AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1996
REGISTRATION STATEMENT NO. 33-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM S-3
REGISTRATION STATEMENT
AND
POST-EFFECTIVE AMENDMENT
Under
The Securities Act of 1933
________________
BEAR STEARNS MORTGAGE SECURITIES INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3633241
State of Incorporation IRS Employer Identification Number
245 Park Avenue
New York, New York 10167
(212) 272-2000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive office)
William J. Montgoris
Treasurer and Secretary
Bear Stearns Mortgage Securities Inc.
245 Park Avenue
New York, New York 10167
(212) 272-2000
Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Lois L. Weinroth, Esq.
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004-2696
<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. X
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
<TABLE>
Proposed
Amount Maximum Proposed Maximum Amount of
Title of Securities to be Aggregate Price Aggregate Registration
Being Registered Registered(1) per Unit(2) Offering Price Fee
<S> <C> <C> <C> <C>
Mortgage Pass-Through $5,000,000,000 100% $5,000,000,000 $1,515,151.52
Certificates
</TABLE>
(1) The amount of Securities being registered, together with approximately
$419,663,804 remaining amount of Securities previously registered by
the Registrant (Registration No. 33-62710) represents the maximum
aggregate principal amount of Securities currently expected to be
offered for sale. The amount of the filing fee associated with such
previously registered Securities that was previously paid was
approximately $144,711.65. The Prospectus included in this
Registration Statement also relates to the above-mentioned
Registration Statement (Registration No. 33-62710) as permitted by
Rule 429.
(2) Estimated solely for purposes of calculating the registration fee.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS
INCLUDED IN THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATES TO
REGISTRATION STATEMENT NO. 33-62710 AS PREVIOUSLY FILED ON MAY 13, 1993 BY THE
REGISTRANT ON FORM S-11, WHICH WAS CONVERTED TO FORM 3 BY POST-EFFECTIVE
AMENDMENT NO. 1 FILED ON JUNE 15, 1994. SUCH REGISTRATION STATEMENT NO. 33-
62710 ON FORM S-11 WAS DECLARED EFFECTIVE ON OR ABOUT MAY 19, 1993 AND SUCH
POST-EFFECTIVE AMENDMENT NO. 1 WAS DECLARED EFFECTIVE ON JUNE 15, 1994. THIS
REGISTRATION STATEMENT, WHICH IS A NEW REGISTRATION STATEMENT, ALSO CONSTITUTES
POST-EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT NO. 33-62710, AND SUCH
POST-EFFECTIVE AMENDMENT SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE
EFFECTIVENESS OF THIS REGISTRATION STATEMENT AND IN ACCORDANCE WITH SECTION 8(C)
OF THE SECURITIES ACT OF 1933.
<PAGE>
CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(A)
<TABLE>
ITEMS AND CAPTIONS IN FORM S-3 LOCATION IN PROSPECTUS
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus............................ Forepart of Registration Statement and
Outside Front Cover Page of Prospectus**
2. Inside Front and Outside Back
Cover Pages of Prospectus........................... Inside Front Cover Page of Prospectus**
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges.................................... Summary of Terms
4. Use of Proceeds..................................... Use of Proceeds**
5. Determination of Offering
Price............................................... *
6. Dilution............................................ *
7. Selling Security Holders............................ *
8. Plan of Distribution................................ Plan of Distribution**
9. Description of Securities
to be Registered.................................... Outside Front Cover Page; Summary of
Terms; The Trust Fund; Description of the
Securities**
10. Interests of Named Experts
and Counsel......................................... *
11. Material Changes.................................... **
12. Incorporation of Certain Information
by Reference........................................ Incorporation of Certain Documents by
Reference
13. Disclosure of Commission
Position on Indemnification
For Securities Act
Liabilities......................................... See page II-3
____________
</TABLE>
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
<PAGE>
PROSPECTUS SUPPLEMENT *
(To Prospectus dated ____________, 199_)
$------------
(Approximate)
Bear Stearns Mortgage Securities Inc.
Seller
[Corporation 1]
Master Servicer
[Corporation 2]
Master Servicer
Mortgage Pass-Through Certificates, Series 199_-_
The Mortgage Pass-Through Certificates, Series 199_-_ (collectively,
the "Certificates"), offered hereby include all Classes identified in the chart
below. The original principal amount of one or more Classes of Certificates may
be increased or decreased prior to their issuance, depending on the Mortgage
Loans actually delivered to the Trustee named herein and to obtain the required
ratings on the Certificates. It is a condition to their issuance that the
Certificates be rated "[__]" by [_______________________] and "[__]" by
[________________________] (See "Rating" herein).
The Certificates will represent, in the aggregate, the entire
beneficial ownership interest in a trust (the "Trust") consisting primarily of a
segregated pool (the "Mortgage Pool") (cover continued on next page) -------- *
This Registration Statement includes a Prospectus and an illustrative form of
Prospectus Supplement. As described in the Prospectus, each transaction may have
Classes of Certificates with various characteristics, Mortgage Assets with
various characteristics, various forms and terms of credit enhancement, one or
more Master Servicers, various underwriting and servicing standards with respect
to the Mortgage Assets, various tax consequences, and various other
characteristics of conventional, one-to-four family, fully amortizing, fixed
rate, first lien mortgage loans (the "Mortgage Loans") having an aggregate
principal balance as of ___________, 199_ (the "Cut-off Date") of approximately
[$_________] and original terms to stated maturity of __ to __ years.
Approximately $_________ of the Mortgage Pool will consist of Mortgage Loans
(the "[C1] Mortgage Loans") originated by various Lenders (as defined herein)
and subsequently acquired by [Corporation 1] ("[Corporation 1]"). Approximately
$__________ of the Mortgage Pool will consist of Mortgage Loans (the "[C2]
Mortgage Loans") originated by [Corporation 2] ("[Corporation 2]"). All the
Mortgage Loans will be acquired by Bear Stearns Mortgage Securities Inc.
("BSMSI") on the date of issuance of the Certificates.
Principal and interest on the Certificates are payable on the ____ day
of each month or, if such day is not a business day, then on the next succeeding
business day, beginning in __________ 199_ (each, a "Distribution Date").
Interest payments on the Mortgage Loans will be passed through to the holders of
the Certificates at the Pass-Through Rate set forth or described below.
Distributions of principal among the Certificates will be made as described
herein. See "Description of the Certificates-Distributions" herein. Realized
Losses (as defined herein) on the Mortgage Loans to the extent not otherwise
covered by credit enhancement will be allocated to the Certificates as described
herein. See "Description of the Certificates--Allocation of Losses" herein.
There is currently no secondary market for the Certificates and there
can be no assurance that one will develop. Bear, Stearns & Co. Inc. 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.
The yield to investors in the Certificates will be sensitive in
varying degrees to the rate and timing of principal payments (including
prepayments) on the Mortgage Loans, which generally may be prepaid in full or in
part at any time without penalty. The yield to investors in the Class A-X
Certificates (the "Variable Strip Certificates") will be extremely sensitive to
the rate and timing of such principal payments on the [C1] Mortgage Loans.
Investors in the Variable Strip Certificates should consider fully the
associated risks, including the risk that a rapid rate of principal payments
(including prepayments) on the [C1] Mortgage Loans could result in the failure
of investors in the Variable Strip Certificates to recover their initial
investments. See "Yield and Prepayment Considerations" and "Yield
Considerations" herein. The yield to investors in the Certificates also will be
adversely affected by Interest
(cover continued on next page)
Shortfalls (as defined herein) and by Realized Losses and NonMortgage Losses (as
defined herein). No representation is made as to the anticipated rate of
prepayments on the Mortgage Loans or as to the anticipated yield to maturity of
any Certificates.
Elections will be made to treat certain assets owned by the Trust as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. As described more fully herein and in the Prospectus, all of the
Certificates other than the Class A-R Certificates will be designated as
"regular interests" in the REMIC related to the Trust and the Class A-R
Certificates will represent the "residual interest" in such REMIC. See "Certain
Federal Income Tax Consequences" in the Prospectus. The Class A-R Certificates
will be subject to certain restrictions on transfer. See "Restrictions on
Purchase and Transfer of the Class A-R Certificates" in this Prospectus
Supplement.
[Corporation 2] will act as master servicer of the [C2] Mortgage Loans
and [Corporation 1] will act as master servicer of the [C1] Mortgage Loans.
Certain limited representations and warranties concerning (i) the [C2] Mortgage
Loans will be made by [Corporation 2] and (ii) the [C1] Mortgage Loans will be
made by [Corporation 1]. The obligation of [Corporation 2] to repurchase or
substitute for a [C2] Mortgage Loan as to which a breach has occurred and is
continuing and of [Corporation 1] to repurchase or substitute for a [C1]
Mortgage Loan as to which a breach has occurred and is continuing will
constitute the sole remedies available to Certificateholders with respect to any
representations or warranties concerning the Mortgage Loans.
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, and Section 21E of the Securities and Exchange Act of 1934, as
amended. Actual results could differ materially from those contained in such
statements as a result of the matters set forth above, under "Summary of
Terms--Yield and Prepayment Considerations" and "Yield and Prepayment
Considerations" and elsewhere in this Prospectus Supplement.
The Certificates offered by this Prospectus Supplement constitute a
separate series of Certificates being offered by BSMSI pursuant to its
Prospectus dated __________, 199_, 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.
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
BSMSI, THE TRUSTEE, [CORPORATION 1], [CORPORATION 2] OR ANY OF THEIR RESPECTIVE
AFFILIATES. EXCEPT AS PROVIDED HEREIN, NEITHER THE CERTIFICATES NOR THE
UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY,
BSMSI, [CORPORATION 1], [CORPORATION 2] OR ANY OF THEIR AFFILIATES, OR ANY OTHER
PERSON. DISTRIBUTIONS ON THE CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS
TRANSFERRED OR PLEDGED TO THE TRUST FOR THE BENEFIT OF CERTIFICATEHOLDERS.
(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 SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
$__________ ____% Class [A-1] Certificates
$__________ ____% Class [A-2] Certificates
$__________ ____% Class [A-3] Certificates
$__________ ____% Class [A-4] Certificates
$__________ ____% Class [A-5] Certificates
$__________ ____% Class [A-6] Certificates
$__________ ____% Class [A-7] Certificates
$__________ ____% Class [A-R] Certificates
$__________ ____% Class [A-8] Certificates
$__________ ____% Class [A-9] Certificates
$__________ (1) Class [A-X] Certificates
$__________ ____% Class [B-1] Certificates
$__________ ____% Class [B-2] Certificates
$__________ (2) Class [P-1] Certificates
$__________ (2) Class [P-2] Certificates
(1) The Class A-X Certificates will be entitled to receive interest in an
amount equal to the excess of (a) the weighted average of the Net
Rates (as defined herein) of the [C1] Mortgage Loans with Net Rates in
excess of ____% per annum over (b) ____% per annum, on the outstanding
principal balance of such [C1] Mortgage Loans (after taking into
account principal advances), as further described under "Summary of
Terms--Interest" herein.
(2) The Class P-1 and Class P-2 Certificates are principal only
Certificates and will receive no interest.
The Certificates offered hereby, except for the Class P-1 Certificates
(which will be transferred to [Corporation 2] as partial consideration for the
[C2] Mortgage Loans and the Class P-2 Certificates (which will be transferred to
[Corporation 1] as partial consideration for the [C1] Mortgage Loans), will be
purchased by Bear, Stearns & Co. Inc. (the "Underwriter") from 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 are
expected to be approximately _____% of the aggregate principal balance of the
Certificates (other than the Class P-1 and Class P-2 Certificates), plus accrued
interest thereon at the applicable Pass-Through Rate from the Cut-off Date, but
before deducting expenses payable by BSMSI, estimated to be $_________.
(cover continued on next page)
<PAGE>
The Certificates (other than the Class P-1 and Class P-2 Certificates)
are offered by the Underwriter when, as and if issued, delivered to and accepted
by the Underwriter subject to certain other conditions. It is expected that
delivery of the Certificates will be made against payment therefor at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167
on or about __________, 199_.
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is ____________, 199_
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by BSMSI with respect to the Trust pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Certificates
shall be deemed to be incorporated by reference in this Prospectus Supplement.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus Supplement to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this Prospectus
Supplement. BSMSI will provide without charge to each person to whom a copy of
the Prospectus Supplement is delivered, on the written or oral request of any
such person, a copy of any or 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 Secretary of BSMSI, 245 Park Avenue, New
York, New York 10167. Telephone requests for such copies should be directed to
the Secretary of BSMSI at (212) 272-2000.
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. Capitalized terms not defined in this summary shall
have the meaning assigned in the Prospectus Supplement. See "Index of Principal
Definitions" herein.
Title of Series.................. Mortgage Pass-Through Certificates, Series
199_-_ (the "Certificates"). The Certificates
will represent in the aggregate the entire
beneficial ownership interest in a
trust (the "Trust") consisting primarily of
a segregated pool (the "Mortgage Pool")
of mortgage loans (the "Mortgage Loans")
having an aggregate principal balance as of
__________, 199_ (the "Cut-off Date") of
approximately $__________. The Certificates
will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of the
Cut-off Date (the "Agreement") among Bear
Stearns Mortgage Securities Inc., as
depositor ("BSMSI"), [Corporation 1], as
master servicer ("[Corporation 1]"),
[Corporation 2], as master servicer
("[Corporation 2]") and [_______________],
as trustee (the "Trustee").
Offered Securities................ Class A-1 Certificates ____% $________
Class A-2 Certificates ____% $________
Class A-3 Certificates ____% $________
Class A-4 Certificates ____% $________
Class A-5 Certificates ____% $________
Class A-6 Certificates ____% $________
Class A-7 Certificates ____% $________
Class A-R Certificates ____% $________
Class A-8 Certificates ____% $________
Class A-9 Certificates ____% $________
Class A-X Certificates Var. $________
Class B-l Certificates ____% $________
Class B-2 Certificates ____% $________
Class P-l Certificates ____% $________
The original principal amount of one or more
Classes of Certificates may be increased or
decreased by BSMSI by up to __%, depending
upon the Mortgage Loans actually acquired by
BSMSI and delivered to the Trustee. In
addition, the original principal amount of
any Class of Certificates may be adjusted,
as necessary, to obtain the required ratings
on the Certificates from the Rating
Agencies (as defined under "Summary
of Terms--Rating" herein). Accordingly, any
investor's commitments with respect to the
Certificates may be correspondingly
increased or decreased.
