any arrangements for the assignment of representations and the repurchase
of Mortgage Loans must be acceptable to the Rating Agency rating the related
Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer may,
at its option, purchase from the Trust Fund any Mortgage Loan which is
delinquent in payment by 91 days or more. Any such purchase shall be at such
price as may be described in the related Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the related Cut-off Date, among the Seller, one or more Master Servicers
and the Trustee for the benefit of the holders of the Certificates of such
Series. The provisions of each Agreement will vary depending upon the nature of
the Certificates to be issued thereunder and the nature of the related Trust
Fund. A form of an Agreement is an exhibit to the Registration Statement of
which this Prospectus is a part. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Certificates will describe any provision of the Agreement relating to
such Series that materially differs from the description thereof contained in
this Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Seller will provide a copy of the Agreement (without exhibits)
relating to any Series without charge upon written request of a holder of a
Certificate of such Series addressed to Bear Stearns Mortgage Securities Inc.,
245 Park Avenue, New York, New York 10167.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in fully registered form only, in the
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the Mortgage Assets included in any other Trust Fund established by the Seller.
The Certificates will not represent obligations of the Seller or any affiliate
of the Seller. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the Prospectus
Supplement ("Retained Interest")), (ii) such assets as from time to time are
required to be deposited in the related Protected Account, Certificate Account
or any other accounts established pursuant to the Agreement (collectively, the
"Accounts"); (iii) property which secured a Mortgage Loan and which is acquired
on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure and (iv) any Primary Insurance Policies, FHA insurance (the "FHA
Insurance"), VA guarantees (the "VA Guarantees"), other insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may include one or more of the following: reinvestment income on payments
received on the Mortgage Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a financial guaranty insurance policy, third party guarantees
or similar instruments or other agreements. If provided in the related
Agreement, a certificate administrator may be obligated to perform certain
duties in connection with the administration of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that receive certain preferential
treatment with respect to one or more other classes of Certificates of such
Series. Certain Series or classes of Certificates may he covered by insurance
policies or other forms of credit enhancement, in each case as described herein
and in the related Prospectus Supplement. Distributions on one or more classes
of a Series of Certificates may be made prior to one or more other classes,
after the occurrence of specified events, in accordance with a schedule or
formula, on the basis of collections from designated portions of the Mortgage
Assets in the related Trust Fund or on a different basis, in each case, as
specified in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (i.e, monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the Prospectus
Supplement (each, a "Record Date"). Distributions will be made by check or money
order mailed to the persons entitled thereto at the address appearing in the
register maintained for holders of Certificates (the "Certificate Register") or,
if specified in the related Prospectus Supplement, in the case of Certificates
that are of a certain minimum denomination, upon written request by the
Certificateholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee or other person specified in
the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
DISTRIBUTIONS ON CERTIFICATES
General. In general, the method of determining the amount of distributions
on a particular Series of Certificates will depend on the type of credit
support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal and interest on the Certificates will
be made by the Trustee out of, and only to the extent of, funds in the related
Certificate Account, including any funds transferred from any Reserve Account
and funds received as a result of credit enhancement. As between Certificates of
different classes and as between distributions of interest and principal and, if
applicable, between distributions of prepayments of principal and scheduled
payments of principal, distributions made on any Distribution Date will be
applied as specified in the Prospectus Supplement. Unless otherwise specified in
the Prospectus Supplement, distributions to any class of Certificates will be
made pro rata to all Certificateholders of that class.
Available Funds. All distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust
Fund received by the Master Servicer after the Cut-off Date and on or
prior to the day of the month of the related Distribution Date
specified in the Prospectus Supplement (the "Determination Date")
except:
(a) all payments which were due on or before the
Cut-off Date;
(b) all Liquidation Proceeds, all Insurance Proceeds,
all Principal Prepayments (each defined herein) and all
proceeds of any Mortgage Loan purchased by a Lender or any
other entity pursuant to the Agreement that were received
after the prepayment period specified in the Prospectus
Supplement and all related payments of interest representing
interest for any period after such prepayment period;
(c) all scheduled payments of principal and
interest due on a date or dates subsequent to the
first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as
late payments of principal or interest or other amounts
required to be paid by the mortgagors (the "Mortgagors"), but
only to the extent of any unreimbursed advance in respect
thereof made by the Master Servicer (including the related
Sub-Servicers);
(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under "Advances"
below, for advances made by the Master Servicer and advances
made by Sub-Servicers that were deposited into the Certificate
Account, and amounts representing reimbursement for certain
other losses and expenses incurred by the Master Servicer or
the Seller and described below or in the related Agreement;
and
(f) that portion of each collection of interest on a
particular Mortgage Loan in such Trust Fund which represents
servicing compensation payable to the Master Servicer or
Retained Interest which is to be retained from such collection
or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans
purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master
Servicer (including Sub-Servicers) as described under
"Advances" below and deposited by it in the Certificate
Account; and
(iii) if applicable, amounts withdrawn from a Reserve Account
or received in connection with other credit support.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Current Principal Amount
(defined herein) (or, in the case of Certificates entitled only to distributions
allocable to interest, the aggregate notional principal balance) of each class
of Certificates entitled to interest from the date, at the PassThrough Rate and
for the periods specified in the Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Certificates entitled to interest (other than a class of Certificates
that provides for interest that accrues, but is not currently payable, referred
to hereafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the Prospectus Supplement until the aggregate
Current Principal Amount of the Certificates of such class has been distributed
in full or, in the case of Certificates entitled only to distributions allocable
to interest, until the aggregate notional principal balance of such Certificates
is reduced to zero or for the period of time designated in the Prospectus
Supplement. The original Current Principal Amount of each Certificate will equal
the aggregate distributions allocable to principal to which such Certificate is
entitled. Unless otherwise specified in the Prospectus Supplement, distributions
allocable to interest on each Certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional principal
balance of such Certificate. The notional principal balance of a Certificate
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Current Principal Amount of
such class of Certificates on that Distribution Date. Unless otherwise specified
in the Prospectus Supplement, distributions of interest on each class of Accrual
Certificates will commence only after the occurrence of the events specified in
the Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement, prior to such time, the beneficial ownership interest of such class
of Accrual Certificates in the Trust Fund, as reflected in the aggregate Current
Principal Amount of such class of Accrual Certificates, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Certificates during the preceding interest accrual period but that was
not required to be distributed to such class on such Distribution Date. Any such
class of Accrual Certificates will thereafter accrue interest on its outstanding
Current Principal Amount as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate "Current Principal Amount" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Current Principal Amount of such class of Certificates specified in the
Prospectus Supplement, reduced by all distributions and losses reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates. The Prospectus Supplement will specify the method by which the
amount of principal to be distributed on the Certificates on each Distribution
Date will be calculated and the manner in which such amount will be allocated
among the classes of Certificates entitled to distributions of principal.
If so provided in the Prospectus Supplement, one or more classes of Senior
Certificates will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in the
Prospectus Supplement. Any such allocation of Principal Prepayments to such
class or classes of Certificateholders will have the effect of accelerating the
amortization of such Senior Certificates while increasing the interests
evidenced by the Subordinated Certificates in the Trust Fund. Increasing the
interests of the Subordinated Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinated Certificates. See "Credit
Enhancement--Subordination."
Unscheduled Distributions. If specified in the Prospectus Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in the Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the Prospectus Supplement if, due to substantial payments of
principal (including Principal Prepayments) on the Mortgage Assets, low rates
then available for reinvestment of such payments or both, the Trustee or the
Master Servicer determines, based on the assumptions specified in the Agreement,
that the amount anticipated to be on deposit in the Certificate Account on the
next Distribution Date, together with, if applicable, any amounts available to
be withdrawn from any Reserve Account, may be insufficient to make required
distributions on the Certificates on such Distribution Date. Unless otherwise
specified in the Prospectus Supplement, the amount of any such unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
Certificates on the next Distribution Date. Unless otherwise specified in the
Prospectus Supplement, all unscheduled distributions will include interest at
the applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the same
priority and manner as distributions of principal on the Certificates would have
been made on the next Distribution Date, and with respect to Certificates of the
same class, unscheduled distributions of principal will be made on a pro rata
basis. Notice of any unscheduled distribution will be given by the Trustee prior
to the date of such distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers 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 and were not advanced by any
Sub-Servicer, subject to the Master Servicer'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 Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the Mortgage
Loans.
In making advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If advances are
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master 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 Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Mortgage Loans with respect to which such advances were made (e.g.,
late payments made by the related Mortgagor, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Mortgage Loan purchased by a Lender
under the circumstances described hereinabove). Advances by the Master Servicer
(and any advances by a Sub-Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer) from cash otherwise distributable to
Certificateholders (including the holders of Senior Certificates) at such time
as the Master Servicer determines that any such advances previously made are not
ultimately recoverable from the proceeds with respect to the specific Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a specific Mortgage Loan. The Master Servicer also will
be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the
Agreement. If specified in the related Prospectus Supplement, the obligations of
the Master Servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in such
Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement or
Agreement, the Master 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:
(i) 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;
(ii) the amount of such distribution allocable to
interest;
(iii) the amount of any advance by the Master
Servicer;
(iv) 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 Senior
Certificateholders;
(v) the outstanding Current Principal Amount or notional
principal balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) if applicable, the percentage of principal payments on
the Mortgage Loans, if any, which such class will be entitled to
receive on the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate,
the Pass-Through Rate applicable to the distribution on the
Distribution Date;
(viii) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month and (b) two
or more months;
(ix) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure, and if such real
estate secured a Multifamily Loan, such additional information as may
be specified in the related Prospectus Supplement; and
(x) 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 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 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.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates registered
in the name of Cede & Co. ("Cede"), the nominee for The Depository Trust Company
("DTC"). 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 ("UCC")
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. 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 their accounts, 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. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the Certificates
from the Trustee through DTC and its 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. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its 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 Certificates and is required to
receive and transmit payments of principal of and interest of 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 such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Certificateholders
or their nominees ("Definitive Certificates"), rather than to DTC or its nominee
only under the events specified in the related Agreement. Such events may
include the following: (i) the Seller advises the Trustee in writing that DTC is
no longer willing or able to properly discharge its responsibilities as
Depository with respect to the Certificates, and the Trustee or the Seller is
unable to locate a qualified successor, (ii) the Seller, at its option, elects
to terminate the book-entry system through DTC, or (iii) after the occurrence of
an Event of Default (defined herein), Certificateholders representing not less
than 50% of the aggregate Current Principal Amount of the Certificates advise
the Trustee and 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. Upon the occurrence of any of the events
specified in the related Agreement, DTC will be required to notify all
Participants of the availability through DTC of Definitive Certificates. Upon
surrender by DTC of the certificates representing the Certificates and
instruction for re-registration, the Trustee will issue the Certificates in the
form of Definitive Certificates, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders. Thereafter,
payments of principal of and interest on the Certificates will be made by the
Trustee directly to Certificateholders in accordance with the procedures set
forth herein and in the Agreement. The final distribution of any Certificate
(whether Definitive Certificates or Certificates registered in the name of
Cede), however, will be made only upon presentation and surrender of such
Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of (i) the subordination of
one or more classes of the Certificates of such Series, (ii) the use of a Pool
Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond, FHA
Insurance, VA Guarantees, Reserve Accounts, a letter of credit, a limited
financial guaranty insurance policy, other third party guarantees, interest rate
or other swap agreements, caps, collars or floors, another method of credit
enhancement described in the related Prospectus Supplement, or the use of a
cross-support feature, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, holders of one or more
classes of Certificates will bear their allocable share of deficiencies. If a
form of credit enhancement applies to several classes of Certificates, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Unless otherwise
specified in the Prospectus Supplement, coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Seller if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates.
SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination thereof
that otherwise would have been payable to one or more classes of Subordinated
Certificates of a Series will instead be payable to holders of one or more
classes of Senior Certificates under the circumstances and to the extent
specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Loans and
losses on defaulted Mortgage Loans 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 Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans which must be borne by the Subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Loans or aggregate losses in respect of such Mortgage
Loans 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 would experience losses
on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
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 established with the Trustee. If so
specified in the 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 Prospectus Supplement, amounts on deposit in
the Reserve Account may be released to the holders of the class of Certificates
specified in the Prospectus Supplement at the times and under the circumstances
specified in the Prospectus Supplement.
If so specified in the Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the 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 Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool of
Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy will
be obtained for the Mortgage Pool and issued by the insurer (the "Pool Insurer")
named in such 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 or Cooperative Loans in the Mortgage Pool in an amount
specified in such Prospectus Supplement. As more fully described below, the
Master Servicer will present claims thereunder to the Pool Insurer on behalf of
itself, the Trustee and the holders of the Certificates. The Mortgage Pool
Insurance Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the Prospectus Supplement, a Pool Insurance Policy will
not cover losses due to a failure to pay or denial of a claim under a Primary
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, 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 Mortgage
Loan 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 Mortgage Rate to the date of purchase and certain expenses incurred by the
Master 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 Mortgage
Loan plus accrued and unpaid interest at the Mortgage Rate to the date of
payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under the related Primary
Insurance Policy. If any Mortgaged Property securing a defaulted Mortgage Loan
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 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 Mortgage Loan after reimbursement of the Master 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 Mortgage Loan, 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 related Prospectus supplement, an endorsement to the Pool
Insurance Policy, a bond or other credit support may cover fraud in connection
with the origination of Mortgage Loans. 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 Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan if
the breach cannot be cured by such Lender. No Pool Insurance Policy will cover
(and many Primary Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy 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 as well as accrued interest on delinquent Mortgage Loans 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 pool of Contracts will
be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage 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 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 "The Pooling and Servicing
Agreement-Hazard Insurance". Each Special Hazard Insurance Policy 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 Mortgage Loan 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
Mortgage Loan (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,
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 Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is 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
Mortgage Loan 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.
Unless otherwise specified in the related Prospectus Supplement, since each
Special Hazard Insurance Policy will be designed to permit full recovery under
the Pool Insurance Policy in circumstances in which such recoveries would
otherwise be unavailable because property has been damaged by a cause not
insured against by a standard hazard policy and thus would not be restored, each
Agreement will provide that, if the related Pool Insurance Policy shall have
been terminated or been exhausted through payment of claims, the Master Servicer
will be under no further obligation to maintain such Special Hazard Insurance
Policy.
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized 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 rating of
such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust Fund to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized 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 Bankruptcy Bond. The amount of any
Bankruptcy Bond 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 rating of such Certificates by any such
rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a Series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such loan.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHAinsured Single Family Loan,
the Master Servicer or any SubServicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master Servicer or
any Sub-Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the mortgagor. Such plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with such payments to be made up on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or beyond the maturity
date. In addition, when a default caused by such circumstances is accompanied by
certain other criteria, HUD may provide relief by making payments to the Master
Servicer or any Sub-Servicer in partial or full satisfaction of amounts due
under the Mortgage Loan (which payments are to be repaid by the mortgagor to
HUD) or by accepting assignment of the loan from the Master Servicer or any
Sub-Servicer. With certain exceptions, at least three full monthly installments
must be due and unpaid under the Mortgage Loan, and HUD must have rejected any
request for relief from the mortgagor before the Master Servicer or any
Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Single Family Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
and, upon assignment, from the date of assignment, to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Single Family Loan guaranteed by the VA
will have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As of
January 1, 1993, the maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on the
guarantee is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guarantee
exceed the amount of the original guarantee. The VA may, at its option and
without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such
a mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, a dollar amount per apartment unit established from time to time by
HUD or, at the discretion of the Secretary of HUD, 25% of the value of the
property. In general the loan term may not exceed 35 years and a loan to value
ratio of no more than 85% is required for the purchase of a project and 70% for
the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of interest
from the date of the default.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
demand notes, certificates of deposit or a combination thereof in the aggregate
amount specified in the Prospectus Supplement will be deposited by the Master
Servicer or Seller on the date specified in the Prospectus Supplement in one or
more Reserve Accounts established with the Trustee. Such cash and the principal
and interest payments on such other instruments will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust Fund, to pay the expenses
of the Trust Fund or for such other purposes specified in the Prospectus
Supplement. Whether or not the Master Servicer or Seller has any obligation to
make such a deposit, certain amounts to which the Subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested, to the extent acceptable to
the applicable Rating Agency, in 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, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Unless otherwise specified in the
Prospectus Supplement, any instrument deposited in the Reserve Account will name
the Trustee, in its capacity as trustee for the holders of the Certificates, as
beneficiary and will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may include
in lieu of some or all of the foregoing or in addition thereto letters of
credit, financial guaranty insurance policies, third party guarantees, and other
arrangements for maintaining timely payments or providing additional protection
against losses on the assets included in such Trust Fund, paying administrative
expenses, or accomplishing such other purpose as may be described in the
Prospectus Supplement. The Trust Fund may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. If any class of Certificates has
a floating interest rate, or if any of the Mortgage Assets has a floating
interest rate, the Trust Fund may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
CROSS SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund. The Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided hereby and of the application of such coverage
to the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Mortgage
Pool will vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise
specified in the related Prospectus Supplement, Single Family Loans, Cooperative
Loans and Contracts may be prepaid without penalty in full or in part at any
time. Multifamily Loans may prohibit prepayment for a specified period after
origination, may prohibit partial prepayments entirely, and may require the
payment of a prepayment penalty upon prepayment in full or in part.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans, Cooperative Loans and Contracts will contain
due-on-sale provisions permitting the mortgagee or holder of the Contract to
accelerate the maturity of the Mortgage Loan or Contract upon sale or certain
transfers by the mortgagor or obligor of the underlying Mortgaged Property. As
described in the related Prospectus Supplement, conventional Multifamily Loans
may contain due-on-sale provisions, due-on-encumbrance provisions, or both.
Mortgage Loans insured by the FHA, and Single Family Loans and Contracts
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on such Mortgage Loans may
be lower than that of conventional Mortgage Loans bearing comparable interest
rates. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes that it is entitled to do so under applicable
law; provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Pooling and Servicing Agreement--Collection
Procedures" and "Certain Legal Aspects of the Mortgage Loans" for a description
of certain provisions of each Agreement and certain legal developments that may
affect the prepayment experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative Loan,
the Mortgagor is charged interest on the principal amount of the Mortgage Loan
so prepaid only for the number of days in the month actually elapsed up to the
date of the prepayment rather than for a full month. Similarly, upon liquidation
of a Mortgage Loan, interest accrues on the principal amount of the Mortgage
Loan only for the number of days in the month actually elapsed up to the date of
liquidation rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, the effect of prepayments in full and
liquidations will be to reduce the amount of interest passed through in the
following month to holders of Certificates because interest on the principal
amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment or liquidation. Interest shortfalls also could result from the
application of the Solders' and Sailors' Civil Relief Act of 1940, as amended,
as described under "Certain Legal Aspects of the Mortgage Loans-Soldiers' and
Sailors' Civil Relief Act" herein. Partial prepayments in a given month may be
applied to the outstanding principal balances of the Mortgage Loans so prepaid
on the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through in such month. Prepayment penalties collected with respect to
Multifamily Loans will be distributed to the holders of Certificates, or to
other persons entitled thereto, as described in the related Prospectus
Supplement.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or another person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust Fund
thereby effecting earlier retirement of the related Series of Certificates. See
"The Pooling and Servicing Agreement--Termination; Optional Termination."
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical, social,
tax, legal and additional factors. The rate of prepayment on Single Family
Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the enforcement of due-on-sale clauses and other
servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage loans,
graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage loans.
The rate of prepayment on Multifamily Loans may be affected by other factors,
including Mortgage Loan terms (e.g., the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and the relative tax benefits
associated with the ownership of income-producing real property.
The timing of payments on the Mortgage Assets may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on each Mortgage Loan from the
first day of the month, the distribution of such interest will not be made
earlier than a specified date in the month following the month of accrual.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Certificates purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Certificate will yield
its Pass-Through Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the Prospectus Supplement
could significantly affect principal prepayments at any time and over the lives
of the Certificates. The relative contribution of the various factors affecting
prepayment may also vary from time to time. There can be no assurance as to the
rate of payment of principal of the Mortgage Assets at any time or over the
lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates of a Series, the Seller will cause the Mortgage Loans comprising
the related Trust Fund to be sold and assigned to the Trustee, together with all
principal and interest received by or on behalf of the Seller on or with respect
to such Mortgage Loans after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date and other than any Retained Interest specified
in the Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Seller in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Agreement. Such schedule will include information as to
the outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate or APR, the current scheduled monthly payment of principal and interest,
the maturity of the loan, the Loan-to-Value Ratio at origination and certain
other information.