Designations...................... All Classes of Certificates other
than the Class A-R Certificates are
referred to collectively herein as the
"Regular Certificates." The Class A-R
Certificates are referred to herein as the
"Residual Certificates." The Class A-X
Certificates are referred to herein
as the "Variable Strip Certificates." The
Class A-l, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6 and Class A-7
Certificates are referred to collectively
herein as the "First Tier Certificates." The
Class A-R, Class A-8 and Class A-9
Certificates are referred to
collectively herein, along with the
Class P-l and Class P-2 Deferred Amounts
(each as defined under "Summary of Terms--
Principal" herein), as the "Second Tier
Certificates." The First Tier
Certificates, Second Tier Certificates and
Class A-X Certificates are referred to
collectively herein as the "Class A
Certificates." The Class B-l and Class B-2
Certificates are referred to collectively
herein as the "Class B Certificates."
Denominations..................... The Certificates will be offered in
certificated, fully-registered form. All
Classes of Certificates other than the
Variable Strip Certificates will be issued in
minimum denominations of $25,000 and
increments of $1,000 in excess thereof. The
Variable Strip Certificates will be issued in
minimum denominations of $1,000 and
increments of $100 in excess thereof. One
Certificate of each Class of Certificates may
be issued in a different principal amount to
accommodate the remainder of the initial
principal amount of the Certificates of such
Class.
Seller............................ BSMSI, a wholly-owned subsidiary of
The Bear Stearns Companies Inc. See "Bear
Stearns Mortgage Securities Inc." in the
Prospectus.
Master Servicers.................. [Corporation 2] will act as master servicer
with respect to the [C2] Mortgage Loans (as
defined below) and [Corporation 1] will act
as master servicer with respect to the
[C1] Mortgage Loans (as defined below). Each
of [Corporation 1] and [Corporation 2] is
referred to as a "Master Servicer" and
collectively as the "Master Servicers." See
"The Pooling and Servicing Agreement" herein.
The Mortgage Pool................. The Mortgage Pool will consist of
conventional, one-to-four family, fully
amortizing, fixed rate Mortgage Loans
secured by first liens on residential real
properties (the "Mortgaged Properties")
having an aggregate principal balance as of
the Cut-off Date of approximately
$_____________ (subject to a permitted
upward or downward variance of up to __%) and
original terms to stated maturity of __ to
__ years. Approximately $_____________ of
the Mortgage Pool will consist of Mortgage
Loans originated by [Corporation 2] (the
"[C2] Mortgage Loans") and approximately
$__________ of the Mortgage Pool will consist
of Mortgage Loans originated by various
Lenders (as defined under "Description
of the Mortgage Pool-- [C1] Mortgage Loans"
herein) and subsequently acquired by
[Corporation 1] (the "[C1] Mortgage Loans").
As of the Cut-off Date, the interest
rates on the Mortgage Loans (the "Mortgage
Rates") are expected to range from
approximately _____% to approximately
______% per annum, and the weighted average
Mortgage Rate is expected to be
approximately _____% per annum. As of the
Cut-off Date, the weighted average
calculated remaining term to maturity of the
Mortgage Loans is expected to be
approximately ___ months. The Mortgage Loans
will have individual principal balances at
origination of not less than approximately
$______ and not more than approximately
$______ and, as of the Cut-off Date, the
average outstanding principal balance of the
Mortgage Loans is expected to be
approximately $______. The original principal
amount of each Mortgage Loan will not be
more than __% of the value of the related
Mortgaged Property at origination, based upon
an appraisal of the Mortgaged Property or
the selling price, whichever is less, or, in
the case of certain refinancings, the value
of such Mortgaged Property set forth in an
appraisal (the "Original Value"). Each
Mortgage Loan for which both the original
principal balance and the outstanding
principal balance as of the Cut-off Date
exceeded __% of the Original Value will
be covered by a primary mortgage guaranty
insurance policy (a "Primary Insurance
Policy") at least until the outstanding
principal amount is reduced below __% of the
Original Value. See "Description of the
Mortgage Pool" herein.
Net Rate.......................... The "Net Rate" for each Mortgage
Loan is the Mortgage Rate for such
Mortgage Loan, less the sum of the
Servicing Rate, Retained Servicing
Rate, Trustee's Fee, Certificate
Administrator's Fee and Credit
Support Fee (each as defined in the
Agreement) attributable thereto (in
each case expressed as a per annum
rate). It is expected that with
respect to a Distribution Date (as
defined under "--Distribution
Dates" herein), the Servicing Rate
will not be less than ___% or more
than ____% per annum, and the other
fees will be approximately ___% per
annum, of the Scheduled Principal
Balance (as defined below) of each
Mortgage Loan as of the Due Date
(as defined under "Description of
the Mortgage Pool--General" herein)
in the month preceding the month in
which such Distribution Date
occurs.
.................................. The "Scheduled Principal Balance"
of a Mortgage Loan as of a Due Date
is the unpaid principal balance of
such Mortgage Loan as of such Due
Date, as specified in the
amortization schedule at the time
relating thereto (before any
adjustment to such amortization
schedule by reason of any
bankruptcy or similar proceeding
(other than a Deficient Valuation,
as defined under "Description of
the Certificates--Credit Mortgage
Loans" herein) or any moratorium or
similar waiver or grace period),
after giving effect to any
Principal Prepayments (as defined
under "Description of the
Certificates--Distributions of
Principal" herein) and the
principal portion of Net
Liquidation Proceeds (as defined
under "Description of the Certificates--
Realized Losses" herein) received
during the month preceding the month in which
such Due Date occurs and the payment
of principal due on such Due Date and
irrespective of any delinquency in
payment by the related Mortgagor, but less
any Realized Losses realized during or prior
to the month preceding the month in which
such Due Date occurs and allocated to
such Mortgage Loan.
Certificate Value................. The "Certificate Value" of an
outstanding Mortgage Loan for a
Distribution Date will be the
Scheduled Principal Balance of such
Mortgage Loan as of the Due Date in
the month in which such
Distribution Date occurs, except
that the Certificate Value of any
Mortgage Loan having a Net Rate as
of the Cut-off Date less than ___%
per annum (a "Discount Mortgage
Loan") will equal such Mortgage
Loan's Scheduled Principal Balance
multiplied by a fraction, the
numerator of which will equal such
Mortgage Loan's Net Rate and the
denominator of which will equal
___% per annum. As a result of the
manner in which Certificate Value
is computed, there will be, with
respect to each Discount Mortgage
Loan, "Excess Principal" each month
in an amount equal to the amount by
which its Scheduled Principal
Balance exceeds its Certificate
Value.
Distribution Dates................ The ____ day of each month, or if
such day is not a business day,
then the next succeeding business
day, beginning in __________ 199_
(each, a "Distribution Date").
Record Date....................... The "Record Date" for each
Distribution Date will be the close
of business on the last business
day of the month preceding the
month in which the related
Distribution Date occurs. See
"Description of the Certificates-
-Distributions" herein.
Due Period........................ With respect to each Distribution
Date, the period commencing on the
second day of the month preceding
the month in which the Distribution
Date occurs and ending at the close
of business on the first day of the
month in which the Distribution
Date occurs (each, a "Due Period").
Prepayment Period................. With respect to each Distribution
Date, the period from the first day
through the last day of the month
preceding the month in which the
Distribution Date occurs (each, a
"Prepayment Period").
Distributions..................... To the extent of Available Funds
(as defined under "Description of
the Certificates-Distributions of
Principal" herein), payments of
principal and interest to holders
of Certificates will be made on
each Distribution Date, commencing
in __________ 199_. Distributions
will be made to holders of record
on the related Record Date, except
that the final payment in respect
of each Class of Certificates will
be made only upon presentation and
surrender of such respective
Certificates at the office or
agency of the Trustee in New York,
New York. Payments on the
Certificates will be applied first
to the payment of interest and then
to the payment of principal. See
"Description of the Certificates--
Distributions of Interest" and
"--Distributions of Principal"
herein.
Interest Accrual Period........... With respect to each Distribution
Date, the "Interest Accrual Period"
will be the calendar month
preceding the month in which the
Distribution Date occurs,
commencing __________, 199_.
Interest.......................... To the extent of the Available
Funds and prior to payments of
principal on the Certificates
(other than payments of Excess
Principal on the Class P-l and
Class P-2 Certificates), each Class
of Certificates (other than Class
P-l and Class P-2 Certificates)
will be entitled to receive
interest on each Distribution Date
as provided below on the respective
Current Principal Amount (as
defined below) of each such Class
applicable to such Distribution
Date (or as otherwise described
below).
All interest bearing Classes of Certificates,
other than the Class A-X Certificates, will
bear interest at a rate of ___% per annum.
The Class A-X Certificates will be entitled
to receive interest in an amount equal to the
excess of (a) the weighted average of the Net
Rates of the [C1] Mortgage Loans with Net
Rates in excess of ___% per annum over (b)
___% per annum, on the outstanding principal
balance of such [C1] Mortgage Loans (after
taking into account principal advances).
With respect to the first Distribution Date,
it is expected that the amount payable
with respect to the Class A-X Certificates
will equal a per annum rate of approximately
___% on the original Current Principal Amount
of the Class A-X Certificates, based upon the
assumption that the weighted average Net Rate
of the [C1] Mortgage Loans with Net Rates
in excess of ___% per annum is approximately
___% per annum.
The Class P-l and Class P-2 Certificates are
principal only Certificates and will
receive no interest.
Distributions of interest on the Certificates
will include interest accrued during the
Interest Accrual Period for the applicable
Distribution Date, reduced by any Interest
Shortfalls (as defined below). To the extent
funds are not available to pay interest at
the rates and in the amounts stated herein,
such unpaid amounts will be deferred to
succeeding Distribution Dates and will not
bear interest.
With respect to any Class of Certificates,
the "Current Principal Amount" as of any
Distribution Date will equal the initial
principal amount of such Certificates reduced
by the sum of (i) all payments made prior to
such Distribution Date with respect to
principal (other than payments under the Pool
Insurance Policy with respect to the Class B
Certificates to the extent that they have
been reduced by a Credit Loss (as defined
under "Description of the Certificates--
Credit Mortgage Loans" herein), and other
than payments with respect to the Class P-1
and Class P-2 Deferred Amounts), (ii) any
Realized Losses or Non-Mortgage Losses (as
defined under "Description of the
Certificates--Realized Losses" and "--Non-
Mortgage Losses" herein) allocated prior to
such Distribution Date to such
Certificates (other than in respect to the
Class P Deferred Amount) and (iii) in the
case of the Class P-l and Class P-2
Certificates, any Class P-l or Class P-2
Deferred Amount (each as defined under
"Summary of Terms--Principal" herein)
allocated prior to such Distribution Date.
With respect to the Class P-l or Class P-2
Deferred Amount, the Current Principal
Amount as of any Distribution Date will
equal the then outstanding aggregate Class
P-l or Class P-2 Deferred Amount, as the
case may be.
The "Interest Shortfall" for any Distribution
Date is equal to the aggregate shortfall, if
any, in collections of interest resulting
from (a) prepayments in full by a mortgagor
of the related Mortgage Loan (a "Mortgagor")
during the related Prepayment Period, (b)
Mortgage Loans which become Liquidated
Mortgage Loans (as defined under
"Description of the Certificates-Special
Hazard Mortgage Loans" herein) during the
related Prepayment Period and (c) interest
payments on certain of the Mortgage Loans
being limited pursuant to the provisions of
the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act").
Such shortfalls will result because (i)
Mortgagors are obligated to pay interest on
prepayments in full only to the date of
prepayment by the Mortgagor, (ii) no interest
is recoverable with respect to Liquidated
Mortgage Loans after the liquidation thereof
and (iii) the Relief Act limits, in certain
circumstances, the interest rate required to
be paid by a Mortgagor in the military
service to 6% per annum.
The Interest Shortfall on any Distribution
Date will be allocated among all Classes of
Certificates (other than the Class P-l and
Class P-2 Certificates) pro rata based on
the amount of interest, if any, payable with
respect to each Class of Certificates for
such Distribution Date, before taking
into account any such reduction. Interest
Shortfalls will not be offset by application
of servicing compensation or otherwise.
Principal......................... On each Distribution Date, the Available
Funds remaining after payment of interest as
described above will be distributed as
principal to the Certificates in the
following manner: (i) to the Class P-l and
Class P-2 Certificates, the lesser of (a) the
product of (A) such remaining Available Funds
multiplied by (B) the Class P Principal
Amount (as defined under "Description of the
Certificates--Distributions of Principal"
herein) divided by the sum of the Class A
Principal Amount, the Class B Principal
Amount (each as defined under "Description of
the Certificates--Distributions of Principal"
herein) and the Class P Principal Amount
and (b) the Class P Principal Amount and (ii)
to the Class A Certificates and the Class B
Certificates, the remainder up to the sum of
the Class A Principal Amount and the Class B
Principal Amount.
As between the Class P-l Certificates and the
Class P-2 Certificates, the Class P-l
Certificates will receive that portion of the
Class P Principal Amount representing
payments of Excess Principal on the [C1]
Mortgage Loans and the Class P-2 Certificates
will receive that portion of the Class P
Principal Amount representing payments of
Excess Principal on the [C2] Mortgage Loans.
As between the Class A Certificates and the
Class B Certificates, the amount of principal
to be distributed will be allocated in
the following manner: to the Class A
Certificates, the Class A Principal
Distribution Amount and to the Class B
Certificates, the Class B Principal
Distribution Amount (each as defined under
"Description of the Certificates-
Distributions of Principal" herein) until the
Current Principal Amounts of the Class A and
Class B Certificates have been reduced to
zero;
As among the Class A Certificates, the Class
A Principal Distribution Amount will be
allocated in the following manner:
(i) to the Class A-X Certificates in an
amount equal to the product of the Class A-X
Percentage (as defined under "Description of
the Certificates--Distributions of
Principal" herein) multiplied by the Class A
Principal Distribution Amount, until the
Current Principal Amount of such Certificates
is reduced to zero;
(ii) to the First Tier Certificates in an
amount (the "First Tier Principal
Distribution Amount") equal to the product of
the First Tier Percentage (as defined under
"Description of the Certificates--
Distributions of Principal" herein)
multiplied by the Class A Principal
Distribution Amount, until the Current
Principal Amounts of such Certificates are
reduced to zero; and
(iii) to the Second Tier Certificates in an
amount (the "Second Tier Principal
Distribution Amount") equal to the product of
the Second Tier Percentage (as defined under
"Description of the Certificates--
Distributions of Principal" herein)
multiplied by the Class A Principal
Distribution Amount, until the Current
Principal Amounts of such Certificates are
reduced to zero.
As among the First Tier Certificates, the
First Tier Principal Distribution Amount
will, except as provided in the second
following paragraph, be allocated in the
following manner:
(i) First, so long as the Current
Principal Amount of the Class A-2
Certificates exceeds $__________,
concurrently to the Class A-l and
Class A-2 Certificates, in the
proportions of approximately
__________% and __________%,
respectively, in an amount up to
the amount necessary to reduce
their Current Principal Amounts to
the product of (A) their respective
Targeted Principal Percentages as
set forth in the table on page
S-129 for such Distribution Date
and (B) their respective original
Current Principal Amounts;
(ii) Second, once the Current
Principal Amount of the Class A-2
Certificates equals $__________,
concurrently to the Class A-l,
Class A-2 and Class A-3
Certificates, in the proportions of
approximately ___%, ___% and ___%,
respectively, in an amount up to
the amount necessary to reduce
their Current Principal Amounts to
the product of (A) their respective
Targeted Principal Percentages as
set forth in the table on page
S-129 for such Distribution Date
and (B) their respective original
Current Principal Amounts;
(iii) Third, to the Class A-4 through A-7
Certificates in the order of their numerical
designations so that no payment of principal
will be made on any Class of such
Certificates until the Current Principal
Amounts of any Classes with lower numerical
designations have been reduced to zero; and
(iv) Fourth, (a) so long as the Current
Principal Amount of the Class A-2
Certificates exceeds $__________,
concurrently to the Class A-l and Class A-2
Certificates, in the proportions set forth in
(i) above, and (b) thereafter, concurrently
to the Class A-1, Class A-2 and Class A-3
Certificates, in the proportions set forth in
clause (ii) above, in each case, without
regard to their respective Targeted Principal
Percentages and until the respective Current
Principal Amounts thereof have been reduced
to zero.
As among the Second Tier Certificates, the
Second Tier Principal Distribution Amount
will, except as provided in the following
paragraph, be allocated in the following
manner:
(i) First, concurrently to the Class A-R and
Class A-8 Certificates, in the proportions of
__% and __%, respectively, in an amount up to
the amount necessary to reduce the Current
Principal Amount of the Class A-R
Certificates to zero;
(ii) Second, to the Class A-8 and Class A-9
Certificates in that order until the
respective Current Principal Amounts thereof
have been reduced to zero; and
(iii) Third, to the Class P-l and Class P-2
Certificates, pro rata based upon their
respective Current Principal Amounts until
their respective Class P Deferred Amounts
are reduced to zero.
Notwithstanding the two preceding paragraphs,
if the Class A Percentage (as defined under
"Description of the Certificates-
-Distributions of Principal" herein)
increases to 100% and the Current Principal
Amounts of the Second Tier Certificates (i)
have not been reduced to zero, any
distributions allocable to principal on the
Second Tier Certificates will be made pro
rata among the remaining Classes of Second
Tier Certificates in accordance with their
respective Current Principal Amounts
immediately prior to the related Distribution
Date or (ii) have been reduced to zero, any
distributions allocable to principal on
the First Tier Certificates will be made pro
rata among the remaining Classes of
First Tier Certificates in accordance with
their Current Principal Amounts.
As between the Class B Certificates, the
Class B Principal Distribution Amount will be
allocated to the Class B-l and Class B-2
Certificates in that order until the
respective Current Principal Amounts thereof
have been reduced to zero; provided, however,
if a required payment under the Pool
Insurance Policy (as defined under "--Pool
Insurance Policy" herein) is not made, until
all such required payments are made, any
distributions allocable to principal on the
Class B Certificates will be made pro rata
between the Class B-l and Class B-2
Certificates in accordance with their
respective Current Principal Amounts
immediately prior to the related Distribution
Date.
The calculation of Excess Principal results
in the Class P-l and Class P-2 Certificates
receiving on each Distribution Date an amount
equal to that portion of the scheduled
principal payments received with respect to
each Discount Mortgage Loan for the Due Date
in the month in which such Distribution Date
occurs and that portion of the Principal
Prepayments and Net Liquidation Proceeds
allocable to principal received with respect
to each Discount Mortgage Loan during the
Prepayment Period preceding such Distribution
Date equal to the product of such scheduled
principal, Principal Prepayments or Net
Liquidation Proceeds allocable to principal,
as the case may be, multiplied by a fraction,
the numerator of which is the Excess
Principal of such Discount Mortgage Loan as
of the Due Date in the month preceding the
month in which such Distribution Date occurs
and the denominator of which is the
Scheduled Principal Balance of such Discount
Mortgage Loan as of such Due Date.
The Class P-l Certificates will receive all
payments representing Excess Principal on
the [C1] Mortgage Loans and the Class P-2
Certificates will receive all payments
representing Excess Principal on the [C2]
Mortgage Loans.
With respect to a Discount Mortgage Loan that
becomes a Liquidated Mortgage Loan during a
Prepayment Period, the Class P-l or Class P-2
Certificates will be entitled to receive on
the related Distribution Date the entire
unpaid Excess Principal for such Discount
Mortgage Loan. If the amount of unpaid
Excess Principal exceeds the portion
of the Liquidation Proceeds allocated to the
Class P-l or Class P-2 Certificates as set
forth above with respect to such Liquidated
Mortgage Loan, such excess will not
be paid to the Class P-l or Class
P-2 Certificates on such Distribution Date
but will, to the extent such excess does not
constitute a Realized Loss allocable to the
Class P-l or Class P-2 Certificates as
described under "--Realized Losses" herein,
be treated as "Class P-l Deferred Amount" or
"Class P-2 Deferred Amount" and paid to the
Class P-l or Class P-2 Certificates as
described above. The Class P-l Deferred
Amount and the Class P-2 Deferred Amount
are referred to herein collectively as the
"Class P Deferred Amount."
On each Distribution Date, the Available
Funds remaining after payment of interest
and principal as described above will be
distributed to the Class A-R Certificates
except that amounts otherwise distributable
to the Class A-R Certificates will be
distributed to other Classes under the
conditions set forth in the Agreement to
cover certain payment shortages on prior
Distribution Dates.
[Credit Enhancement
Letters of Credit............... To enhance the likelihood of regular receipt
by holders of the Certificates of the full
amount of their monthly distributions and to
afford such holders limited protection
against losses due to (i) any failure of
[Corporation 1] to comply with its
obligations to repurchase [C1] Mortgage
Loans and [Corporation 2] to comply with its
obligation to repurchase [C2] Mortgage
Loans, in each case as to which there
was fraud, misrepresentation or
dishonesty and denial of coverage under any
applicable Primary Insurance Policy and the
Pool Insurance Policy referred to below, (ii)
Special Hazard Losses (as defined under
"Description of the Certificates-
-Special Hazard Mortgage Loans" herein) and
(iii) certain other Realized Losses in
connection with bankruptcy proceedings
related to a Mortgagor, three letters of
credit will be obtained (the "Mortgage
Repurchase Letter of Credit," the
"Special Hazard Letter of Credit"
Credit," respectively, and, collectively,
the "Letters of Credit"). Such Letters
of Credit are expected to be in initial
amounts of approximately $__________,
$__________ and $__________, respectively
(or approximately ___%, ___% and ___%,
respectively, of the aggregate unpaid
principal balance of the Mortgage
Loans as of the Cut-off Date), and are
expected to be provided by
[_______________________]. See "Description
of the Certificates-Credit Enhancement--
Letters of Credit" herein.]
[Pool Insurance Policy............. [_______________________] will issue a Pool
Insurance Policy (the "Pool Insurance
Policy"), limited in scope, for the benefit
of the holders of the Class B Certificates
which will cover losses realized by such
holders by reason of Credit Losses. Such
Pool Insurance Policy will be in an initial
amount equal to the initial principal amount
of the Class B Certificates and will
decline as described herein. In addition,
an endorsement to the Pool Insurance Policy
will provide for the payment of Monthly
Advances (as defined under "Summary of
Terms--Monthly Advances" herein) under
certain circumstances, as described below.
Each Mortgage Loan will be required to be
covered by a standard hazard insurance
policy, which may be a blanket policy. See
"Description of the Certificates--Credit
Enhancement--Pool Insurance Policy" herein.]
Allocation of Losses.............. The Class B-l Certificates will bear all
Credit Losses on the Mortgage Loans by a
reduction in their Current Principal Amount
until the Current Principal Amount
thereof is reduced to zero. Thereafter, the
Class B-2 Certificates will bear all Credit
Losses until the Current Principal Amount
thereof is reduced to zero. However,
if required payments under the Pool Insurance
Policy are not made to cover Credit Losses,
the Class B-l and Class B-2
Certificates will bear such Credit Losses pro
rata based upon their Current Principal
Amounts until all such required payments have
been made. Any additional Credit Losses will
be borne first by the holders of any
then outstanding Second Tier Certificates
(including any Class P Deferred Amount) and
by the Class A-X Certificates to the extent
of the Class A-X Percentage of such Credit
Loss by a reduction in their Current
Principal Amounts until the Current
Principal Amounts of the Second Tier
Certificates are reduced to zero and
then by the holders of any then outstanding
First Tier Certificates and by the
Class A-X Certificates to the extent of the
Class A-X Percentage of such Credit
Loss and, if such Credit Loss relates to a
Discount Mortgage Loan, the Class P-l or
Class P-2 Certificates (other than
the Class P-l or Class P-2 Deferred Amount,
respectively) by a reduction in their Current
Principal Amounts. All losses on the Mortgage
Loans which are not Credit Losses ("Non-
Credit Losses") and all Non-Mortgage Losses
will, to the extent not covered by the
Letters of Credit, be borne by the holders of
all then outstanding Class A Certificates
and, in the case of Non-Credit Losses
relating to a Discount Mortgage Loan, the
Class P-l or Class P-2 Certificates (other
than the Class P-l or Class P-2 Deferred
Amount, respectively) by a reduction in their
Current Principal Amounts. After the Current
Principal Amount of each Class of the
Class A Certificates is reduced to zero, any
additional Non-Credit Losses and Non-Mortgage
Losses will be allocated to the Class B-l anD
Class B-2 Certificates pro rata based
upon their Current Principal Amounts. If the
Class B-l or Class B-2 Certificates are
allocated a Credit Loss, the respective Class
will be entitled to the benefits of
the Pool Insurance Policy.
Any reduction in Current Principal Amount for
a loss other than a loss relating to a
Discount Mortgage Loan will be allocated pro
rata among the Class A Certificates
(including the Class P-l and Class P-2
Deferred Amounts) or Class B Certificates
bearing such loss based on their respective
Current Principal Amounts but, in the case
of the Class A-X Certificates, only
with respect to the Class A-X Percentage.
Any such reduction for a loss relating to a
Discount Mortgage Loan will be allocated as
follows (i) pro rata based on Current
Principal Amounts among the Class A
Certificates or Class B Certificates bearing
such loss but, in the case of the Class A-X
Certificates, only with respect to the Class
A-X Percentage, the product of such loss
multiplied by a fraction, the numerator of
which is the Net Rate of such Discount
Mortgage Loan and the denominator of which
is ___% and (ii) the remainder to the Class
P-l Certificates in the case of a [C1]
Mortgage Loan or the Class P-2 Certificates
in the case of a [C2] Mortgage Loan.
Because principal distributions are paid to
certain Classes of Class A Certificates
before other Classes in the same tier,
holders of Classes that receive principal
later bear a greater risk of losses
on the Mortgage Loans than holders
of Classes in the same tier that
receive principal earlier. Similarly, because
principal distributions are paid to the Class
B-1 Certificates before the Class B-2
Certificates, holders of the Class B-2
Certificates bear a greater risk of losses
on the Mortgage Loans than holders
of the Class B-1 Certificates.
Special Considerations
for Class B Certificates........ The Pool Insurance Policy will be issued in
an amount equal to the original principal
amount of the Class B Certificates. The terms
for the reduction of coverage of the original
amount (or such lesser amount as is
subsequently acceptable to the Rating
Agencies) of the Pool Insurance Policy are
established so that the amount of coverage of
the Pool Insurance Policy will not be reduced
to an amount that is less than the
outstanding principal amount of the Class B
Certificates. Payments made on the Pool
Insurance Policy to cover Credit Losses will
be applied to pay principal on the Class B
Certificates in conjunction with the
allocation of those losses to the Class B
Certificates. If payments are not made to
cover Credit Losses covered under the
terms of the Pool Insurance Policy, the
principal amount of the Class B
Certificates will nonetheless be charged with
the amount of such Credit Losses and the
holders of the Class B Certificates will
incur a loss to the extent there is no
ultimate recovery on the Pool
Insurance Policy. For information
concerning the Pool Insurance Policy and
[_________], see "Description of the
Certificates-Credit Enhancement-Pool
Insurance Policy" herein. For information on
yields to maturity, see "Yield and
Prepayment Considerations--Senior-
Subordinated Classes" in this
summary of terms.
Yield and Prepayment
Considerations.................. General Considerations. The yields to
maturity of the Certificates will be
affected by the amount and timing of
principal payments on the Mortgage Loans,
the allocation of available funds to various
Classes of Certificates, the applicable
pass-through rate for various Classes of
Certificates and the purchase price paid for
the Certificates. In addition, the
yields to investors in the Certificates will
be adversely affected by Interest Shortfalls,
Realized Losses and Non-Mortgage Losses. The
interaction of the foregoing factors may have
different effects on the various Classes of
Certificates and the effects on any Class may
vary at different times during the life of
such Class. No representation is made as to
the anticipated rate of prepayments on the
Mortgage Loans or as to the anticipated yield
to maturity of any 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. In addition
to the discussion below, prospective
investors should review the discussion under
"Yield and Prepayment Considerations" herein
and in the Prospectus.
Mortgage Loan Payments. 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, borrower's net
equity in the mortgaged properties and
servicing decisions. Amounts received by
virtue of liquidations of Mortgage
Loans, repurchases of Mortgage Loans upon
breach of representations and optional
termination of the Trust also affect the
receipt of principal on the Mortgage Loans.
[All] the Mortgage Loans may be prepaid at
any time without penalty and have
due-on-sale clauses.
Timing of Payments and Distributions. Unlike
certain corporate bonds, the times at which
principal payments will be made on the
Certificates are not fixed because they are
determined by the timing of principal
payments on the Mortgage Loans. The timing
of payments 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.