In addition, unless otherwise specified in the Prospectus Supplement, the
Seller will deliver or cause to be delivered to the Trustee (or to the custodian
hereinafter referred to) as to each Mortgage Loan, among other things, (i) the
mortgage note or Contract endorsed without recourse in blank or to the order of
the Trustee, (ii) in the case of Single Family Loans or Multifamily Loans, the
mortgage, deed of trust or similar instrument (a "Mortgage") with evidence of
recording indicated thereon (except for any Mortgage not returned from the
public recording office, in which case the Seller will deliver or cause to be
delivered a copy of such Mortgage together with a certificate that the original
of such Mortgage was or will be delivered to such recording office), (iii) an
assignment of the Mortgage or Contract to the Trustee, which assignment will be
in recordable form in the case of a Mortgage assignment, and (iv) such other
security documents as may be specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, (i) in the case
of Single Family Loans or Multifamily Loans, the Seller or Master Servicer will
promptly cause the assignments of the related Mortgage Loans to be recorded in
the appropriate public office for real property records, except in the
discretion of the Seller in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such loans against the claim of any subsequent transferee
or any successor to or creditor of the Seller or the originator of such loans,
and (ii) in the case of Contracts, the Seller or Master Servicer will promptly
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the Seller
will cause to be delivered to the Trustee (or to the custodian hereinafter
referred to), the related original cooperative note endorsed without recourse in
blank or to the order of the Trustee, the original security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Seller will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the Trustee's security interest
in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Seller, and the Master Servicer will
notify the related Lender. Unless otherwise specified in the related Prospectus
Supplement, if the Lender or an entity which sold the Mortgage Loan to the
Lender cannot cure the omission or defect within 60 days after receipt of such
notice, the Lender or such entity will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price. There can be no assurance
that a Lender or such entity will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under "Mortgage Loan Program--Representations by Lenders;
Repurchases," neither the Master Servicer nor the Seller will be obligated to
purchase such Mortgage Loan if the Lender or such entity defaults on its
purchase obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Seller, as the case
may be. Unless otherwise specified in the related Prospectus Supplement, this
purchase obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. Certain rights of substitution for defective Mortgage
Loans may be provided with respect to a Series in the related Prospectus
Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Assignment of Agency Securities. The Seller will cause Agency Securities to
be registered in the name of the Trustee or its nominee, and the Trustee
concurrently will execute, countersign and deliver the Certificates. Each Agency
Security will be identified in a schedule appearing as an exhibit to the
Agreement, which will specify as to each Agency Security the original principal
amount and outstanding principal balance as of the Cut-off Date, the annual
pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Seller will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund-Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement or provided
in the Agreement, each Master Servicer and Sub-Servicer servicing the Mortgage
Loans 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 Mortgage Assets (the "Protected Account"), which must be either (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 each Rating Agency rating the Series of
Certificates, (ii) an account or accounts the deposits in which are fully
insured by 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 Permitted Investments held in the name of the
Trustee, or (iv) an account or accounts otherwise acceptable to each Rating
Agency. A Protected Account may be maintained as an interest bearing account or
the funds held therein may be invested pending each succeeding Distribution Date
in Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the related Master Servicer or SubServicer or its designee will be
entitled to receive any such interest or other income earned on funds in the
Protected Account as additional compensation and will be obligated to deposit in
the Protected Account the amount of any loss immediately as realized. The
Protected Account may be maintained with the Master Servicer or Sub-Servicer or
with a depository institution that is an affiliate of the Master Servicer or
Sub-Servicer, provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer will be required to deposit or cause
to be deposited in the Protected Account for each Trust Fund on a daily basis,
to the extent applicable and unless otherwise specified in the related
Prospectus Supplement or provided in the Agreement, 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 Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage
Loans, net of applicable servicing compensation;
(iii) to the extent specified in the related 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 Sub-Servicer, if any) of the title insurance
policies, 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 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
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, 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;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "Mortgage Loan Program--Representations by Lenders;
Repurchases" or "--Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described under
"--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or SubServicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the
Protected Account pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Certificates, a
Protected Account maintained by a Master Servicer or Sub-Servicer may commingle
funds from the Mortgage Loans deposited in the Trust Fund with similar funds
relating to other mortgage loans which are serviced or owned by the Master
Servicer or Sub-Servicer. The Agreement may require that certain payments
related to the Mortgage Assets be transferred from a Protected Account
maintained by a Master Servicer or Sub-Servicer into another Account maintained
under conditions acceptable to each 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
each Rating Agency (the "Certificate Account"). The Certificate Account may be
maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. If
there is more than one Master Servicer for the rated Series of Certificates,
there may be a separate Certificate Account or a separate subaccount in a single
Certificate Account for funds received from each Master Servicer. Unless
otherwise specified in the Prospectus Supplement, the related Master Servicer or
its designee will be entitled to receive any interest or other income earned on
funds in the Certificate Account or subaccount of the Certificate Account as
additional compensation and will be obligated to deposit in the Certificate
Account or subaccount the amount of any loss immediately as realized. The
Trustee will be required to deposit into the Certificate Account on the business
day received all funds received from the Master Servicer for deposit into the
Certificate Account and any other amounts required to be deposited into the
Certificate Account pursuant to the Agreement. In addition to other purposes
specified in the Agreement, the Trustee will be required to make withdrawals
from the Certificate 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 Mortgage Assets may be withdrawn from the
Certificate Account included in the latter Trust Fund and deposited into another
Account included in the former Trust Fund prior to transmittal to Certificate-
holders with a beneficial ownership interest in the former Trust Fund. If
specified in the related Prospectus Supplement, the Protected Account and the
Certificate Account may be combined into a single Certificate Account.
SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing entity
may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant to which a Series of Certificates
is issued will provide that, if for any reason the Master Servicer for such
Series of Certificates is no longer the Master Servicer of the related Mortgage
Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but, unless otherwise specified
in the Prospectus Supplement, such Sub-Servicer will remain obligated under the
related Sub-Servicing Agreement. Each Sub-Servicer will be required to perform
the customary functions of a servicer of mortgage loans. Such functions
generally include collecting payments from mortgagors or obligors and remitting
such collections to the Master Servicer; maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of mortgagors or obligors for payment of taxes, insurance
and other items required to be paid by the mortgagor or obligor pursuant to the
related Mortgage Loan; processing assumptions or substitutions, although, unless
otherwise specified in the related Prospectus Supplement, the Master Servicer is
generally required to exercise due-on-sale clauses to the extent such exercise
is permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; maintaining
accounting records relating to the Mortgage Loans; and, to the extent specified
in the related Prospectus Supplement, maintaining additional insurance policies
or credit support instruments and filing and settling claims thereunder. A
Sub-Servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on Mortgage Loans, as described more
fully above under "--Payments on Mortgage Loans; Deposits to Accounts", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the mortgage note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Mortgage Loans if
the Sub-Servicer elects to release the servicing of such Mortgage Loans to the
Master Servicer. See "--Servicing and Other Compensation and Payment of
Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Sub-Servicer in its servicing capacity.
Each Sub-Servicer will be required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Sub-Servicing Agreement for the entire term of such Mortgage
Loan, unless the Sub-Servicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
may terminate a Sub-Servicing Agreement without cause, upon written notice to
the Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement or, upon termination of the Sub-Servicing Agreement, the Master
Servicer may act as servicer of the related Mortgage Loans or enter into new
Sub-Servicing Agreements with other sub-servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and warranties
of the Sub-Servicer which it replaces. Each Sub-Servicer must be a Lender or
meet the standards for becoming a Lender or have such servicing experience as to
be otherwise satisfactory to the Master Servicer and the Seller. The Master
Servicer will make reasonable efforts to have the new Sub-Servicer assume
liability for the representations and warranties of the terminated Sub-Servicer,
but no assurance can be given that such an assumption will occur. In the event
of such an assumption, the Master Servicer may in the exercise of its business
judgment release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement or
new Sub-Servicing Agreements may contain provisions different from those which
are in effect in the original Sub-Servicing Agreement. However, each Agreement
will provide that any such amendment or new agreement may not be inconsistent
with or violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Mortgage
Loans and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to mortgage loans that are comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Pool Insurance Policy, Primary Insurance
Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance Policy, Bankruptcy
Bond or alternative arrangements, if applicable, arrange with a Mortgagor a
schedule for the liquidation of delinquencies running for no more than 125 days
after the applicable due date for each payment or such other period as is
specified in the Agreement. Both the Sub-Servicer and the Master Servicer remain
obligated to make advances during any period of such an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will, to
the extent it has knowledge of such conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten to
impair any recovery under any related Primary Insurance Policy. If these
conditions are not met or if such Mortgage Loan is insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Mortgage Loan and, to the extent permitted
by applicable law, the mortgagor remains liable thereon; provided, however, that
the Master Servicer will not enter into such an agreement if it would jeopardize
the tax status of the Trust Fund. Any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by or
on behalf of the Master Servicer as additional servicing compensation. In the
case of Multifamily Loans, and unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will agree to exercise any right it
may have to accelerate the maturity of a Multifamily Loan to the extent it has
knowledge of any further encumbrance of the related Mortgaged Property effected
in violation of any due-on-encumbrance clause applicable thereto. See "Certain
Legal Aspects of the Mortgage Loans--Due-on-Sale Clauses." In connection with
any such assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans." This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each Single
Family Loan, Multifamily Loan or Contract 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. Such coverage will be in
an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
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 or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Mortgage Loans 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 will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage 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 Mortgage Loan by fire, lightning, explosion, smoke, windstorm and
hail, riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the Mortgage
Loans may have been underwritten by different insurers under different state
laws in accordance with different applicable forms and therefore may not contain
identical terms and conditions, the basic 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 reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the Mortgaged Property
securing a Mortgage Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans 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 the Master Servicer may cause to be maintained on
the improvements securing the Mortgage Loans 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 "Credit Enhancement--Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Insurance Policies. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master 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 Agreement unless the replacement Primary Insurance
Policy for such canceled 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
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan 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 Mortgage Loan, (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 borrowers. 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 Mortgage Loans, including misrepresentation by
the originator, borrower or other persons involved in the origination of the
Mortgage Loan; (ii) failure to construct the Mortgaged Property subject to the
Mortgage Loan in accordance with specified plans; (iii) physical damage to the
Mortgaged Property; and (d) the related Master Servicer not being approved as a
servicer by the Primary Insurer.
Recoveries Under a Primary Insurance Policy. As conditions precedent to the
filing of or payment of a claim under a Primary Insurance Policy covering a
Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a Sub-Servicer,
the Sub-Servicer, on behalf of itself, the Trustee and Certificateholders, will
present claims to the Primary Insurer, and all collections thereunder will be
deposited in the Protected Account maintained by the Sub-Servicer. In all other
cases, the Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the Primary Insurer under each
Primary Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Insurance Policy and, when the Mortgaged
Property has not been restored, the hazard insurance policy, are to be deposited
in the Protected Account, subject to withdrawal as heretofore described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Insurance Policy, if any, the Master Servicer
is not required to expend its own funds to restore the damaged Mortgaged
Property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of such Mortgage Loan plus interest accrued thereon that is
payable to Certificateholders, the Trust Fund will realize a loss in the amount
of such difference plus the aggregate of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Protected Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Protected Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. See "Credit Enhancement."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
described in the Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Mortgage Loan, such amounts will decrease
as the Mortgage Loans amortize. In addition to primary compensation, the Master
Servicer or the Sub-Servicers will be entitled to retain all assumption fees and
late payment charges, to the extent collected from Mortgagors, and, unless
otherwise provided in the related Prospectus Supplement or Agreement, any
prepayment penalties and any interest or other income which may be earned on
funds held in any Accounts. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent specified
in the related Agreement, the Master Servicer will pay from its servicing
compensation certain expenses incurred in connection with its servicing of the
Mortgage Loans, including, without limitation, payment in certain cases of
premiums for insurance policies, guarantees, sureties or other forms of credit
enhancement, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Certificateholders, and payment of certain other
expenses. The Master Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and Sellers under certain
limited circumstances. In addition, as indicated in the preceding section, the
Master Servicer will be entitled to reimbursement for certain expenses incurred
by it in connection with any defaulted Mortgage Loan as to which it has
determined that all recoverable Liquidation Proceeds and Insurance Proceeds have
been received.
EVIDENCE AS TO COMPLIANCE
Each 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 or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans, agency
securities or private mortgage-backed securities, under pooling and servicing
agreements substantially similar to each other (including the related 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 or the Audit Program for Mortgages
serviced for FHLMC 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 SubServicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC or FNMA (rendered within one year of such
statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each 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
each Master Servicer to the effect that such Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of each Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer at the address
set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that a Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, in
certain instances, the Seller nor any director, officer, employee, or agent of
the Master Servicer 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
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer, the Seller nor any such person will be protected against any breach of
warranties or representations made in the Agreement or any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each Agreement will further
provide that the Master Servicer, in certain instances, the Seller and any
director, officer, employee or agent of the Master Servicer or the Seller will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer 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 Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Seller may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the 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 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 may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is 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 Series that
have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement or
Agreement, "Events of Default" under each Agreement will include (i) any failure
by the Master Servicer to cause to be deposited in the Certificate Account any
amount so required to be deposited pursuant to the Agreement, and such failure
continues unremedied for two business days or such other time period as is
specified in the Agreement; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for sixty days or such
other time period as is specified in the Agreement after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the holders of Certificates of any class evidencing
not less than 25% of the aggregate principal amount or interests ("Percentage
Interests") evidenced by such class; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceeding and certain actions by or on behalf of the Master Servicer indicating
its insolvency, reorganization or inability to pay its obligations.
If specified in the Prospectus Supplement, the Agreement will permit the
Trustee to sell the Mortgage Assets and the other assets of the Trust Fund in
the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only under
the circumstances and in the manner specified in the Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
Except as otherwise specified in the related Agreement, so long as an Event
of Default under an Agreement remains unremedied, the Trustee may, and at the
direction of holders of Certificates evidencing Percentage Interests aggregating
not less than 25% of the principal of the related Trust Fund and under such
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of the rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Mortgage Loans,
whereupon, unless otherwise specified in the related Prospectus Supplement, the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement, including, if specified in the
Prospectus Supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. 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 Mortgage Loan servicing institution with a net worth
of at least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
Except as otherwise specified in the related Agreement, no
Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class 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, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
AMENDMENT
Unless otherwise specified in the Prospectus Supplement, each Agreement may
be amended by the Seller, each Master Servicer and the Trustee, 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; or (iii) to make any other
revisions with respect to matters or questions arising under the 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 related Agreement,
an Agreement may be amended without the consent of any of the
Certificateholders, to change the manner in which the Certificate Account, the
Protected Account or any other Accounts are 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 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.
Unless otherwise specified in the Prospectus Supplement, each Agreement may also
be amended by the Seller, each Master Servicer and the Trustee with consent of
holders of Certificates of such Series evidencing not less than 66% 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 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 Mortgage 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 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 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.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in any
Accounts or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the later of (i) the final payment or other liquidation
of the last of the Mortgage Assets subject thereto or the disposition of all
property acquired upon foreclosure or deed in lieu of foreclosure of any such
Mortgage Assets remaining in the Trust Fund and (ii) the purchase by the Master
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" below),
from the related Trust Fund of all of the remaining Mortgage Assets and all
property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer or other entity at a price, and in accordance with the procedures,
specified in the Prospectus Supplement. The exercise of such right will effect
early retirement of the Certificates of that Series, but the right of the Master
Servicer or other entity to so purchase is subject to the principal balance of
the related Mortgage Assets being less than the percentage specified in the
related Prospectus Supplement of the aggregate principal balance of the Mortgage
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.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Seller, each Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state, or to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
Single Family Loans and Multifamily Loans. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or (ii) leases the land generally by a long-term ground lease and
owns the apartment building. The Cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the Cooperative and/or
underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with the
construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust Fund including Cooperative Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Contracts. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such loan. The Contracts generally
are "chattel paper" as defined in the UCC in effect in the states in which the
Manufactured Homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Unless otherwise specified
in the Prospectus Supplement, under the Agreement, the Seller will transfer or
cause the transfer of physical possession of the Contracts to the Trustee or its
custodian. In addition the Seller will make or cause to be made an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Seller.
The Seller will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Seller,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Seller or the Lender will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title and the new secured party succeeds to the Seller's rights as the
secured party. However, in some states there exists a risk that, in the absence
of an amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Seller or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Seller and the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for value
of Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee, on behalf of the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans and Multifamily Loans. Foreclosure of a deed of trust
is generally accomplished by a non-judicial sale under a specific provision in
the deed of trust which authorizes the trustee to sell the property at public
auction upon any default by the borrower under the terms of the note or deed of
trust. In some states, the trustee must record a notice of default and send a
copy to the borrower-trustor, to any person who has recorded a request for a
copy of any notice of default and notice of sale, to any successor in interest
to the borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. Before such non-judicial sale takes place, typically a
notice of sale must be posted in a public place and published during a specific
period of time in one or more newspapers, posted on the property, and sent to
parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time- consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the mortgage is not reinstated, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
Contracts. The Master Servicer on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
Single Family Loans and Multifamily Loans. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
Contracts. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right of
the beneficiary or mortgagee to obtain a deficiency judgment against borrowers
financing the purchase of their residence or following sale under a deed of
trust or certain other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the Master Servicer will not seek deficiency
judgments against defaulting mortgagors. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state 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 realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Certificates and
possible reductions in the aggregate amount of such payments. Some states also
have homestead exemption laws which would protect a principal residence from a
liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgager
or secured party. The Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of Single Family Loans, Cooperative
Loans or Contracts with respect to prepayments on loans secured by liens
encumbering owner-occupied residential properties. Since many of the Mortgaged
Properties will be owner-occupied, it is anticipated that prepayment charges may
not be imposed with respect to many of the Single Family Loans, Cooperative
Loans and Contracts. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Single Family Loans, Cooperative Loans or Contracts
having higher Mortgage Rates or APR's, may increase the likelihood of
refinancing or other early retirement of such loans or contracts. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower 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 borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act 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 to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted alleging
personal injury or property damage from the existence of certain chemical
substances which may be present in building materials. For example, formaldehyde
and asbestos have been and in some cases are incorporated into many building
materials utilized in manufactured and other housing. As a consequence, lawsuits
may arise from time to time asserting claims against manufacturers or builders
of the housing, suppliers of component parts, and related persons in the
distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by a
Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Lender, and the Certificateholders would
suffer a loss only to the extent that (i) the Lender breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Lender, the Seller or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Certificateholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde and certain other chemicals in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without the
benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances may
have claims and defenses against the builders which could be asserted against
the Trust Fund.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Mortgage Loan became the property of the Trust Fund in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
by statute impose a lien for any Cleanup Costs incurred by such state on the
property that is the subject of such Cleanup Costs (a "Superlien"). All
subsequent liens on such property are subordinated to such Superlien and, in
some states, even prior recorded liens are subordinated to such Superliens. In
the latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereby. The discussion, and the opinions referred to below,
are based on laws, regulations, rulings and decisions now in effect (or, in the
case of certain regulations, proposed), all of which are subject to change or
possibly differing interpretations. Because tax consequences may vary based upon
the status or tax attributes of the owner of a Certificate, prospective
investors should consult their own tax advisors in determining the federal,
state, local and other tax consequences to them of the purchase, ownership and
disposition of Certificates. For purposes of this tax discussion (except with
respect to information reporting, or where the context indicates otherwise), the
terms "Certificateholder" and "holder" mean the beneficial owner of a
Certificate and the term "Mortgage Loan" includes Agency Securities and Private
Mortgage-Backed Securities.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust Fund related to a series of
Certificates to treat such Trust Fund or certain assets of such Trust Fund as a
"real estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement
for each series of Certificates will indicate whether a REMIC election will be
made with respect to the related Trust Fund. To the extent provided in the
Prospectus Supplement for a series, Certificateholders may also have the benefit
of a Reserve Account and of certain agreements (each, a "Yield Supplement
Agreement") under which payment will be made from the Reserve Account in the
event that interest accrued on the Mortgage Loans at their Mortgage Rates is
insufficient to pay interest on the Certificates of such Series (a "Basis Risk
Shortfall"). If a REMIC election is to be made, the Prospectus Supplement will
designate the Certificates of such series or the interests composing such
Certificates as "regular interests" ("REMIC Regular Certificates", which where
the context so requires includes a reference to each interest composing a
Certificate where such interest has been designated as a regular interest, in
lieu of such Certificates) in the REMIC (within the meaning of Section
860G(a)(l) of the Code) or as the "residual interest" ("REMIC Residual
Certificates") in the REMIC (within the meaning of Section 860G(a)(2) of the
Code). The terms "REMIC Certificates" and "Non-REMIC Certificates" denote,
respectively, Certificates (or the interests composing Certificates) of a series
with respect to which a REMIC election will, or will not, be made. The
discussion below is divided into two parts, the first part applying only to
REMIC Certificates and the second part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust Fund or certain assets of
such Trust Fund as a REMIC. Qualification as a REMIC requires ongoing compliance
with certain conditions. Upon the issuance of each series of REMIC Certificates,
Stroock & Stroock & Lavan, counsel to the Seller, will deliver its opinion
generally to the effect that, with respect to each series of REMIC Certificates
for which a REMIC election is to be made, under then existing law, and assuming
a proper and timely REMIC election and ongoing compliance with the provisions of
the Agreement and applicable provisions of the Code and applicable Treasury
regulations, the related Trust Fund or certain assets of such Trust Fund will be
a REMIC and the REMIC Certificates will be considered to evidence ownership of
"regular interests" or "residual interests" within the meaning of the REMIC
provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, holders
of REMIC Regular Certificates who are entitled to payments from the Reserve
Account in the event of a Basis Risk Shortfall will be required to allocate
their purchase price between their beneficial ownership interests in the related
REMIC regular interests and Yield Supplement Agreements, and will be required to
report their income realized with respect to each, calculated taking into
account such allocation. In general, such allocation would be based on the
respective fair market values of the REMIC regular interests and the related
Yield Supplement Agreements on the date of purchase of the related REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. Holders of REMIC Regular
Certificates are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the Agreement, holders of
applicable REMIC Regular Certificates will agree that, for federal income tax
purposes, they will be treated as owners of the respective regular interests and
of the corresponding Yield Supplement Agreement.