Furthermore, 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. Moreover, any Interest
Shortfall resulting from prepayments,
liquidations and interest reductions
pursuant to the Relief Act [will] be
allocated among the Classes pro rata based
on the amount of interest otherwise payable
to each Class and accordingly will
reduce the yield to investors in such
Classes.
Discounts and Premiums. 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.
Reinvestment Risk. Because the Mortgage
Loans may be prepaid at any time, it is not
possible to predict the rate at which
distributions on the Certificates will be
received. 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
yields on the Certificates. Yields on any
such reinvestments may be lower, and may even
be significantly lower, than yields 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 or comparable
yields may not be possible. Prospective
investors in the Certificates should
consider carefully the related reinvestment
risks in light of other investments that may
be available to such investors.
Variable Strip Certificates. The yield to
investors in the Class A-X Certificates,
which will be offered at substantial premiums
over their stated principal amounts, will be
extremely sensitive to the rate and timing of
principal payments of the [C1] Mortgage
Loans. A rapid rate of principal payments
on such Mortgage Loans will have a materi-
ally negative effect on the yield to
investors in the Class A-X Certificates.
Investors should fully consider the
associated risks, including the risk that a
rapid rate of principal payments could result
in the failure of investors in the Class A-X
Certificates to recover fully their initial
investments. In addition, [C1] Mortgage
Loans with relatively high Net Rates will
account for a disproportionately large share
of the interest payments paid on the Class
A-X Certificates. Accordingly, to the extent
[C1] Mortgage Loans with relatively higher
Net Rates prepay faster than those with Net
Rates less than or equal to the weighted
average Net Rate of the [C1] Mortgage Loans,
the total cash flow and the yield on the
Class A-X Certificates will be reduced. See
"Yield and Prepayment Considerations--Yield
on Class A-X Certificates" herein.
Senior-Subordinated Classes. Prepayments
(other than those relating to Discount
Mortgage Loans) will be allocated solely to
the Class A Certificates during at least the
first five years after the date of the
initial sale of the Certificates and then
such allocation will decrease subject to
meeting certain loss and delinquency tests
during the next four years until the Class A
and Class B Certificates share pro rata in
such allocations. Consequently, during not
less than the first [nine] years after the
Closing Date, prepayments will have
the effect of accelerating the amortization
of the Class A Certificates while increasing
the percentage interest in the Trust
evidenced by the Class B Certificates. To the
extent that Credit Losses are incurred as a
result of defaults on the Mortgage Loans, the
allocation of such Credit Losses and the
proceeds of the Pool Insurance Policy
described above to the Class B
Certificates will have the effect of
accelerating the amortization of the Class B
Certificates while increasing the percentage
interest in the Trust evidenced by the Class
A Certificates. High Credit Losses and
related high payments on the Pool
Insurance Policy will result in faster
amortization of the Class B Certificates.
Low Credit Losses on the Mortgage
Loans will result in low payments on the
Pool Insurance Policy and slower
amortization of the Class B Certificates.
Targeted Amortization Classes ("TACs"). The
Certificates have been structured to provide
for relatively stable distributions of
principal on the Class A-1, Class A-2 and
Class A-3 Certificates (in accordance with
their respective Targeted Principal
Percentages) assuming that prepayments on the
Mortgage Loans occur at a constant
level of ___% SPA. To the extent that
prepayments on the Mortgage Loans occur at
a constant level lower than ___% SPA, the
Available Funds allocable as payments
of principal on the First Tier Certificates
on each Distribution Date may be
insufficient to make distributions of
principal on the Class A-1, Class A-2
and Class A-3 Certificates in amounts
sufficient to reduce their principal
balances in accordance with their respective
Targeted Principal Percentages for such
Distribution Date, and, as a result, the
weighted average lives of such Certificates
may be extended. To the extent that
prepayments occur at a constant level higher
than __% SPA, the weighted average
lives of the Class A-1, Class A-2 and Class
A-3 Certificates may be reduced. The ability
to pay amounts sufficient to reduce the
principal balances of the Class A-1,
Class A-2 and Class A-3 Certificates in
accordance with their respective Targeted
Principal Percentages for a Distribution
Date will not be enhanced by the averaging
of high and low principal prepayments
because any excess over such amounts will be
distributed on each Distribution Date. In
addition, because of the diverse remaining
terms to maturity of the Mortgage Loans
(which will include recently originated
Mortgage Loans), the Class A-1, Class A-2
and Class A-3 Certificates may not be
reduced to their Targeted Principal
Balances, even if prepayments occur at a
constant level of __% SPA.
Companion Classes to TACs. Distributions
of principal on the Class A-4, Class A-5,
Class A-6 and Class A-7 Certificates will
be very sensitive to the rate of
prepayments of the Mortgage Loans because
their monthly principal distributions will
be limited to the excess, if any, of the
Available Funds allocable as payments of
principal on the First Tier Certificates
over the sum of the principal payments
distributed to the Class A-1, Class A-2 and
Class A-3 Certificates. In particular, to
the extent that prepayments result in
Available Funds allocable as payments of
principal on the First Tier Certificates
equal to or less than the sum of the amounts
sufficient to reduce the principal balances
of the Class A-1, Class A-2 and Class A-3
Certificates to their Targeted Principal
Percentages specified for any Distribution
Date, the Class A-4, Class A-5, Class A-6
and Class A-7 Certificates will receive
no principal distribution on such
Distribution Date. To the extent that
prepayments result in Available Funds
allocable as payments of principal on
the First Tier Certificates in excess of
such sum on any Distribution Date, such
excess will be applied to the Class A-4,
Class A-5, Class A-6 and Class A-7
Certificates as described herein.
Sequential Pay Class A and Class B
Certificates. Certain Classes of Class A
Certificates are subject to various
priorities for payment of principal as
described herein. Similarly, the Class B-1
Certificates receive payment of principal
prior to the Class B-2 Certificates as
described herein. Distributions on Classes
currently entitled to receive principal
payments will be immediately affected by the
prepayment rate of the Mortgage Loans at such
time. Distributions on Classes with a
later priority of payment will not
be directly affected by the prepayment rate
until such time as principal is
distributable on such Classes. However,
the timing of commencement of principal
distributions and the weighted average lives
of such Classes will be affected by the
prepayment rate experienced both before and
after the commencement of principal
distributions on such Classes.
[In addition to the disclosure with respect
to the Classes described in this illustrative
form of Prospectus Supplement, the following
discussion sets forth examples of disclosure
for other types of Classes:]
[Floating and Inverse Floating Rate
Certificates. Interest on the Class [I]
Certificates fluctuates in response to
changes in [an Index], and, accordingly, the
yield on the Class [I] Certificates will
be sensitive to the level of the Index.
Interest on the Class [II] Certificates
fluctuates inversely as a multiple of the
Index, and, accordingly, the yield on the
Class [II] Certificates will be very
sensitive to the level of the Index. A high
level of the Index will have a material
negative effect on the yields to investors
in the Class [II] Certificates. The timing of
changes in the level of the Index may
significantly affect the actual yield to
investors in the Class [I] and Class [II]
Certificates, even if the average level of
the Index is consistent with the expectations
of investors. In general, the earlier
the change in the level of the Index, the
greater the effect on an investor's yield.
As a result, the effect on an investor's
yield of the Index occurring at a level
higher (or lower) than the level 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 level of the
Index. Changes in the Index may not correlate
with changes in prevailing mortgage interest
rates. Lower prevailing mortgage interest
rates, which might be expected to result in
faster prepayments, could occur concurrently
with an increased level of the Index.]
[Weighted-Average Pass-Through Rate
Certificates. Interest on the Class [III]
Certificates is based on the weighted average
of the Net Rates on the Mortgage Loans.
Interest on such Certificates may be paid in
the future at a rate lower than the initial
interest rate to the extent that Mortgage
Loans bearing higher rates of interest are
prepaid more quickly than Mortgage Loans
bearing lower rates of interest.]
[Interest-Weighted Certificates.
The yield to investors in the Class
[IV] Certificates, which will be
offered at substantial premiums
over their stated principal
amounts, will be extremely
sensitive to the rate and timing of
principal payments of the [C1]
Mortgage Loans. A rapid rate of
principal payments on such Mortgage
Loans will have a materially
negative effect on the yield to in-
vestors in the Class [IV]
Certificates. Investors should
fully consider the associated
risks, including the risk that a
rapid rate of principal payments
could result in the failure of
investors in the Class [IV] Certi-
ficates to recover fully their
initial investments.]
[Principal-Weighted Certificates.
The Class [V] Certificates will be
principal only certificates, will
not bear interest and will be
offered at substantial discounts to
their original principal balances.
Low prepayment levels will have a material
negative effect on the yield of the
Class [V] Certificates.]
[Planned Amortization Classes
("PACs"). The Certificates have
been structured to provide for
relatively stable distributions of
principal on the [Class VI-1, Class
VI-2 and Class VI-3] Certificates
(in accordance with their respec-
tive PAC Principal Percentages)
assuming that prepayments on the
Mortgage Loans occur at a constant
level of ___% to ___% SPA. To the
extent that prepayments on the
Mortgage Loans occur at a constant
level lower than [lower percentage
of range]% SPA, the Available Funds
allocable as payments of principal
on the First Tier Certificates on
each Distribution Date may be
insufficient to make distributions
of principal on the [Class VI-1,
Class VI-2 and Class VI-3] Certifi-
cates in amounts sufficient to
reduce their principal balances in
accordance with their respective
PAC Principal Percentages for such
Distribution Date, and, as a
result, the weighted average lives
of such Certificates may be
extended. To the extent that
prepayments occur at a constant
higher level than [higher
percentage of range]% SPA, the
weighted average lives of the
[Class VI-1, Class VI-2 and Class
VI-3] Certificates may be reduced.
The amounts available for principal
payments may be insufficient to
reduce the [Class VI-1, Class VI-2
and Class VI-3] Certificates to
their respective PAC Principal
Percentages for the related
Distribution Date, or conversely,
the weighted average lives of the
[Class VI-1, Class VI-2 and Class
VI-3] Certificates may be reduced,
if prepayments on the Mortgage
Loans do not occur at a constant rate,
even if such prepayments remain within
the range of ___% to ___% SPA. For example,
the PAC Principal Percentages may not be
attained if payments of principal initially
occur at a relatively fast rate within the
range and subsequently occur at a
significantly slower rate within the range.]
[Companion Classes to PACs. Distributions of
principal on the [Class VI-4, Class VI-5,
Class VI-6 and Class VI-7] Certificates will
be very sensitive to the rate of prepayments
of the Mortgage Loans because their monthly
principal distributions will be limited to
the excess, if any, of the Available Funds
allocable as payments of principal on the
First Tier Certificates over the sum of
the principal payments distributed
to the [Class VI-1, Class VI-2 and
Class VI-3] Certificates. In particular, to
the extent that prepayments result in
Available Funds allocable as payments of
principal on the First Tier Certificates
equal to or less than the sum of the amounts
sufficient to reduce the principal balances
of the [Class VI-1, Class VI-2 and Class
VI-3] Certificates to their PAC Principal
Percentages specified for any Distribution
Date, the [Class VI-4, Class VI-5, Class
VI-6 and Class VI-7] Certificates will
receive no principal distribution on such
Distribution Date. To the extent that
prepayments result in Available Funds
allocable as payments of principal on the
First Tier Certificates in excess of such
sum on any Distribution Date, such excess
will be applied to the Class [VI-4,
Class VI-5, Class VI-6 and Class VI-7]
Certificates as described herein.]
[Residual Certificates. Holders of
the Residual Certificates are
entitled to receive distributions
of principal and interest as
described herein. However, holders
of such Certificates may have tax
liabilities with respect to their
Certificates during the early years
of the term of the related REMIC
that substantially exceed the
principal and interest payable
thereon during such periods.]
Liquidity......................... There is currently no secondary
market for the Certificates, and
there can be no assurance that one
will develop. Bear, Stearns & Co.
Inc. 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
"Description of the Certificates--
Reports to Certificateholders" in
the Prospectus. There are a
limited number of sources which
provide certain limited information
about mortgage pass-through
certificates in the secondary
market, and 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.
Optional Termination.............. On the earlier of __________ or any
Distribution Date on which the
aggregate Scheduled Principal Balance
of the Mortgage Loans is less than
__% of the aggregate unpaid
principal balance of the Mortgage
Pool as of the Cut-off Date,
[Corporation 1] or its designee may
repurchase from the Trust all
Mortgage Loans remaining outstanding at
a purchase price equal to (a) the the unpaid
principal balance of such Mortgage Loans
(other than Mortgage Loans related to
REO Property), net of the principal portion
of any unreimbursed Monthly Advances made
by the purchaser, plus accrued but
unpaid interest thereon at the applicable
Mortgage Rate to the next Due Date,
plus (b) the appraised value of any REO
Property (but not more than the unpaid
principal balance of the related Mortgage
Loan, together with accrued but unpaid
interest on that balance at the applicable
Mortgage Rate to the next Due Date), less
the good faith estimate of the Master
Servicer of liquidation expenses to be
incurred in connection with its disposal
thereof. The Trust may also be terminated
and the Certificates retired on any
Distribution Date upon the determination by
the Master Servicer for the [C1] Mortgage
Loans, based upon an opinion of counsel,
that the REMIC status of the Trust has been
lost or that a substantial risk exists
that such status will be lost for the then
current taxable year. Upon termination, the
Certificateholders will receive the Current
Principal Amount of the Certificates plus
accrued interest thereon. See "The
Pooling and Servicing Agreement-Termination"
herein.
Monthly Advances.................. [Corporation 2] and [Corporation 1]
will be obligated to advance
delinquent scheduled payments of
principal and interest on the [C2]
Mortgage Loans and [C1] Mortgage
Loans, respectively, under certain
circumstances (each such advance, a
"Monthly Advance"). An endorsement
to the Pool Insurance Policy
insures the payment of such Monthly
Advances under certain
circumstances and subject to
certain limitations. See
"Description of the Certificates--
Credit Enhancement--Pool Insurance
Policy" and "The Pooling and
Servicing Agreement--Monthly
Advances" herein.
Certain Federal Income
Tax Consequences................ An election will be made to treat
certain of the assets of the Trust
as a REMIC for federal income tax
purposes. The Certificates (other
than the Class A-R Certificates)
will be designated as "regular
interests" in the REMIC (the "REMIC
Regular Certificates") and the
Class A-R Certificates will be
designated as the "residual
interest" (the "REMIC Residual
Certificates") in the REMIC. See
"Federal Income Tax Considerations"
herein and "Certain Federal Income
Tax Consequences" in the
Prospectus.