Status of REMIC Certificates as Real Property Loans. The REMIC Certificates
will be "real estate assets" for purposes of Section 856(c)(5)(A) of the Code
and assets described in Section 7701(a)(19)(C) of the Code (assets qualifying
under one or both of those sections, applying each section separately,
"qualifying assets") to the extent that the REMIC's assets are qualifying
assets, but not to the extent that the REMIC's assets consist of Yield
Supplement Agreements. However, if at least 95 percent of the REMIC's assets are
qualifying assets, then 100 percent of the REMIC Certificates will be qualifying
assets. Similarly, income on the REMIC Certificates will be treated as "interest
on obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code, subject to the limitations of the preceding
two sentences. In addition to Mortgage Loans, the REMIC's assets will include
payments on Mortgage Loans held pending distribution to holders of REMIC
Certificates, amounts in Reserve Accounts (if any), other credit enhancements
(if any), and possibly buydown funds ("Buydown Funds"). The Mortgage Loans will
be qualifying assets under the foregoing sections of the Code except to the
extent provided in the Prospectus Supplement. The regulations under Sections
860A through 860G of the Code (the "REMIC Regulations") treat credit
enhancements as part of the mortgage or pool of mortgages to which they relate,
and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Mortgage Loans and held pending distribution to holders of REMIC
Certificates ("cash flow investments") will be treated as qualifying assets. It
is unclear whether amounts in a Reserve Account or Buydown Funds would also
constitute qualifying assets. The Prospectus Supplement for each series will
indicate (if applicable) that it has Buydown Funds. The REMIC Certificates will
not be "residential loans" for purposes of the residential loan requirement of
Section 593(g)(4)(B) of the Code.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust Fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Stroock & Stroock & Lavan will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the related
Agreement and applicable provisions of the Code and applicable Treasury
regulations and rulings, the Tiered REMICs will each qualify under then existing
law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would 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.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates--Current Income on REMIC Regular Certificates-Original Issue
Discount--Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates--Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate may also have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust Fund will report original issue discount, if any, to the holders
of REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such as
a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations," and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any de minimis original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's 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
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with 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 REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. 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 such holder is entitled. It is unclear
whether the Prepayment Assumption is taken into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally 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 the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
Qualified Stated Interest. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includable in the stated redemption price at maturity of
the REMIC Regular Certificate. Accordingly, if the interest on a REMIC Regular
Certificate does not constitute "qualified stated interest," the REMIC Regular
Certificate will have original issue discount. Interest payments will not
qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Loans underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the de
minimis rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations, REMIC
Regular Certificates paying interest at a variable rate (a "Variable Rate REMIC
Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate, but which is subject to one or more restrictions such
as a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate REMIC
Regular Certificate will not constitute an objective rate if it is reasonably
expected that the average value of such rate during the first half of the
Variable Rate REMIC Regular Certificate's term will be either significantly less
than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates--Current Income
on REMIC Regular Certificates-Original Issue Discount" based on the following:
(i) stated interest on the Single Variable Rate REMIC Regular Certificate which
is unconditionally payable in cash or property (other than debt instruments of
the issuer) at least annually will constitute qualified stated interest; (ii) by
assuming that the variable rate on the Single Variable Rate REMIC Certificate is
a fixed rate equal to: (a) in the case of a Single Variable Rate REMIC Regular
Certificate with a qualified floating rate or a qualified inverse floating rate,
the value, as of the issue date, of the qualified floating rate or the qualified
inverse floating rate or (b) in the case of a Single Variable Rate REMIC Regular
Certificate with an objective rate (other than a qualified inverse floating
rate), a fixed rate which reflects the reasonably expected yield for such Single
Variable Rate REMIC Regular Certificate; and (iii) the qualified stated interest
allocable to an accrual period is increased (or decreased) if the interest
actually paid during an accrual period exceeds (or is less than) the interest
assumed to be paid under the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC Regular
Certificate") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. (A Multiple Variable Rate REMIC Regular
Certificate may not bear more than one objective rate.) In the case of a
Multiple Variable Rate REMIC Regular Certificate that qualifies as a "variable
rate debt instrument" and provides for stated interest at a fixed rate in
addition to either one or more qualified floating rates or a qualified inverse
floating rate, the fixed rate is initially converted into a qualified floating
rate (or a qualified inverse floating rate, if the Multiple Variable Rate REMIC
Regular Certificate provides for a qualified inverse floating rate). Under such
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate REMIC Regular Certificate as of the Multiple Variable
Rate REMIC Regular Certificate's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate REMIC Regular Certificate is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amounts of original issue discount and qualified stated interest, if any,
are determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates--Current Income on REMIC
Regular Certificates-Original Issue Discount". A holder of the Multiple Variable
Rate REMIC Regular Certificate will account for such original issue discount and
qualified stated interest as if the holder held the "equivalent" fixed rate debt
instrument. In each accrual period, appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Multiple Variable Rate REMIC Regular Certificate during the
accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. It is not clear under current law how a Variable Rate REMIC Regular
Certificate would be taxed if such REMIC Regular Certificate were treated as a
contingent payment debt obligation since the OID Regulations relating to
contingent payment debt obligations do not apply to REMIC regular interests.
Interest-Only REMIC Regular Certificates. The Trust Fund intends to report
income from interest-only REMIC Regular Certificates to the Internal Revenue
Service and to holders of interest-only REMIC Regular Certificates based on the
assumption that the stated redemption price at maturity is equal to the sum of
all payments determined under the Prepayment Assumption. As a result, such
interest-only REMIC Regular Certificates will be treated as having original
issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates--Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate in proportion to the amounts of such principal
distributions, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Holders of REMIC Regular Certificates
should consult their own tax advisors regarding the availability or advisability
of such an election.
Single-Class REMICs. In the case of "single-class REMICs," certain expenses
of the REMIC will be allocated to the holders of the REMIC Regular Certificates.
The deductibility of such expenses may be subject to certain limitations. See
"Deductibility of Trust Fund Expenses" below.
Sales of REMIC Regular Certificates. If a REMIC Regular 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 Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
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
includable in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includable in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includable in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate, if not earlier, shortly following
the REMIC's receipt of the final payment in respect of the underlying qualified
mortgages. The last distribution on a REMIC Regular Certificate should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Regulations determine the fair market value of the
contributed property by deeming it equal to the aggregate issue prices of all
regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Loans held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Loans or as principal on the Mortgage Loans is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. Although not entirely free from doubt, the related REMIC taxable
income may be recognized when the adjusted issue price of such REMIC Regular
Certificate would exceed the maximum amount of future payments with respect to
such REMIC Regular Certificate. It is unclear whether the Prepayment Assumption
is taken into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the purchase price of
the REMIC Residual Certificate), and will be reduced (but not below zero) by the
holder's share of cash distributions and losses and increased by its share of
taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable income
recognized by the holder of a REMIC Residual Certificate in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest and discount income (or deductions for amortization of
premium) with respect to qualified mortgages, on the one hand, and the timing of
deductions for interest (including original issue discount) on the REMIC Regular
Certificates, on the other. In the case of multiple classes of REMIC Regular
Certificates issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from 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 shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Loans may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Loans.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Loans (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust Fund will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a qualified mortgage other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a qualified mortgage or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the qualified mortgages pending distribution on the
REMIC Certificates. In addition, a tax is imposed on the REMIC equal to 100
percent of the value of certain property contributed to the REMIC after its
"startup day." No REMIC in which interests are offered hereunder will accept
contributions that would cause it to be subject to such tax. This provision will
not affect a REMIC's ability in accordance with the Agreement to accept
substitute Mortgage Loans or to sell defective Mortgage Loans.
A REMIC is subject to a tax (deductible from its income) on any "net income
from foreclosure property" (determined in accordance with Section 857(b)(4)(B)
of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust Fund initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificates, unless
otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark to Market REMIC Residual Certificates. Temporary
regulations provide that "negativevalue" REMIC Residual Certificates are not
securities and cannot be marked to market pursuant to Section 475 of the Code
(relating to the requirement that dealers in securities mark them to market). A
REMIC Residual Certificate is a negative-value REMIC Residual Certificate if on
the date the dealer acquires the REMIC Residual Certificate the present value of
the anticipated tax liabilities associated with holding the REMIC Residual
Certificate (net of the present value of the tax savings resulting from losses
associated with holding the REMIC Residual Certificate) exceeds the present
value of the expected future distributions on the REMIC Residual Certificate.
Proposed regulations would provide that all REMIC Residual Certificates acquired
on or after January 4, 1995 are not securities and cannot be marked to market
pursuant to Section 475 of the Code.
The anticipated and expected tax consequences and distributions are
determined by taking into account events that have occurred through the date of
acquisition, the Prepayment Assumption and reinvestment assumption adopted when
the residual was created, and by taking account of required liquidations and
required or permitted clean up calls.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although the tax treatment with respect to a REMIC Residual Certificate
that has unrecovered basis after all funds of the Trust Fund have been
distributed is unclear, the holder presumably would be entitled to claim a loss
in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as defined
in Section 7701(i) of the Code) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Section 1091 of the Code. In that event, any loss
realized by the seller on the sale generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions for periods after such transfer with respect to the interest
transferred multiplied by the highest corporate rate of tax. The transferor (or
agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a
REMIC Residual Certificate. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear. The preamble to the REMIC Regulations
indicates that the Internal Revenue Service is considering the tax treatment of
these types of residual interests. A transferee of such an interest should
consult its own tax advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. An entity or
segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(i.e., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring the
REMIC Residual Certificate is a disqualified organization. In addition, as to
the requirement that reasonable arrangements be made to ensure that disqualified
organizations do not hold a residual interest in the REMIC, the REMIC
Regulations require that notice of the prohibition be provided either through a
legend on the certificate that evidences ownership, or through a conspicuous
statement in the prospectus or other offering document used to offer the
residual interest for sale. As to the requirement that sufficient information be
made available to calculate the tax on transfers to disqualified organizations
(or the tax, discussed below, on pass-through entities, interests in which are
held by disqualified organizations), the REMIC Regulations further require that
such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Fund Expenses" below. No prediction can be made
regarding whether such legislation or similar legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate, and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions from the REMIC, at or after the time
at which taxes on such excess inclusion accrue, sufficient to pay the taxes
thereon. A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if (i) the transferor
conducts, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee represents to the transferor that (A) the transferee understands that
it might incur tax liabilities in excess of any cash received with respect to
the residual interest and (B) the transferee intends to pay the taxes associated
with owning the residual interest as they come due. Any transferee of a REMIC
Residual Certificate must execute and deliver to the transferor an affidavit
containing the representations described in (ii) above. A different formulation
of this rule applies to transfers of REMIC Residual Certificates by or to
foreign transferees. See "Foreign Investors" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Certificates that is an individual, estate or trust will
be subject to the limitation with respect to certain itemized deductions
described in Code Section 67, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the Master Servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trust Funds with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC", the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including REITs), the deductibility of such expenses will be subject to the
limitations described above. The reduction or disallowance of these deductions
may have a significant impact on the yield of REMIC Regular Certificates to such
a holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includable in gross income for United States federal income
taxation regardless of its source, and (iv) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax
years ending after August 20, 1996. Proposed Treasury regulations, which would
be effective with respect to payments made after December 31, 1997 if adopted in
their current form, would provide alternative certification requirements and
means by which a holder of REMIC Certificates could claim the exemption from
federal income and withholding tax.
REMIC Residual Certificates. The Conference Report to the Tax Reform Act of
1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by a
Trust Fund will not qualify as portfolio interest, although interest on the
Private Mortgage-Backed Securities, other pass-through certificates, or REMIC
regular interests held by a Trust Fund may qualify. In any case, a holder of a
REMIC Residual Certificate will not be entitled to the portfolio interest
exception from the 30% withholding tax (or to any treaty exemption or rate
reduction) for that portion of a payment that constitutes excess inclusions.
Generally, the withholding tax will be imposed when REMIC gross income is paid
or distributed to the holder of a residual interest or there is a disposition of
the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Loans from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and Schedules Q
thereto) must be filed as if the Trust Fund were a partnership for federal
income tax purposes. Information on Schedule Q must be provided to holders of
REMIC Residual Certificates with respect to every calendar quarter. Each holder
of a REMIC Residual Certificate will be required to treat items on its federal
income tax returns consistently with their treatment on the Trust Fund's
information returns unless the holder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from an incorrect
schedule received from the Trust Fund. The Trust Fund also will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC taxable income by the Internal Revenue Service. Holders of REMIC Residual
Certificates will have certain rights and obligations with respect to any
administrative or judicial proceedings involving the Internal Revenue Service.
Under the Code and Regulations, a REMIC generally is required to designate a tax
matters person. Generally, subject to various limitations, the tax matters
person has authority to act on behalf of the REMIC and the holders of the REMIC
Residual Certificates in connection with administrative determinations and
judicial review respecting returns of taxable income of the REMIC. Treasury
regulations exempt from certain of these procedural rules REMICs having no more
than one residual interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Seller or its designee will act as the tax matters person for
each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance of
its interest in the REMIC Residual Certificate, agrees that the Seller or its
designee will act as the holder's fiduciary in the performance of any duties
required of the holder in the event that the holder is the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made.
Tax Status of the Trust Fund. Upon the issuance of each series of Non-REMIC
Certificates, Stroock & Stroock & Lavan, counsel to the Seller, will deliver its
opinion to the effect that, under then current law, assuming compliance with the
Agreement, the related Trust Fund will be classified for federal income tax
purposes as a grantor trust and not as an association taxable as a corporation
or a taxable mortgage pool. Accordingly, each holder of a Non-REMIC Certificate
will be treated for federal income tax purposes as the owner of an undivided
interest in the Mortgage Loans included in the Trust Fund. As further described
below, each holder of a Non-REMIC Certificate therefore must report on its
federal income tax return the gross income from the portion of the Mortgage
Loans that is allocable to such Non-REMIC Certificate and may deduct the portion
of the expenses incurred by the Trust Fund that is allocable to such Non-REMIC
Certificate, at the same time and to the same extent as such items would be
reported by such holder if it had purchased and held directly such interest in
the Mortgage Loans and received directly its share of the payments on the
Mortgage Loans and incurred directly its share of expenses incurred by the Trust
Fund when those amounts are received or incurred by the Trust Fund.
A holder of a Non-REMIC Certificate that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the "applicable amount" ($100,000 (or
$50,000 in the case of a separate return by a married individual), adjusted for
changes in the cost of living subsequent to 1990) will be reduced by the lesser
of (i) 3 percent of the excess of adjusted gross income over the applicable
amount, or (ii) 80 percent of the amount of itemized deductions otherwise
allowable for such taxable year. A holder of a Non-REMIC Certificate that is not
a corporation cannot deduct such expenses for purposes of the alternative
minimum tax (if applicable). Such deductions will include servicing, guarantee
and administrative fees paid to the servicer of the Mortgage Loans. As a result,
individuals, estates, or trusts holding Non-REMIC Certificates may have taxable
income in excess of the cash received.
Status of the Non-REMIC Certificates as Real Property Loans. The Non-REMIC
Certificates generally will be "real estate assets" for purposes of Section
856(c)(5)(A) of the Code and "loans... secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code, and interest income
on the Non-REMIC Certificates generally will be "interest on obligations secured
by mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. However, the Non-REMIC Certificates may not be qualifying assets under the
foregoing sections of the Code to the extent that the Trust Fund's assets
include Buydown Funds, amounts in a Reserve Account, or payments on mortgages
held pending distribution to Certificateholders. The Non-REMIC Certificates
should not be "residential loans made by the taxpayer" for purposes of the
residential loan requirement of Section 593(g)(4)(B) of the Code.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Master Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Master
Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Mortgage Loans. In Revenue Ruling 91-46, the Internal Revenue Service
concluded that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the NonREMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a NonREMIC Certificate will account for any discount on the
Non-REMIC Certificate (other than an interest treated as a "stripped coupon") as
market discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount de minimis rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates. See "REMIC Regular
Interests--Current Income on REMIC Regular Interests-Original Issue Discount"
and "--Market Discount" above.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Mortgage Loan underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate that, if
used in discounting the holder's share of the payments on the Mortgage Loans,
would cause the present value of those payments to equal the price at which the
holder purchased the Non-REMIC Certificate. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that original issue
discount be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. It is unclear whether such regulations
would apply this rule to the Non-REMIC Certificates, whether Section 1272(a)(6)
might apply to the NonREMIC Certificates in the absence of such regulations, or
whether the Internal Revenue Service could require use of a reasonable
prepayment assumption based on other tax law principles. If required to report
interest income on the Non-REMIC Certificates to the Internal Revenue Service
under the stripped bond rules, it is anticipated that the Trustee will calculate
the yield of the Non-REMIC Certificates based on a representative initial
offering price of the Non-REMIC Certificates and a reasonable assumed rate of
prepayment of the Mortgage Loans (although such yield may differ from the yield
to any particular holder that would be used in calculating the interest income
of such holder). The Prospectus Supplement for each series of Non-REMIC
Certificates will describe the prepayment assumption that will be used for this
purpose, but no representation is made that the Mortgage Loans will prepay at
that rate or at any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Loans allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Non-REMIC Certificate acquired at a discount or
premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a NonREMIC Certificate
acquired at a discount or premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-through Rate based on the weighted average
of the interest rates of the Mortgage Loans held by the Trust Fund, which
interest rates may be fixed or variable. In the case of a Variable Rate
Non-REMIC Certificate that is subject to the original issue discount rules, the
daily portions of original issue discount generally will be calculated in the
same manner as discussed above except the principles discussed in "REMIC Regular
Certificates--Current Income on REMIC Regular Certificates--Original Issue
Discounts-Variable Rate REMIC Regular Certificates" will be applied.