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 subject to Title I of ERISA,
as well as certain plans not
subject to ERISA, but which are
subject to Section 4975 of the
Internal Revenue Code of 1986, as
amended (the "Code"), such as
individual retirement accounts and
Keogh plans covering only a sole
proprietor or partners
(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.
ss. 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 investment standards of ERISA, or
cause the excise tax provisions of Section
4975 of the Code to apply to the Trust
Assets unless some exemption granted by the
Department of Labor applies to the purchase,
sale, transfer or holding of the
Certificates.
As each Class of Certificates may
be considered subordinated, the
exemptions issued to date applying
to mortgage pool pass-through
certificates may not apply,
although other exemptions based on
the Plan investor's status may be
available. See "ERISA
Considerations" herein and in the
Prospectus. Certificates may not
be acquired by or on behalf of a
"benefit plan investor" as
described in or subject to the plan
asset regulations set forth at 29
C.F.R.ss. 2510.3-101, unless a
Benefit Plan Opinion is provided to
the Trustee and the Certificate
Administrator as described in
"ERISA Considerations" herein.
Restrictions on Purchase
and Transfer of the
Class A-R Certificates.......... The Class A-R Certificates are not
offered for sale to certain
tax-exempt organizations that are
"disqualified organizations" as
defined in "Certain Federal Income
Tax Consequences--REMIC Residual
Certificates--Tax on Disposition of
REMIC Residual Certificates;
Restrictions on Transfer; Holding
by Pass-Through Entities" in the
Prospectus. Such "disqualified
organizations" are prohibited from
acquiring or holding any beneficial
interest in the Class A-R
Certificates. In addition, there
are limitations on acquisitions by
Plans as described above. Further,
neither the Class A-R Certificates
nor any beneficial interest therein may be
sold or otherwise transferred without the
express written consent of [Bear Stearns
Securities Administration Corporation], an
affiliate of BSMSI (the "Tax Matters
Person"), which will be withheld only to
avoid a risk of REMIC disqualification or
REMIC-level tax, and in any event may not
be sold to disqualified organizations.
See "Certain Federal Income Tax
Consequences-REMIC Residual Certificates--
Tax on Disposition of REMIC Residual
Certificates; Restrictions on Transfer;
Holding by Pass-Through Entities" in the
Prospectus and "Restrictions on Purchase and
Transfer of the Class A-R Certificates"
herein. Finally, unless [Corporation 1]
consents in writing (which consent may
be withheld in [Corporation 1's] sole
discretion), the Class A-R Certificates
(including a beneficial interest therein)
may not be purchased by or transferred to
any person who is not a "United States
person," as such term is defined in Section
7701(a)(30) of the Code.
Rating............................ It is a condition to their issuance
that the Certificates be rated
"[___]" by [ ] and
"[___]" by [ ] .
[_________] and [_________] are
referred to herein as the "Rating
Agencies." A security rating is
not a recommendation to buy, sell
or hold securities and may be
subject to revision or withdrawal
at any time by the assigning rating
organization. A security rating
does not represent any assessment
of the likelihood of principal
prepayments on the Mortgage Loans
or of the degree to which such
prepayments might differ from those
originally anticipated. The rating
does not address the possibility
that Certificateholders might
suffer a lower than anticipated yield or
that if there is a rapid rate of
principal payments (including prepayments)
on the [C1] Mortgage Loans, investors in
the Class A-X Certificates could fail to
recover their initial investments. See
"Rating" herein.
Legal Investment.................. The Certificates 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 entities to
the extent provided in SMMEA, subject to
state laws overriding SMMEA. Certain states
have recently enacted legislation overriding
the legal investment provisions of SMMEA and
other states may do so.
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" in the Prospectus.
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of approximately ___ conventional
(neither insured by the Federal Housing Administration ("FHA") nor guaranteed by
the Veterans' Administration ("VA")), one- to four-family, fully amortizing,
fixed rate Mortgage Loans secured by first liens on Mortgaged Properties having
an aggregate principal balance as of the Cutoff Date of approximately
$__________, subject to a permitted upward or downward variance of up to ___%
(the "Cut-off Date Scheduled Principal Balance"), and original terms to stated
maturity of __ to __ years. Approximately $__________ of the Mortgage Pool will
consist of [C2] Mortgage Loans and approximately $__________ of the Mortgage
Pool will consist of [C1] Mortgage Loans. Each Mortgage Loan will have scheduled
payments of principal and interest due on the first day of each month (each a
"Due Date"). The following paragraphs and tables set forth certain additional
information with respect to the Mortgage Loans.*
BSMSI will cause the Mortgage Loans to be assigned to the Trustee.
[Corporation 1] will act as Master Servicer with respect to the [C1] Mortgage
Loans, which Mortgage Loans will be serviced by the Lenders. [Corporation 2]
will act as Master Servicer of the [C2] Mortgage Loans, which Mortgage Loans
will be serviced either by [Corporation 2] or through sub-servicers, pursuant to
the Agreement. With respect to those Mortgage Loans serviced by others, each
Master Servicer will remain liable for its servicing obligations under the
Agreement as if such Master Servicer alone were servicing such Mortgage Loans.
The [C1] Mortgage Loans were originated by the Lenders under the program
described under "--[C1] Mortgage Loan Program" herein. [Corporation 2]
originated all of the [C2] Mortgage Loans as described under "--[C2] Mortgage
Loans" herein.
- --------
** The description herein of the Mortgage Pool is based upon estimates of
the composition of the Mortgage Pool as of the Cut-Off Date, as
adjusted for all scheduled principal payments due on or before the
Cut-Off Date. Prior to the issuance of the Certificates, Mortgage
Loans may be removed from the Mortgage Pool as a result of (i)
principal prepayments thereof in full prior to _________, 19__, (ii)
requirements of [_________] or [_________] or (iii) delinquencies or
otherwise. In any such event, other mortgage loans may be included in
the Mortgage Pool. BSMSI believes that the estimated information set
forth herein with respect to the Mortgage Pool as presently
constituted is representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Certificates are
issued, although certain characteristics of the Mortgage Loans in the
Mortgage Pool may vary.
Under the Agreement, [Corporation 1] will make certain representations
and warranties to the Trustee relating to certain characteristics of the [C1]
Mortgage Loans and [Corporation 2] will make certain representations and
warranties to the Trustee relating to certain characteristics of the [C2]
Mortgage Loans. [Corporation 1] and [Corporation 2] will be obligated to
repurchase or substitute for any [C1] or [C2] Mortgage Loan, respectively, as to
which there exists materially deficient documentation or an uncured material
breach of any such representation or warranty which materially and adversely
affects the interests of the Certificateholders in the related Mortgage Loan;
provided that no such repurchase or substitution will be made with respect to
any Mortgage Loan which is not in default or as to which no default is imminent
until [Corporation 1] or [Corporation 2], as the case may be, obtains for the
Trustee an opinion of counsel to the effect that such repurchase or substitution
would have no adverse effect on the qualification of the REMIC as a REMIC.
Characteristics of the Mortgage Loans
The tables set forth estimates of certain characteristics (as of the
Cut-off Date) of the Mortgage Loans expected to constitute the Mortgage Pool. In
each of the following tables, the percentages under the column "% of Mortgage
Pool" are based on the Cut-off Date Scheduled Principal Balance and have been
rounded and, as a result, may not total 100.000%:
Year of First Payment of Mortgage Loans (1)
................... Number of Aggregate Principal % of
................... Mortgage Balance Outstanding Mortgage
................... Loans as of Cut-off Date Pool
--------- ------------------- ------
................... $ %
...................
...................
...................
...................
...................
Total............ $ %
------ ---------- -------
- ---------------
(1) With respect to adjustable rate mortgage loans that were converted on
or prior to the Cut-off Date to fixed rate mortgage loans, the year of
first payment is the year in which the first payment was due following
conversion.
Types of Mortgaged Properties
......................... Number of Aggregate Principal % of
......................... Mortgage Balance Outstanding Mortgage
......................... Loans as of Cut-off Date Pool
--------- ------------------- ------
Condominium.............. $ %
PUDS.....................
Single Family-
Attached(1).............
Single Family-
Detached(1).............
Two Family...............
Total.................. $ %
------ --------- -------
- ---------------
(1) Includes De Minimis PUDs
Occupancy of Mortgaged Properties(1)
.......................... Number of Aggregate Principal % of
.......................... Mortgage Balance Outstanding Mortgage
.......................... Loans as of Cut-off Date Pool
--------- ------------------- ------
Primary Residence......... $ %
Second/Vacation
Home.....................
Total................... $ %
------ ---------- -------
- ---------------
(1) Based on representations of the Mortgagor at time of
Mortgage Loan origination.
Geographical Distribution of Mortgaged Properties(1)
.......................... Number of Aggregate Principal % of
.......................... Mortgage Balance Outstanding Mortgage
State..................... Loans as of Cut-off Date Pool
- ----- --------- ------------------- ------
.......................... $ %
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
Total................... $ %
------ ---------- ---
- ---------------
(1) No more than approximately ___% of the Cut-off Date aggregate outstanding
principal balance of the Mortgage Loans is expected to be secured by
properties located in any one zip code.
Loan Purpose
.......................... Number of Aggregate Principal % of
......... Mortgage Balance Outstanding Mortgage
Loan Purpose Loans as of Cut-off Date Pool
Cash-Out
Refinances(1)............ $ %
Purchases.................
Refinances................
Total................... $ %
------ ---------- -------
- ---------------
(1) Represents the refinancing of existing indebtedness where the principal
amount of the Mortgage Loan included in the Mortgage Pool is more than ___%
of the outstanding principal balance of the prior existing indebtedness.
Distribution of Original Mortgage Loan Amounts
............................ Number of Aggregate Principal % of
Original Mortgage........... Mortgage Balance Outstanding Mortgage
Loan Amount (1) Loans as of Cut-off Date(2) Pool
- ----------------- --------- --------------------- ------
$ 50,000.01-$100,000........ $ %
$100,000.01-$150,000........
$150,000.01-$200,000........
$200,000.01-$250,000........
$250,000.01-$300,000........
$300,000.01-$350,000........
$350,000.01-$400,000........
$400,000.01-$450,000........
$450,000.01-$500,000........
$500,000.01-$550,000........
$550,000.01-$600,000........
$600,000.01-$650,000........
Total..................... $ %
------ ---------- -------
- ---------------
(1) With respect to adjustable rate mortgage loans that were converted on
or prior to the Cut-off Date, the original Mortgage Loan amount is as
of the date of conversion.
(2) As of the Cut-off Date, the average outstanding principal
balance of the Mortgage Loans is expected to be
approximately $__________.
Original Loan-to-Value Ratios(1)
................... Number of Aggregate Principal % of
Range of Original........... Mortgage Balance Outstanding Mortgage
Loan-to-Value Ratio Loans as of Cut-off Date Pool
50.00% or Less.............. $ %
50.01%-55.00%...............
55.01%-60.00%...............
60.01%-65.00%...............
65.01%-70.00%...............
70.01%-75.00%...............
75.01%-80.00%...............
80.01%-85.00%...............
85.01%-90.00%...............
90.01%-95.00%...............
Total..................... $ %
------ ---------- -------
- ---------------
(1) The weighted average Loan-to-Value Ratio (as defined under
"--[C1] Mortgage Loans" herein) at origination of the
Mortgage Loans is expected to be approximately ___%. As of
the Cut-off Date, approximately ___% of the Mortgage Loans
by Cut-off Date Scheduled Principal Balance will be
Temporary Buydown Loans, as defined under "The Mortgage
Pools" in the Prospectus. Set forth below is certain
information concerning the Temporary Buydown Loans expected
to be included in the Mortgage Pool. See "--Temporary
Buydown Loans" herein.
Type of Temporary Buydown Plans
...................... Number of Aggregate Principal % of
...................... Mortgage Balance Outstanding Mortgage
Type of Plan(1)................ Loans as of Cut-off Date Pool
- --------------- --------- ------------------- ------
No Buydown.....................
[1 Annual Buydown..............
1.914-1.264-.625 Annual
Buydown......................
2-1 Annual Buydown.............
2-1-.875 Annual
Buydown......................
2-1.5-1 Annual
Buydown......................
2.25-2-1 Annual
Buydown......................
2.625-1.625-.75 Annual
Buydown......................
2.75-1.75-.75 Annual
Buydown......................
2.875-1.875-1 Annual
Buydown......................
3-2-1 Annual Buydown...........
3-2-1-1 Annual
Buydown......................
3-2-2-1 Annual
Buydown......................
3.375-2.375-1.5-.5
Annual Buydown...............
3.75-2.875-2-1-.75
Annual Buydown...............
3.875-2.875-2-1 Annual
Buydown......................
4-3-2-1 Annual Buydown.........
4-3-2-1-1 Annual
Buydown......................
4-3-2-2-1 Annual
Buydown......................
4-4-3-3-2-1 Annual
Buydown......................
4.125-3.125-2.125-
1.25-.25 Annual
Buydown......................
4.25-3.875-2.875-
1.875-.875 Annual
Buydown......................
4.375-3.375-2.5-
1.5-0.5 Annual
Buydown......................
4.5-3.5-2.625-1.625-
.625 Annual
Buydown......................
4.5-3.625-2.625-1.625-
.625 Annual
Buydown......................
5-4-3-2-1 Annual
Buydown......................
5-5-4-4-3-2-1 Annual
Buydown......................
5.75-4.75-3.75-2.75-
1.75-.875 Annual
Buydown......................
6-5-4-3-2-1 Annual
Buydown].....................
Total........................
- ---------------
(1) Numbers under "Type of Plan" relate to percentage points below the
Mortgage Rate required to be paid by the Mortgagor of the related
Mortgage Loan during the first and, if applicable, second and subsequent
years after origination of such Mortgage Loan.
Mortgage Rates of the Mortgage Loans(1)
.................. Number of Aggregate Principal % of
.................. Mortgage Balance Outstanding Mortgage
Mortgage Rate Loans as of Cut-off Date Pool
7.875%....................
8.875%....................
9.000%....................
9.125%....................
9.250%....................
9.375%....................
9.500%....................
9.625%....................
9.650%....................
9.700%....................
9.750%....................
9.800%....................
9.850%....................
9.875%....................
9.900%....................
9.950%....................
10.000%....................
10.050%....................
10.100%....................
10.125%....................
10.150%....................
10.200%....................
10.250%....................
10.300%....................
10.350%....................
10.375%....................
10.400%....................
Mortgage Rates of the Mortgage Loans(1)
.................. Number of Aggregate Principal % of
.................. Mortgage Balance Outstanding Mortgage
Mortgage Rate Loans as of Cut-off Date Pool
10.450%....................
10.500%....................
10.600%....................
10.625%....................
10.650%....................
10.750%....................
10.875%....................
11.375%....................
Total....................
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate
is expected to be approximately ___% per annum.
Net Rates of the Mortgage Loans(1)
.................... Number of Aggregate Principal % of
.................... Mortgage Balance Outstanding Mortgage
Net Rate Loans as of Cut-off Date Pool
7.276%......................
8.151%......................
8.276%......................
8.401%......................
8.526%......................
8.651%......................
8.776%......................
8.901%......................
9.000%......................
9.026%......................
9.051%......................
9.101%......................
9.151%......................
9.201%......................
9.251%......................
9.276%......................
9.301%......................
9.351%......................
9.401%......................
9.451%......................
9.481%......................
9.501%......................
Net Rates of the Mortgage Loans(1)
...................... Number of Aggregate Principal % of
...................... Mortgage Balance Outstanding Mortgage
Net Rate Loans as of Cut-off Date Pool
9.526%........................
9.551%........................
9.601%........................
9.621%........................
9.631%........................
9.651%........................
9.701%........................
9.751%........................
9.776%........................
9.801%........................
9.851%........................
9.871%........................
9.901%........................
10.001%........................
10.026%........................
10.561%........................
Total........................
- ---------------
(1) As of the Cut-off Date, the weighted average Net Rate of the Mortgage
Loans is expected to be approximately ___% per annum. The Net Rate of
all the [C2] Mortgage Loans (other than the Discount Mortgage Loans)
will be ___% per annum.
Net Rates of the [C1] Mortgage Loans(1)
................... Number of Aggregate Principal % of
................... Mortgage Balance Outstanding Mortgage
Mortgage Rate Loans as of Cut-off Date Pool
7.276%.....................
8.151%.....................
8.276%.....................
8.401%.....................
8.776%.....................
8.901%.....................
9.026%.....................
9.051%.....................
9.101%.....................
9.151%.....................
Net Rates of the [C1] Mortgage Loans(1)
................... Number of Aggregate Principal % of
................... Mortgage Balance Outstanding Mortgage
Mortgage Rate Loans as of Cut-off Date Pool
9.201%.....................
9.251%.....................
9.276%.....................
9.301%.....................
9.351%.....................
9.401%.....................
9.451%.....................
9.481%.....................
9.501%.....................
9.526%.....................
9.551%.....................
9.601%.....................
9.621%.....................
9.631%.....................
9.651%.....................
9.701%.....................
9.751%.....................
9.776%.....................
9.801%.....................
9.851%.....................
9.871%.....................
9.901%.....................
10.001%.....................
10.026%.....................
10.561%.....................
Total.....................
- ---------------
(1) As of the Cut-off Date, the weighted average Net Rate of the [C1]
Mortgage Loans is expected to be approximately ___% per annum.
Calculated Remaining Term to Maturity(1)
Calculated................... Number of Aggregate Principal % of
Remaining.................... Mortgage Balance Outstanding Mortgage
Term (Months) Loans as of Cut-off Date Pool
_______ Months...............
_______ Months...............
_______ Months...............
_______ Months...............
_______ Months...............
_______ Months...............
Total......................
- ---------------
(1) Calculated remaining term to maturity means, for each Mortgage Loan,
the remaining term to maturity as of the Cut-off Date taking account of
all scheduled payments of principal and interest and prepayments
previously made. The weighted average calculated remaining term to
maturity is expected to be approximately ___ months as of the Cut-off
Date.
Documentation Program for the Mortgage Loans
.................... Number of Aggregate Principal % of
.................... Mortgage Balance Outstanding Mortgage
Type of Program Loans as of Cut-off Date Pool
Full/Alternative
Documentation..............
Limited Documentation........
Total......................
[C1] Mortgage Loans
Each [C1] Mortgage Loan will have been selected by [Corporation 1] for
inclusion in the Mortgage Pool from among those acquired by [Corporation 1] from
banks, savings and loan associations, mortgage bankers and other mortgage loan
originators not affiliated with [Corporation 1] (the "Lenders"), all as
described under "--[Corporation 1] Mortgage Loan Program." See "--[C1] Mortgage
Loan Program--Underwriting Standards" and "--Delinquency and Foreclosure
Experience of [Corporation 1]."
[The [Corporation 1] conduit mortgage loan purchase program generally
allows Loan-to-Value Ratios at origination of up to ___% for mortgage loans with
original principal balances of up to $__________, up to ___% for mortgage loans
with original principal balances of up to $__________ and up to __% for mortgage
loans with original principal balances of up to $__________. For each mortgage
loan with an original Loan-toValue Ratio exceeding ___%, [Corporation 1]
generally requires a Primary Insurance Policy insuring the balance of the
mortgage loan in excess of ___% of the Original Value of the mortgaged property
to be maintained until the Loan-to-Value Ratio decreases to ___% or less. In
determining whether a prospective borrower has sufficient monthly income
available (i) to meet the borrower's monthly obligation on the proposed mortgage
loan and (ii) to meet monthly housing expenses and other financial obligations
including the borrower's monthly obligations on the proposed mortgage loan,
[Corporation 1] generally considers the ratios of such amounts to the proposed
borrower's acceptable stable monthly gross income. Such ratios vary depending on
a number of underwriting criteria including Loan-to-Value Ratios and are
determined on a loan-by-loan basis. The "Loan-to-Value Ratio" is the ratio,
expressed as a percentage, of the principal amount of the Mortgage Loan at
origination to the Original Value of the related Mortgaged Property.
[Corporation 1] has entered into contracts (each a "Seller/Servicer
Contract") with the Lenders to sell mortgage loans to [Corporation 1] and to
perform, as independent contractors, servicing functions for [Corporation 1]
subject to its supervision. [Corporation 1] may permit Lenders to contract with
sub-servicers to perform some or all of the Lender's servicing duties, but the
Lender will not thereby be released from its obligations under the
Seller/Servicer Contract and the [Corporation 1] Seller and Servicer Guide (the
"Guide") relating to such servicing duties. [Corporation 1] may perform certain
supervisory functions with respect to servicing by the Lenders directly or
through an agent or independent contractor, and will be responsible for
administering and servicing the [C1] Mortgage Loans pursuant to the Agreement.
[Corporation 1] has reserved the right to remove the Lender servicing any
[Corporation 1] Mortgage Loan at any time and will exercise that right if
[Corporation 1] considers such removal to be in the best interests of the
Certificateholders. In the event that [Corporation 1] removes a Lender,
[Corporation 1] will continue to be responsible for servicing such [C1] Mortgage
Loan and intends to designate a replacement servicer, which may be an affiliate
of [Corporation 1]. See "--[C1] Mortgage Loan Program."
[Corporation 1] Mortgage Loan Program
General. The [C1] Mortgage Loans will have been purchased by
[Corporation 1] from Lenders which have been approved by [Corporation 1]. Each
Lender's deposits or accounts must be insured by the Federal Deposit Insurance
Corporation ("FDIC") or the Lender must be an FHA-approved mortgagee.
[Corporation 1] has approved (or will approve) individual institutions as
eligible Lenders by applying certain criteria, including the Lender's depth of
mortgage origination experience, servicing experience and financial stability.
The Lenders will have represented that the Mortgage Loans were originated in
accordance with the underwriting criteria specified below under "Underwriting
Standards."
Underwriting Standards. Each Mortgage Loan must meet credit, appraisal
and underwriting standards acceptable to [Corporation 1]. Such underwriting
standards are applied to evaluate the prospective borrower's credit standing and
repayment ability and the value and adequacy of the Mortgaged Property as
collateral. These standards are applied in accordance with applicable federal
and state laws and regulations. As a condition to eligibility of a Mortgage Loan
for purchase by [Corporation 1], the Lender will be required to comply with the
procedures determined by [Corporation 1]. Under the [Corporation 1] High Equity
Mortgage ("HEM") Programs, a Lender may not be required to verify a prospective
borrower's income or employment if the Loan-to-Value Ratio of a Mortgage Loan is
sufficiently low. Under most circumstances, with the exception of seasoned
mortgage loans, assets of the borrower will be verified. High-Equity Mortgage
Loans with various combinations of Loan-to-Value Ratios and principal balances
may be purchased under an HEM Program. The Loan-to-Value Ratios under an HEM
Program may be more restrictive then under the standard underwriting criteria of
[Corporation 1].
The [Corporation 1] Mortgaged Properties may be located in states
where, in general, a Lender may not seek a deficiency judgment against the
Mortgagor but rather must look solely to the Mortgaged Property for repayment in
the event of foreclosure. [Corporation 1]'s underwriting standards applicable to
all states (including such anti-deficiency states) require that the value of the
property being financed, as indicated by the appraisal, currently supports and
is anticipated to support in the future the outstanding loan balance.
Delinquency and Foreclosure Experience of [Corporation 1].
[Corporation 1]'s recent delinquency and foreclosure experience on its portfolio
of conventional, fixed and adjustable rate, first-lien, one-to four-family
mortgage loans, purchased from approved Lenders and master serviced by
[Corporation 1], is summarized in the following table. [Corporation 1]'s
portfolio of mortgage loans may differ significantly from the [C1] Mortgage
Loans included in the Mortgage Pool in terms of interest rates, principal
balances, geographic distribution, Loan-to-Value Ratios and other possibly
relevant characteristics. There can be no assurance, and no representation is
made, that the delinquency and foreclosure experience with respect to the [C1]
Mortgage Loans in the Mortgage Pool will be similar to that reflected in the
table below, nor is any representation made as to the rate at which losses may
be experienced on liquidation of defaulted [C1] Mortgage Loans in the Mortgage
Pool. The actual loss and delinquency experience on the Mortgage Loans will
depend, among other things, upon the value of the real estate securing such
Mortgage Loans and the ability of borrowers to make required payments.
Delinquency and Foreclosure Experience in
[Corporation 1]'s Portfolio of One-to Four-Family
Residential Mortgage Loans(1)
<TABLE>
<CAPTION>
As of ,
-----------------------------------------------------------
19__ 19__ 19__
No. of Principal No. of Principal No. of Principal
Loans Balance Loans Balance Loans Balance
------ --------- ------ --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Total
Portfolio. .
Period of Delin-
quency(2)................
30-59 Days...............
60-89 Days
90 Days or
more....................
Total Delin-
quencies(3)..............
Foreclosures...............
Real Estate
Owned....................
- --------------------
</TABLE>
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(3) Entries may not add up to total due to rounding.
The following table presents, for [Corporation 1]'s portfolio of
mortgage loans, the net gains (losses) on the disposition of properties acquired
in foreclosure or by deed-in-lieu of foreclosure during the periods indicated.
Year Ended ,
-------------------------------------------------
19__ 19__ 19__
Net gains (losses)(1)
- --------------------
(1) Gains (losses) are defined as proceeds from sale less outstanding
principal balance less certain capitalized costs related to disposition
of the related property (exclusive of accrued interest).
[Corporation 2]
General. The [C2] Mortgage Loans will be serviced by [Corporation 2]
pursuant to the Agreement. [Corporation 2] is a [__________] corporation with
executive offices located at [______________________], telephone number
_____________. It is wholly-owned by [______________]. Its primary business
segments consist of [___________________].
At __________, 199_ [Corporation 2] provided servicing for $___
billion aggregate principal amount of mortgage loans, substantially all of which
are being serviced for unaffiliated persons.
Loan Production. The following table sets forth the number and dollar
value of [Corporation 2]'s mortgage loan production for the periods indicated.
Mortgage Loan Production
Three Months
Year Ended , Ended ,
-------------------------- -------------------
19__ 19__ 19__ 19__ 19__
Total Loans................
Number of
Loans.....................
Volume of
Loans.....................
Average Loan
Balance...................
[Substantially all of the mortgage loans originated by [Corporation 2]
are conventional mortgage loans, and [Corporation 2] does not originate
significant dollar amounts of FHA or VA mortgage loans.]
Foreclosure and Delinquency Experience. The following table sets forth
the delinquency and foreclosure experience of residential mortgage loans funded
and serviced by [Corporation 2], as of the dates indicated. [Corporation 2]'s
portfolio of mortgage loans may differ significantly from the [C2] Mortgage
Loans included in the Mortgage Pool in terms of interest rates, principal
balances, geographic distribution, Loan-to-Value Ratios and other possibly
relevant characteristics. There can be no assurance, and no representation is
made, that the delinquency and foreclosure experience with respect to the [C2]
Mortgage Loans in the Mortgage Pool will be similar to that reflected in the
table below, nor is any representation made as to the rate at which losses may
be experienced on liquidation of defaulted [C2] Mortgage Loans in the Mortgage
Pool. The actual loss and delinquency experience on the Mortgage Loans will
depend, among other things, upon the value of the real estate securing such
Mortgage Loans and the ability of borrowers to make required payments.
<TABLE>
Delinquency and Foreclosure Experience(1)
<CAPTION>
As of , As of ,
------------------------------------------------- -------------
19 19 19 19
---------------- --------------- ---------------- ---------
No. of Principal No. of Principal No. of Principal No. of Principal
Loans Balance Loans Balance Loans Balance Loans Balance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio . . .
Period of
Delinquency(2)
30-59 Days...........
60-89 Days...........
90 Days or
more................
Total of Delin-
quencies(3).........
Foreclosures..........
Real Estate
Owned...............
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(3) Entries may not add up to total due to rounding.
</TABLE>
The following table presents, for [Corporation 2]'s portfolio of
mortgage loans, the net gains (losses) on the disposition of properties acquired
in foreclosure or by deed-in-lieu of foreclosure during the periods indicated.
Three
Months
Ended
Year Ended , ,
------------------------------------------ -------
19__ 19__ 19__ 19__
---- ---- ---- --
Net gains
(losses)(1)....
(1) Gains (losses) are defined as proceeds from sale less outstanding
principal balance less certain capitalized costs related to disposition
of the related property (exclusive of accrued interest).
While the above foreclosure and delinquency experience is typical of
[Corporation 2]'s recent experience, there can be no assurance that experience
on the [C2] Mortgage Loans will be similar. [As a result of the rapid growth
experience by [Corporation 2], its servicing portfolio is relatively unseasoned.