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a NonREMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Mortgage Loans in accordance with its tax accounting method. In addition, if the
holder purchased the Non-REMIC Certificate at a discount or premium, the holder
will be required to account for such discount or premium in the manner described
below, as if it had purchased the Mortgage Loans directly. The treatment of any
discount will depend on whether the discount with respect to the Mortgage Loans
is original issue discount as defined in the Code and, in the case of discount
other than original issue discount, whether such other discount exceeds a de
minimis amount. In the case of original issue discount, the holder (whether a
cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Mortgage Loans. However, original issue discount could arise with respect to
a Mortgage Loan ("ARM") that provides for interest at a rate equal to the sum of
an index of market interest rates and a fixed number. The original issue
discount for ARMs generally will be determined under the principals discussed in
"REMIC Regular Certificates--Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
If discount on the Mortgage Loans other than original issue discount
exceeds a de minimis amount (described below), the holder will also generally be
required to include in income in each month the amount of such discount accrued
through such month and not previously included in income, but limited, with
respect to the portion of such discount allocable to any Mortgage Loan, to the
amount of principal on such Mortgage Loan received by the Trust Fund in that
month. Because the Mortgage Loans will provide for monthly principal payments,
such discount may be required to be included in income at a rate that is not
significantly slower (and, under certain circumstances, faster) than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-REMIC Certificate to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the de minimis rule,
market discount with respect to a Non-REMIC Certificate will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Mortgage Loans allocable to the Non-REMIC Certificate and (ii) the weighted
average life (determined using complete years) of the Mortgage Loans remaining
at the time of purchase of the Non-REMIC Certificate. See "REMIC Regular
Certificates--Current Income on REMIC Regular Certificates-Market Discount."
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize, as an offset to interest
income, the portion of such premium that is allocable to a Mortgage Loan under a
constant yield method based on the yield of the Mortgage Loan to such holder,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should be
allocated among the principal payments on the Mortgage Loan and allowed as an
ordinary deduction as principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a NonREMIC Certificate
acquired at a discount or premium will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
Mortgage Loan that is allocable to the Non-REMIC Certificate and the portion of
the adjusted basis of the Non-REMIC Certificate (see "Sales of Non-REMIC
Certificates" below) that is allocable to the Mortgage Loan.
Sales of Non-REMIC Certificates. A holder that sells a NonREMIC Certificate
will recognize gain or loss equal to the difference between the amount realized
in the sale and its adjusted basis in the Non-REMIC Certificate. In general,
such adjusted basis will equal the holder's cost for the Non-REMIC Certificate,
increased by the amount of any income previously reported with respect to the
Non-REMIC Certificate and decreased by the amount of any losses previously
reported with respect to the Non-REMIC Certificate and the amount of any
distributions received thereon. Any such gain or loss generally will be capital
gain or loss if the assets underlying the Non-REMIC Certificate were held as
capital assets, except that, for a NonREMIC Certificate to which the stripped
bond rules do not apply and that was acquired with more than a de minimis amount
of discount other than original issue discount (see "Taxation of Non-REMIC
Certificates if Stripped Bond Rules Do Not Apply" above), such gain will be
treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a "United
States person" (as defined below) and is not subject to federal income tax as a
result of any direct or indirect connection to the United States other than its
ownership of a Non-REMIC Certificate will not be subject to United States income
or withholding tax in respect of payments of interest or original issue discount
on a Non-REMIC Certificate to the extent attributable to Mortgage Loans that
were originated after July 18, 1984, provided that the holder complies to the
extent necessary with certain identification requirements (including delivery of
a statement, signed by the holder of the Non-REMIC Certificate under penalties
of perjury, certifying that such holder is not a United States person and
providing the name and address of such holder). Proposed Treasury regulations,
which would be effective with respect to payments made after December 31, 1997
if adopted in their current form, would provide alternative certification
requirements and means by which a holder of Non-REMIC Certificates could claim
the exemption from federal income and withholding tax. Interest or original
issue discount on a Non-REMIC Certificate attributable to Mortgage Loans that
were originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). For
these purposes, the term "United States person" means a citizen or a resident of
the United States, a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, and a trust for which one or
more United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. For years beginning before January
1, 1997, the term "United States person" shall include a trust whose income is
includible in gross income for United States federal income taxation regardless
of source, in lieu of trusts just described, unless the trust elects to have its
United States status determined under the criteria described in the previous
sentence for tax years ending after August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable mortgage
pools" are subject to corporate level tax on their net income. A "taxable
mortgage pool" is generally defined as an entity that meets the following
requirements: (i) the entity is not a REMIC, (ii) substantially all of the
assets of the entity are debt obligations, and more than 50 percent of such debt
obligations consists of real estate mortgages (or interests therein), (iii) the
entity is the obligor under debt obligations with two or more maturities, and
(iv) payments on the debt obligations on which the entity is the obligor bear a
relationship to the payments on the debt obligations which the entity holds as
assets. With respect to requirement (iii), the Code authorizes the Internal
Revenue Service to provide by regulations that equity interests may be treated
as debt for purposes of determining whether there are two or more maturities. If
a Series of Non-REMIC Certificates were treated as obligations of a taxable
mortgage pool, the Trust Fund would be ineligible to file consolidated returns
with any other corporation and could be liable for corporate tax. Treasury
regulations do not provide for the recharacterization of equity as debt for
purposes of determining whether an entity has issued debt with two maturities,
except in the case of transactions structured to avoid the taxable mortgage pool
rules.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes are imposed upon such
persons by Section 4975 of the Code. The Seller, Bear, Stearns & Co. Inc., each
Master Servicer or other servicer, any Pool Insurer, any Special Hazard Insurer,
the Trustee, and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition, holding or disposition of Certificates by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. Furthermore, if
an investing Plan's assets were deemed to include the Mortgage Assets and not
merely an interest in the Certificates, transactions occurring in the management
of Mortgage Assets might constitute prohibited transactions and the fiduciary
investment standards of ERISA could apply to the assets of the Trust Fund,
unless an administrative exemption applies.
In DOL Regulation { 2510.3-101 (the "Regulation"), the U.S. Department of
Labor has defined what constitutes Plan assets for purposes of ERISA and Section
4975 of the Code. The Regulation provides that if a Plan makes an investment in
an "equity interest" in an entity, the assets of the entity will be considered
the assets of such Plan unless certain exceptions apply. The Seller can give no
assurance that the Certificates will qualify for any of the exceptions under the
Regulation. As a result, the Mortgage Assets may be considered the assets of any
Plan which acquires a Certificate, unless some administrative exemption is
available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and the
Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Seller; and (iii) the payments made to
and retained by the Seller in connection with the Trust Fund, together with all
funds inuring to its benefit for administering the Trust Fund, represent no more
than "adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Seller, the Special Hazard Insurer, the Pool Insurer,
the Master Servicer, or other servicer, or the Trustee is a party in interest if
the Plan does not pay more than fair market value for such Certificate and the
rights and interests evidenced by such Certificate are not subordinated to the
rights and interests evidenced by other Certificates of the same pool. PTCE 83-1
also exempts from the prohibited transaction rules any transactions in
connection with the servicing and operation of the Mortgage Pool, provided that
any payments made to the Master Servicer in connection with the servicing of the
Trust Fund are made in accordance with a binding agreement, copies of which must
be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly approved
by an independent fiduciary who has authority to manage and control those plan
assets being invested in Certificates; (ii) the Plan pays no more for the
Certificates than would be paid in an arm's length transaction; (iii) no
investment management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Seller with regard to the sale, exchange or transfer
of Certificates to the Plan; (iv) the total value of the Certificates purchased
by such Plan does not exceed 25% of the amount issued; and (v) at least 50% of
the aggregate amount of Certificates is acquired by persons independent of the
Seller, the Trustee, the Master Servicer, and the Special Hazard Insurer or Pool
Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust Fund is a "mortgage pool", that the Certificates constitute "mortgage
pool pass-through certificates," and that the conditions set forth in PTCE 83-1
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should consider the availability of any other prohibited transaction exemptions.
The Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the following
general categories: single and multifamily residential or commercial mortgages,
motor vehicle receivables, consumer or commercial receivables and guaranteed
government mortgage pool certificates and the purchase, sale and holding of
mortgage-backed or asset- backed pass-through certificates representing
beneficial ownership interests in the assets of such investment trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by certain Plans must be on terms that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. Second,
the rights and interests evidenced by the Certificates must not be subordinated
to the rights and interests evidenced by other certificates of the same trust.
Third, the Certificates at the time of acquisition by the Plan must be rated in
one of the three highest generic rating categories by Standard & Poor's
Structured Rating Group, Moody's Investors Service Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Services, L.P. ("National Credit Rating
Agencies"). Fourth, the Trustee cannot be an affiliate of any member of the
"Restricted Group" which consists of any underwriter as defined in PTE 90-30,
the Seller, the Master Servicer, each servicer, the Pool Insurer, the Special
Hazard Insurer and any obligor with respect to obligations or receivables
constituting more than 5% of the aggregate unamortized principal balance of the
obligations or receivables as of the date of initial issuance of the
Certificates. Fifth, the sum of all payments made to and retained by such
underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained by
the Seller pursuant to the assignment of the obligations or receivables to the
related Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer and any servicer must represent not more than reasonable compensation
for such person's services under the Trust Agreement and reimbursement of such
person's reasonable expenses in connection therewith. Sixth, (i) the investment
pool consists only of assets of the type enumerated in the exemption and which
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools have been rated in one of the three
highest generic rating categories by one of the National Credit Rating Agencies
for at least one year prior to a Plan's acquisition of certificates; and (iii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to a Plan's
acquisition of certificates. Finally, the investing Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933, as amended. The Seller assumes that only Plans which
are accredited investors under the federal securities laws will be permitted to
purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption may
provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the Certificates,
no more than 25% of the assets over which the fiduciary has investment authority
are invested in Certificates of a trust containing assets which are sold or
serviced by the same entity. Finally, in the case of initial issuance (but not
secondary market transactions), at least 50% of each class of Certificates, and
at least 50% of the aggregate interests in the trust, must be acquired by
persons independent of the Restricted Group.
Before purchasing a Certificate in reliance on any of these exemptions or
any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain prohibited
transactions to which neither PTCE 83-1 nor PTE 90-30 is applicable, depending
in part upon the type of Plan fiduciary making the decision to acquire
Certificates and the circumstances under which such decision is made, including,
but not limited to PTCE 90-1 (regarding investments by insurance company pooled
separate accounts), PTCE 91-38 (regarding investments by bank collective
investments funds), PTCE 84-14 (regarding transactions effected by "qualified
professional asset managers"), PTCE 95-60 (regarding investments by insurance
company general accounts) and PTCE 96-23 (regarding transactions effected by
"in-house asset managers"). However, even if the conditions specified in either
of these exemptions are met, the scope of the relief provided by these
exemptions might or might not cover all acts which might be construed as
prohibited transactions.
Any Plan fiduciary considering whether to purchase a Certificate on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement and for so
long as they are rated in one of the two highest rating categories by a least
one nationally recognized statistical rating organization, the Certificates will
constitute "mortgage related securities" for purposes of SMMEA, and as such,
absent state legislation described below, 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 (including the District of Columbia and Puerto Rico)
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 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 adopted
legislation which limits the ability of insurance companies domiciled in these
states to purchase mortgage-related securities, such as the Certificates.
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,
federal credit unions may invest in Certificates, and national banks may
purchase Certificates for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. ss. 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which included
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities, and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), (whether or not the class of Certificates
under consideration for purchase constitutes a "mortgage related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is not
suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
A depository institution must ascertain and document prior to purchase and
no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative product
possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the character- istics of a mortgage derivative product
are such that the first two tests cannot be applied (such as interest-only
strips), the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i) the
mortgage derivative product has an expected weighted average life greater than
10.0 years; (ii) the expected weighted average life of the mortgage derivative
product: (a) extends by more than 4.0 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or (b) shortens by
more than 6.0 years, assuming an immediate and sustained parallel shift in the
yield curve of minus 300 basis points; and (iii) the estimated change in the
price of the mortgage derivative product is more than 17%, due to an immediate
and sustained parallel shift in the yield curve of plus or minus 300 basis
points.
When performing the price sensitivity test, the same prepayment assumptions
and same cash flows that were used to estimate average life sensitivity must be
used. The discount rate assumptions should be determined by (i) assuming that
the discount rate for the security equals the yield on a comparable average life
U.S. Treasury security plus a constant spread, (ii) calculating the spread over
Treasury rates from the bid side of the market for the mortgage derivative
product, and (iii) assuming the spread remains constant when the Treasury curve
shifts up or down 300 basis points. Discounting the cash flows by their
respective discount rates estimates a price in the plus or minus 300 basis point
environments. The initial price must be determined by the offer side of the
market and used as the base price from which the 17% price sensitivity test will
be measured.
Generally, a floating-rate debt class will not be subject to the average
life and average life sensitivity tests described above if it bears a rate that,
at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Inter- bank Offered Rate (LIBOR). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to purchase
Certificates representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors and comply with any other applicable
requirements.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the 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 Seller,
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Seller. In connection with the
sale of the Certificates, underwriters may receive compen- sation from the
Seller or from purchasers of the Certificates in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Seller.
Alternatively, the 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 Certificates,
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
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 Seller and purchasers of
Certificates of such Series.
The Seller 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 Seller may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Seller 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 Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the Seller
by Stroock & Stroock & Lavan, Seven Hanover Square, New York, New York 10004.
FINANCIAL INFORMATION
A new Trust Fund 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.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates under certain scenarios might fail to recoup
their underlying investments.
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.
<PAGE>
GLOSSARY
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
TERM PAGE
Accounts.................................................. 53
APR....................................................... 11
ARM....................................................... 135
Accrual Certificates...................................... 56
Agency Securities......................................... 1
Agreement................................................. 15
Available Funds........................................... 55
Bear, Stearns............................................. 146
Bankruptcy Bond........................................... 22
Buydown Funds ............................................ 112
Buydown Loans............................................. 39
CMO....................................................... 13
Cede...................................................... 61
Certificateholder......................................... 2
Certificate Account........................................ 81
Certificate Register....................................... 54
Certificates............................................... 1
Charter Act................................................ 39
Cleanup Costs.............................................. 110
Code........................................................ 25
Collateral Value............................................ 32
Commission.................................................. 4
Contracts................................................... 1
Cooperative Loans........................................... 1
Cooperatives................................................ 7
Current Principal Amount.................................... 56
Cut-off Date................................................ 18
Definitive Certificates..................................... 62
Detailed Description........................................ 30
Determination Date.......................................... 55
Distribution Dates.......................................... 4
DTC......................................................... 61
ERISA....................................................... 28
Events of Default............................................. 93
FDIC.......................................................... 50
FHA........................................................... 7
FHA Insurance................................................. 53
FHA Loans..................................................... 37
FHLMC......................................................... 1
FHLMC Act....................................................... 41
FHLMC Certificate group......................................... 41
FHLMC Certificates.............................................. 12
FNMA............................................................ 1
FNMA Certificates............................................... 12
FTC Rule........................................................ 106
GNMA............................................................ 1
GNMA Certificates.............................................. 12
GNMA Issuer.................................................... 37
Garn-St Germain Act............................................ 107
Guaranty Agreement............................................. 37
HUD............................................................. 45
Housing Act..................................................... 36
Index........................................................... 135
Indirect Participants............................................. 61
Insurance Proceeds................................................ 80
Insured Expenses.................................................. 80
Lender............................................................ 1
LIBOR............................................................. 146
Liquidation Expenses.............................................. 81
Liquidation Proceeds.............................................. 81
Loan-to-Value Ratio............................................... 32
Lower Tier REMIC.................................................. 123
Manufactured Homes................................................ 36
Manufacturer's Invoice Price...................................... 33
Margin ........................................................... 135
Master Servicer................................................... 2
Mortgage.......................................................... 77
Mortgage Assets................................................... 1
Mortgage Loans.................................................... 6
Mortgage Pool..................................................... 6
Mortgage Rate..................................................... 9
Mortgaged Property................................................ 30
Mortgagors........................................................ 55
Multifamily Loans................................................. 1
National Credit Rating Agencies................................... 141
Non-REMIC Certificates............................................ 27
Participants...................................................... 61
Pass-Through Rate................................................. 4
Plan.............................................................. 138
PMBS Agreement.................................................... 44
PMBS Issuer....................................................... 15
PMBS Servicer..................................................... 15
PMBS Trustee...................................................... 15
Percentage Interests ............................................. 93
Permitted Investments............................................. 72
Policy Statement................................................... 144
Pool Insurance Policy.............................................. 21
Pool Insurer....................................................... 65
Prepayment Assumption.............................................. 114
Primary Insurance Policy .......................................... 30
Primary Insurer.................................................... 88
Principal Prepayments.............................................. 57
Private Mortgage-Backed Securities................................. 1
Proposed OID Regulations........................................... 114
Protected Account.................................................. 79
PTCE 83-1.......................................................... 139
PTE 90-30.......................................................... 141
Purchase Price.................................................... 51
REMIC............................................................. 2
REMIC Certificates................................................ 111
REMIC Regular Certificates........................................ 26
REMIC Regulations................................................. 112
REMIC Residual Certificates........................................ 26
Rating Agency...................................................... 23
Record Date........................................................ 54
Refinance Loan..................................................... 32
Regulation......................................................... 139
Relief Act......................................................... 109
Reserve Account.................................................... 4
Retained Interest.................................................. 53
RICs .............................................................. 124
REITs ............................................................. 124
SMMEA.............................................................. 25
Seller............................................................. 1
Senior Certificates................................................ 15
Single Family Loans................................................ 1
Special Hazard Insurance Policy.................................... 21
Special Hazard Insurer............................................. 67
Sub-Servicer....................................................... 24
Sub-Servicing Agreement............................................ 82
Subordinated Certificates.......................................... 16
Superlien.......................................................... 110
Tiered REMICs...................................................... 113
Title V............................................................ 108
Trust Fund......................................................... 1
Trustee............................................................ 2
UCC................................................................ 61
United States person............................................... 129
VA................................................................. 7
VA Guarantees...................................................... 53
VA Loans........................................................... 37
Variable Rate Non-REMIC Certificates............................... 134
Variable Rate REMIC Regular Certificate............................ 117
Yield Supplement Agreement......................................... 111
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No dealer, salesman or other person has been authorized to
give any information or to make any representations in
connection with this offering other than those contained in
this Prospectus Supplement and the accompanying Prospectus,
and, if given or made, such information or representations
must not be relied upon as having been authorized by BSMSI,
the Underwriter or the Certificate Insurer. This Prospectus
Supplement and the accompanying Prospectus do not constitute
an offer to sell or a solicitation of an offer to buy any
securities other than the Certificates offered hereby nor an
offer of such Certificates to any person, in any state or
other jurisdiction in which such offer would be unlawful.
The delivery of this Prospectus Supplement and the
accompanying Prospectus at any time does not imply that
information herein is correct as of any time subsequent to
its date.
Until 90 days after the date of this Prospectus
Supplement, all dealers effecting transactions in the
Certificates offered hereby, whether or not participating in
this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
Prospectus Supplement
Summary of Terms.................................... S-4
Description of the Certificates..................... S-13
Description of the Pooled Certificates.............. S-16
Yield and Prepayment Considerations................. S-21
The Pooling Agreement............................... S-31
Federal Income Tax Considerations................... S-33
Certain State Tax Considerations.................... S-35
ERISA Considerations................................ S-35
Legal Investment.................................... S-36
Method of Distribution.............................. S-36
Legal Matters....................................... S-36
Certificate Rating.................................. S-36
Glossary............................................ S-38
Exhibit I - Underlying FNMA Prospectus.............. I-1
Exhibit II - Underlying FHLMC Offering Circular..... II-1
Annex 1 - Pooled Certificate Current Information.... 1-1
Prospectus
Prospectus Supplement............................... 2
Available Information............................... 2
Incorporation of Certain Documents By Reference..... 2
Reports to Certificateholders....................... 3
Summary of Terms.................................... 4
The Trust Fund...................................... 16
Use of Proceeds..................................... 26
The Seller ......................................... 27
Mortgage Loan Program............................... 27
Description of the Certificates..................... 30
Credit Enhancement.................................. 36
Yield and Prepayment Considerations................. 43
The Pooling and Servicing Agreement................. 45
Certain Legal Aspects of the Mortgage Loans......... 56
Certain Federal Income Tax Consequences............. 64
ERISA Considerations................................ 83
Legal Investment.................................... 86
Method of Distribution.............................. 88
Legal Matters....................................... 88
Financial Information............................... 89
Ratings............................................. 89
Glossary............................................ 90
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$61,948,522
(Approximate)
Bear Stearns
Mortgage Securities Inc.
Pass-Through
Certificates,
Series 1996-10
PROSPECTUS SUPPLEMENT
Bear, Stearns & Co. Inc.
December 23, 1996
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