Accordingly, the information should not be considered to reflect the credit
quality of the [C2] Mortgage Loans, or as a basis for assessing the likelihood,
amount or severity of losses on the [C2] Mortgage Loans.] The statistical data
in the table is based on all of the loans in [Corporation 2]'s servicing
portfolio. The [C2] Mortgage Loans may be more recently originated than, and are
likely to have other characteristics which distinguish them from, the majority
of the loans in [Corporation 2]'s servicing portfolio.
[C2] Mortgage Loans
The underwriting standards of [Corporation 2] generally allow
Loan-to-Value Ratios at origination of up to __% for Mortgage Loans with
original principal balances of up to $_______, up to __% for Mortgage Loans with
original principal balances of up to $_______, and up to __% for Mortgage Loans
with original principal balances of up to $_______; provided that any
Loan-to-Value Ratio over __% is as a result of the financing of Primary
Insurance Policy costs. In determining whether a prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligation on the proposed mortgage loan and (ii) to meet monthly housing
expenses and other financial obligations including the borrower's monthly
obligations on the proposed mortgage loan, [Corporation 2] generally applies
ratios of up to __% and __%, respectively, of the proposed borrower's acceptable
stable monthly gross income. In addition, with respect to Mortgage Loans secured
by owner-occupied condominium units, [Corporation 2] generally will fund up to
the lesser of __ units or __% of the total units in a project.
[[Corporation 2] also originates mortgage loans pursuant to an
alternative set of underwriting criteria under its Reduced Documentation Loan
Program (the "Reduced Documentation Program"). The Reduced Documentation Program
is designed to facilitate the loan approval process. Under the Reduced
Documentation Program, relatively more emphasis is placed on property
underwriting than on credit underwriting and certain credit underwriting-related
documentation concerning income and employment verification is waived. Loans
underwritten under the Reduced Documentation Program are limited to borrowers
who can demonstrate an established ability and willingness to repay the mortgage
loans in a timely fashion. Permitted maximum Loan-to-Value Ratios under the
Reduced Documentation Program are more restrictive than under the standard
underwriting criteria of [Corporation 2]].
[Corporation 2] does not maintain separate records regarding the
delinquency or foreclosure rate of mortgage loans underwritten under the Reduced
Documentation Program, as compared to mortgage loans underwritten pursuant to
its standard underwriting criteria. [Corporation 2] does monitor the delinquency
and foreclosure rates of all such mortgage loans and does not believe that there
are material differences between such rates.
Approximately ___% of the Mortgage Loans (based on the Cutoff Date
Scheduled Principal Balance) are "Relocation Loans." Relocation Loans are
mortgage loans made to employees of corporations who have a substantial portion
of the costs related to the mortgage loan reimbursed by their employer. Some of
the expenses eligible for consideration include closing costs, discount points
or real estate commissions. Relocation Loans generally prepay faster than other
loans with similar characteristics that are not Relocation Loans.
Temporary Buydown Loans
Temporary Buydown Loans are subject to temporary buydown plans,
pursuant to which the monthly payments made by the Mortgagor in the early years
of a Temporary Buydown Loan will be less than the scheduled monthly payments
thereon after the expiration of the buydown period, the resulting difference to
be made up from an amount contributed by the Mortgagor, the seller of the
related Mortgaged Property or the Lender, in the case of the [C1] Mortgage
Loans, or [Corporation 2] or an employer, in the case of the [C2] Mortgage Loans
(such amount, exclusive of investment earnings thereon, is hereinafter referred
to as "Buydown Funds") and placed in custodial accounts (collectively, the
"Buydown Account"). Temporary Buydown Loans provide for interest payments
payable by the Mortgagor based on a reduced interest rate (the "Buydown Mortgage
Rate") that will be not more than _____ percentage points less, in the case of
the [C1] Mortgage Loans, or ___ percentage points less, in the case of the [C2]
Mortgage Loans, than the otherwise applicable Mortgage Rate. The annual increase
in the Buydown Mortgage Rate will not exceed one percentage point and, not later
than _____ years after origination, in the case of [C1] Mortgage Loans, and
_____ years after origination, in the case of [C2] Mortgage Loans, the Buydown
Mortgage Rate will equal the otherwise applicable Mortgage Rate. Generally, the
Mortgagor under a Temporary Buydown Loan qualifies for such loan at the Buydown
Mortgage Rate. Accordingly, the repayment of a Temporary Buydown Loan is
dependent on the ability of the Mortgagor to make larger level monthly mortgage
payments than were required at origination.
With respect to each Temporary Buydown Loan, not later than the
Distribution Date in each month during the Buydown Period, [Corporation 2], in
the case of the [C2] Mortgage Loans, and [Corporation 1], in the case of the
[C1] Mortgage Loans, will deposit into the Certificate Account (as defined under
"The Pooling and Servicing Agreement--Certificate Account" herein) the amount,
if any, of the Buydown Funds for such Temporary Buydown Loan that, when added to
the amount due from the Mortgagor on such Temporary Buydown Loan, equals the
full monthly payment which would be due on the Temporary Buydown Loan on the
related Due Date if it were not subject to the buydown plan.
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.
General
Distributions of principal and interest as set forth below will be
made by the Trustee to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the last
Business Day (as defined below) of the month preceding the month in which the
related Distribution Date occurs. Such distributions will be made (i) by check
mailed to each Certificateholder entitled thereto at the address appearing in
the Certificate Register to be maintained in accordance with the provisions of
the Agreement or (ii) upon timely receipt by the Trustee of written instructions
from a Certificateholder holding Certificates representing an initial aggregate
Current Principal Amount of not less than $__________, from a holder of Class
A-R Certificates representing an initial aggregate Current Principal Amount of
not less than $__________, from a holder of Class P-l or Class P-2 Certificates
representing an initial aggregate Current Principal Amount of not less than
$__________ or from a holder of Class A-X Certificates representing an initial
aggregate Current Principal Amount of not less than $__________, by wire
transfer to a United States dollar account maintained by the payee at any United
States depository institution with appropriate facilities for receiving such a
wire transfer; provided, however, that the final payment in respect of each
Class of Certificates will be made only upon presentation and surrender of such
respective Certificates at the office or agency of the Trustee specified in the
notice to Certificateholders of such final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York are authorized or obligated by law or executive order
to be closed.
The Certificates 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 New York City. 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 [______________________].
Distributions of Interest
To the extent of Available Funds and prior to payments of principal on
the Certificates (other than payments of Excess Principal on the Class P-l and
Class P-2 Certificates), each Class of Certificates (other than Class P-l and
Class P-2 Certificates) will be entitled to receive interest on each
Distribution Date as provided below on the respective Current Principal Amount
of each such Class applicable to such Distribution Date (or as otherwise
described below).
All interest bearing Classes of Certificates, other than the Class A-X
Certificates, will bear interest at a rate of ___% per annum.
The Class A-X Certificates will be entitled to receive interest in an
amount equal to the excess of (a) the weighted average of the Net Rates of the
[C1] Mortgage Loans with Net Rates in excess of ___% per annum over (b) ___% per
annum, on the outstanding principal balance of such [C1] Mortgage Loans (after
taking into account principal advances). With respect to the first Distribution
Date, it is expected that the amount payable with respect to the Class A-X
Certificates will equal a per annum rate of approximately ___% on the original
Current Principal Amount of the Class A-X Certificates, based upon the
assumption that the weighted average Net Rate of the [C1] Mortgage Loans with
Net Rates in excess of ___% per annum is approximately ___% per annum. It is
expected that the Mortgage Rates of the [C1] Mortgage Loans will range from
approximately ___% to ___% per annum.
The Class P-l and Class P-2 Certificates are principal only
Certificates and will receive no interest.
Distributions of interest on the Certificates will include interest
accrued during the Interest Accrual Period for the applicable Distribution Date,
reduced by any Interest Shortfalls. To the extent funds are not available to pay
interest at the rates and in the amounts stated herein, such unpaid amounts will
be deferred to succeeding Distribution Dates and will not bear interest. Because
interest will not be distributed to Certificateholders until the ____ day (or if
such day is not a Business Day, then on the next succeeding Business Day) of the
month following the month in which interest accrues on the Mortgage Loans, the
effective yield to the holders of the Certificates will be lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price. See
"Yield and Prepayment Considerations" herein.
The Interest Shortfall on any Distribution Date will be allocated
among all Classes of Certificates (other than the Class P-l and Class P-2
Certificates) pro rata based on the amount of interest, if any, payable with
respect to each Class of Certificates for such Distribution Date, before taking
into account any such reduction. Interest Shortfalls will not be offset by
application of servicing compensation or otherwise.
Distributions of Principal
On each Distribution Date, the Available Funds (as defined below)
remaining after payment of interest as described above will be distributed as
principal to the Certificates in the following manner: (i) to the Class P-l and
Class P-2 Certificates, the lesser of (a) the product of (A) such remaining
Available Funds multiplied by (B) the Class P Principal Amount (as defined
below) divided by the sum of the Class A Principal Amount, the Class B Principal
Amount (each as defined below) and the Class P Principal Amount and (b) the
Class P Principal Amount and (ii) to the Class A Certificates and the Class B
Certificates, the remainder up to the sum of the Class A Principal Amount and
the Class B Principal Amount.
As between the Class P-l Certificates and the Class P-2 Certificates,
the Class P-l Certificates will receive that portion of the Class P Principal
Amount representing payments of Excess Principal on the [C2] Mortgage Loans and
the Class P-2 Certificates will receive that portion of the Class P Principal
Amount representing payments of Excess Principal on the [C1] Mortgage Loans.
As between the Class A Certificates and the Class B Certificates, the
amount of principal to be distributed will be allocated in the following manner:
to the Class A Certificates, the Class A Principal Distribution Amount (as
defined below) and to the Class B Certificates, the Class B Principal
Distribution Amount (as defined below) until the Current Principal Amounts of
the Class A and Class B Certificates have been reduced to zero;
As among the Class A Certificates, the Class A Principal Distribution
Amount will be allocated in the following manner:
(i) to the Class A-X Certificates in an amount equal to the
product of the Class A-X Percentage (as defined below) multiplied by
the Class A Principal Distribution Amount, until the Current Principal
Amount of such Certificates is reduced to zero;
(ii) to the First Tier Certificates in an amount (the "First Tier
Principal Distribution Amount") equal to the product of the First Tier
Percentage (as defined below) multiplied by the Class A Principal
Distribution Amount, until the Current Principal Amounts of such
Certificates are reduced to zero; and
(iii) to the Second Tier Certificates in an amount (the "Second
Tier Principal Distribution Amount") equal to the product of the
Second Tier Percentage (as defined below) multiplied by the Class A
Principal Distribution Amount, until the Current Principal Amounts of
such Certificates are reduced to zero.
As among the First Tier Certificates, the First Tier Principal Distribution
Amount will, except as provided in the second following paragraph, be allocated
in the following manner:
(i) First, so long as the Current Principal Amount of the Class
A-2 Certificates exceeds $__________, concurrently to the Class A-l
and Class A-2 Certificates, in the proportions of approximately ___%
and ___%, respectively, in an amount up to the amount necessary to
reduce their Current Principal Amounts to the product of (A) their
respective Targeted Principal Percentages as set forth in the table on
page S-129 for such Distribution Date and (B) their respective
original Current Principal Amounts;
(ii) Second, once the Current Principal Amount of the Class A-2
Certificates equals $__________, concurrently to the Class A-l, Class
A-2 and Class A-3 Certificates, in the proportions of approximately
__________%, __________% and __________%, respectively, in an amount
up to the amount necessary to reduce their Current Principal Amounts
to the product of (A) their respective Targeted Principal Percentages
as set forth in the table on page [S-132] for such Distribution Date
and (B) their respective original Current Principal Amounts;
(iii) Third, to the Class A-4 through A-7 Certificates in the
order of their numerical designations so that no payment of principal
will be made on any Class of such Certificates until the Current
Principal Amounts of any Classes with lower numerical designations
have been reduced to zero; and
(iv) Fourth, (a) so long as the Current Principal Amount of the
Class A-2 Certificates exceeds $__________, concurrently to the Class
A-l and Class A-2 Certificates, in the proportions set forth in (i)
above, and (b) thereafter, concurrently to the Class A-l, Class A-2
and Class A-3 Certificates, in the proportions set forth in clause
(ii) above, in each case, without regard to their respective Targeted
Principal Percentages and until the respective Current Principal
Amounts thereof have been reduced to zero.
As among the Second Tier Certificates, the Second Tier Principal Distribution
Amount will, except as provided in the following paragraph, be allocated in the
following manner:
(i) First, concurrently to the Class A-R and Class A-8
Certificates, in the proportions of ___% and ___%, respectively, in an
amount up to the amount necessary to reduce the Current Principal
Amount of the Class A-R Certificates to zero;
(ii) Second, to the Class A-8 and Class A-9 Certificates in that
order until the respective Current Principal Amounts thereof have been
reduced to zero; and
(iii) Third, to the Class P-l and Class P-2 Certificates pro rata
based upon their respective Current Principal Amounts, until their
respective Class P Deferred Amounts are reduced to zero.
Notwithstanding the two preceding paragraphs, if the Class A
Percentage (as defined below) increases to 100% and the Current Principal
Amounts of the Second Tier Certificates (i) have not been reduced to zero, any
distributions allocable to principal on the Second Tier Certificates will be
made pro rata among the remaining Classes of Second Tier Certificates in
accordance with their respective Current Principal Amounts immediately prior to
the related Distribution Date or (ii) have been reduced to zero, any
distributions allocable to principal on the First Tier Certificates will be made
pro rata among the remaining Classes of First Tier Certificates in accordance
with their Current Principal Amounts.
As between the Class B Certificates, the Class B Principal
Distribution Amount will be allocated to the Class B-1 and Class B-2
Certificates in that order until the respective Current Principal Amounts
thereof have been reduced to zero; provided, however, if a required payment
under the Pool Insurance Policy is not made, until all such required payments
are made, any distributions allocable to principal on the Class B Certificates
will be made pro rata between the Class B-l and Class B-2 Certificates in
accordance with their respective Current Principal Amounts immediately prior to
the related Distribution Date.
With respect to any Distribution Date, the "Class A Principal Amount"
will equal the sum of:
(i) the Class A Percentage multiplied by the Non-P Percentage (as
defined below) of all scheduled principal payments due on the Mortgage
Loans during the related Due Period;
(ii) the Class A Prepayment Percentage (as defined below)
multiplied by the Non-P Percentage of any Principal Prepayments (as
defined below) received during the related Prepayment Period; and
(iii) with respect to any Liquidated Mortgage Loan (as defined
under "--Special Hazard Mortgage Loans" herein) liquidated during the
related Prepayment Period, any principal amount of Net Liquidation
Proceeds (as defined under "--Realized Losses" herein) received during
the related Prepayment Period up to the amount of the Class A
Percentage of the Certificate Value of such Mortgage Loan at the time
of liquidation.
With respect to any Distribution Date, the "Class B Principal Amount"
will equal the sum of:
(i) the Class B Percentage (as defined below) multiplied by the
Non-P Percentage of all scheduled principal payments on the Mortgage
Loans due during the related Due Period;
(ii) the Class B Prepayment Percentage (as defined below)
multiplied by the Non-P Percentage of any Principal Prepayments
received during the related Prepayment Period; and
(iii) with respect to any Liquidated Mortgage Loan liquidated
during the related Prepayment Period, any principal amount of Net
Liquidation Proceeds received during the related Prepayment Period
which were not allocated to the Class A, Class P-l or Class P-2
Certificates.
The calculation of Excess Principal results in the Class P-l and Class
P-2 Certificates receiving on each Distribution Date an amount (the "Class P
Principal Amount") equal to that portion of the scheduled principal payments
received with respect to each Discount Mortgage Loan for the Due Date in the
month in which such Distribution Date occurs and that portion of the Principal
Prepayments and Net Liquidation Proceeds allocable to principal received with
respect to each Discount Mortgage Loan during the Prepayment Period preceding
such Distribution Date equal to the product of such scheduled principal,
Principal Prepayments or Net Liquidation Proceeds allocable to principal, as the
case may be, multiplied by a fraction, the numerator of which is the Excess
Principal of such Discount Mortgage Loan as of the Due Date in the month
preceding the month in which such Distribution Date occurs and the denominator
of which is the Scheduled Principal Balance of such Discount Mortgage Loan as of
such Due Date. The Class P-l Certificates will receive all payments representing
Excess Principal on the [C2] Mortgage Loans and the Class P-2 Certificates will
receive all payments representing Excess Principal on the [C1] Mortgage Loans.
With respect to a Discount Mortgage Loan that becomes a Liquidated
Mortgage Loan during a Prepayment Period, the Class P-l or Class P-2
Certificates will be entitled to receive on the related Distribution Date the
entire unpaid Excess Principal for such Discount Mortgage Loan. If the amount of
unpaid Excess Principal exceeds the portion of the Net Liquidation Proceeds
allocated to the Class P-l or Class P-2 Certificates as set forth above with
respect to such Liquidated Mortgage Loan, such excess will not be paid to the
Class P-l or Class P-2 Certificates on such Distribution Date but will, to the
extent such excess does not constitute a Realized Loss allocable to the Class
P-l or Class P-2 Certificates as described under "--Realized Losses" herein, be
treated as "Class P-l Deferred Amount," if such excess relates to a [C2]
Mortgage Loan, or as "Class P-2 Deferred Amount," if such excess relates to a
[C1] Mortgage Loan, and paid to the Class P-l or Class P-2 Certificates as
described above. The Class P-l Deferred Amount and Class P-2 Deferred Amount are
referred to herein collectively as the "Class P Deferred Amount."
On each Distribution Date, the Class A Principal Amount and the Class
B Principal Amount will be adjusted in the following manner:
(i) if the related Master Servicer determines that any
Delinquency Amount (as defined below) would not be attributed to a
Credit Loss if the related Mortgage Loan became a Liquidated Mortgage
Loan, the Delinquency Amount will be allocated to the Class A
Certificates up to the amount otherwise distributable to such
Certificates on such Distribution Date until the Current Principal
Amounts of the Class A Certificates are reduced to zero, and then to
the Class B Certificates (provided, however, that if such Delinquency
Amount relates to a Discount Mortgage Loan, a portion of such
Delinquency Amount will be allocated to (A) the Class P-l Certificates
other than with respect to the Class P-l Deferred Amount in the case
of a [C2] Mortgage Loan or (B) the Class P-2 Certificates other than
with respect to the Class P-2 Deferred Amount in the case of a [C1]
Mortgage Loan);
(ii) if the related Master Servicer has not made the
determination set forth in clause (i) with respect to any Delinquency
Amount, the Delinquency Amount will be allocated first to the Class B
Certificates up to the amount otherwise distributable to such
Certificates on such Distribution Date until the Current Principal
Amounts of the Class B Certificates are reduced to zero, and then to
the Class A Certificates (provided, however, that if such Delinquency
Amount relates to a Discount Mortgage Loan, a portion of such
Delinquency Amount will be allocated (A) to the Class P-l Certificates
other than with respect to the Class P-l Deferred Amount in the case
of a [C2] Mortgage Loan or (B) the Class P-2 Certificates other than
with respect to the Class P-2 Deferred Amount in the case of a [C1]
Mortgage Loan); and
(iii) if there is a Class A Unrecovered Portion (as defined
below), the distribution to the Class A Certificates will be increased
by, and the distribution to the Class B Certificates will be reduced
by, such Class A Unrecovered Portion up to the amount of the Class B
Principal Amount as adjusted pursuant to clauses (i) and (ii) above.
The Class A Principal Amount and the Class B Principal Amount as
adjusted pursuant to clauses (i) through (iii) above are referred to as the
"Class A Principal Distribution Amount" and the "Class B Principal Distribution
Amount," respectively.
"Available Funds" for each Distribution Date will equal the aggregate
of (a) all previously undistributed payments on account of principal (including
scheduled payments of principal, Principal Prepayments and the principal amount
of Liquidation Proceeds) and interest received after the Cut-off Date and on or
prior to the related Determination Date (as defined in the Agreement), (b) any
advances by Lenders, any Monthly Advances (including Certificate Account
Advances, as defined under "The Pooling and Servicing Agreement--Monthly
Advances" herein) by the Master Servicers and any advances pursuant to the
endorsement to the Pool Insurance Policy with respect to such Distribution Date,
(c) all payments from the Bankruptcy Letter of Credit, Mortgage Repurchase
Letter of Credit, Special Hazard Letter of Credit, any alternative credit
enhancement (other than the Pool Insurance Policy) or the Letter of Credit
Replacement Account (as defined under "--Credit Enhancement--Letters of Credit"
herein) and (d) any amount reimbursed by the Master Servicers in connection with
losses on certain eligible investments, except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all Principal Prepayments and Liquidation Proceeds received
during the month in which such Distribution Date occurs and all
related payments of interest;
(iii) all payments, other than Principal Prepayments, that
represent early receipt of scheduled payments due on a date or dates
subsequent to the Due Date in the month in which such Distribution
Date occurs;
(iv) amounts received on particular Mortgage Loans as late
payments of principal or interest and respecting which, and to the
extent that, there are any unreimbursed Monthly Advances or
Certificate Account Advances;
(v) amounts of Monthly Advances or Certificate Account Advances
determined to be nonrecoverable; and
(vi) amounts permitted to be withdrawn from the Certificate
Account pursuant to clauses (i) through (xii) described under the
caption "The Pooling and Servicing Agreement--Certificate Account"
herein.
"Insurance Proceeds" are amounts paid by an insurer under any Primary
Insurance Policy, standard hazard insurance policy, flood insurance policy or
title insurance policy covering any Mortgage Loan or Mortgaged Property other
than amounts required to be paid over to the Mortgagor pursuant to law or the
related Mortgage Note and other than amounts used to repair or restore the
Mortgaged Property or to reimburse certain expenses.
"Repurchase Proceeds" are proceeds of any Mortgage Loan repurchased by
[Corporation 1] or [Corporation 2] pursuant to the provisions described under
"The Pooling and Servicing Agreement-Assignment of Mortgage Loans" herein.
With respect to any Distribution Date, the "Class A Percentage" will
equal the quotient (expressed as a percentage) of (a) the sum of the Current
Principal Amount immediately prior to such Distribution Date of all the Class A
Certificates divided by (b) the sum of the Current Principal Amounts immediately
prior to such Distribution Date of all the Class A and Class B Certificates.
With respect to any Distribution Date, the "Class A-X Percentage" will
equal the quotient (expressed as a percentage) of (a) the Current Principal
Amount immediately prior to such Distribution Date of the Class A-X Certificates
divided by (b) the sum of the Current Principal Amounts immediately prior to
such Distribution Date of all of the Class A Certificates.
With respect to any Distribution Date, the "First Tier Percentage"
will equal the quotient (expressed as a percentage) of (i) the sum of the
Current Principal Amounts immediately prior to such Distribution Date of the
First Tier Certificates divided by (b) the sum of the Current Principal Amounts
of all of the Class A Certificates.
With respect to any Distribution Date, the "Second Tier Percentage"
will equal the quotient (expressed as a percentage) of (a) the sum of the
Current Principal Amounts of the Second Tier Certificates divided by (b) the sum
of the Current Principal Amounts of all of the Class A Certificates.
With respect to any Distribution Date, the "Class B Percentage" will
equal the quotient (expressed as a percentage) of (a) the Current Principal
Amount immediately prior to such Distribution Date of the Class B Certificates
divided by (b) the sum of the Current Principal Amounts immediately prior to
such Distribution Date of all the Class A and Class B Certificates.
The "Class A Prepayment Percentage" means, generally, subject to
certain conditions set forth in the Agreement, as of any Distribution Date up to
and including the Distribution Date in __________, 100%; as of any Distribution
Date in the first year thereafter, the Class A Percentage plus __% of the Class
B Percentage for such Distribution Date; as of any Distribution Date in the
second year thereafter, the Class A Percentage plus __% of the Class B
Percentage for such Distribution Date; as of any Distribution Date in the third
year thereafter, the Class A Percentage plus __% of the Class B Percentage for
such Distribution Date; as of any Distribution Date in the fourth year
thereafter, the Class A Percentage plus __% of the Class B Percentage for such
Distribution Date; and as of any Distribution Date thereafter, the Class A
Percentage.
The "Class B Prepayment Percentage" means, with respect to any
Distribution Date, 100% minus the Class A Prepayment Percentage for such
Distribution Date.
The "Non-P Percentage" means, with respect to any Mortgage Loan that
is not a Discount Mortgage Loan, 100%, and with respect to any Discount Mortgage
Loan, a fraction (expressed as a percentage), the numerator of which will equal
the Net Rate of the Mortgage Loan and the denominator of which will equal ___%.
The "Class A Unrecovered Portion" means, with respect to each
Distribution Date for which a Credit Loss is to be allocated to the Class B
Certificates, the aggregate excess of (i) the Class A Percentage multiplied by
the Certificate Value of each Liquidated Mortgage Loan with respect to which a
Credit Loss is to be allocated to the Class B Certificates over (ii) the
principal amount of any Net Liquidation Proceeds with respect to each such
Mortgage Loan to be allocated to the Class A Certificates.
The "Delinquency Amount" means, with respect to any Mortgage Loan on
any Distribution Date, the amount, if any, of any scheduled payments of
principal and interest due on such Mortgage Loan on the related Due Date, which
has not been paid by the Mortgagor or by the application of any Buydown Funds or
advanced by the related Master Servicer (including any Certificate Account
Advance), or Lender or the issuer of the Pool Insurance Policy.
"Principal Prepayment" is any payment or other recovery of principal
on a Mortgage Loan which is received in advance of its scheduled Due Date to the
extent that it is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months subsequent to
the month of prepayment, including the purchase price in connection with any
purchase of a Mortgage Loan and any cash deposit in connection with the
substitution of a Mortgage Loan, but excluding Liquidation Proceeds received at
the time a Mortgage Loan becomes a Liquidated Mortgage Loan.
Allocation of Losses
The Class B-1 Certificates will bear all Credit Losses on the Mortgage
Loans by a reduction in their Current Principal Amount until the Current
Principal Amount thereof is reduced to zero. Thereafter, the Class B-2
Certificates will bear all Credit Losses until the Current Principal Amount
thereof is reduced to zero. However, if required payments under the Pool
Insurance Policy are not made to cover Credit Losses, the Class B-1 and Class
B-2 Certificates will bear such Credit Losses pro rata based upon their Current
Principal Amounts until all such required payments have been made. Any
additional Credit Losses will be borne first by any then outstanding Second Tier
Certificates (including any Class P Deferred Amount) and by the Class A-X
Certificates to the extent of the Class A-X Percentage of such Credit Loss by a
reduction in their Current Principal Amounts until the Current Principal Amounts
of the Second Tier Certificates are reduced to zero and then by any then
outstanding First Tier Certificates and by the Class A-X Certificates to the
extent of the Class A-X Percentage of such Credit Loss and, if such Credit Loss
relates to a Discount Mortgage Loan, the Class P-1 or Class P-2 Certificates
(other than the Class P-1 or Class P-2 Deferred Amount, respectively) by a
reduction in their Current Principal Amounts. All losses on the Mortgage Loans
which are not Credit Losses ("Non-Credit Losses") and all NonMortgage Losses (as
defined under "--Non-Mortgage Losses" herein) will, to the extent not covered by
the Letters of Credit, be borne by all then outstanding Class A Certificates
and, in the case of Non-Credit Losses relating to a Discount Mortgage Loan, the
Class P-1 or Class P-2 Certificates (other than the Class P-1 or Class P-2
Deferred Amounts, respectively) by a reduction in their Current Principal
Amounts. After the Current Principal Amount of each Class of the Class A
Certificates is reduced to zero, any additional Non-Credit Losses and
Non-Mortgage Losses will be allocated to the Class B-l or Class B-2 Certificates
pro rata based upon their Current Principal Amounts. If the Class B-l or Class
B-2 Certificates are allocated a Credit Loss, the respective Class will be
entitled to the benefits of the Pool Insurance Policy.
Any reduction in Current Principal Amount for a loss other than a loss
relating to a Discount Mortgage Loan will be allocated pro rata among the Class
A Certificates (including the Class P-l and Class P-2 Deferred Amounts) or Class
B Certificates bearing such loss based on their respective Current Principal
Amounts but, in the case of the Class A-X Certificates, only with respect to the
Class A-X Percentage. Any such reduction for a loss relating to a Discount
Mortgage Loan will be allocated as follows (i) pro rata based on Current
Principal Amounts among the Class A Certificates or Class B Certificates bearing
such loss but, in the case of the Class A-X Certificates, only with respect to
the Class A-X Percentage, the product of such loss multiplied by a fraction, the
numerator of which is the Net Rate of such Discount Mortgage Loan and the
denominator of which is ___% and (ii) the remainder to the Class P-1
Certificates in the case of a [C2] Mortgage Loan or the Class P-2 Certificates
in the case of a [C1] Mortgage Loan.
Because principal distributions are paid to certain Classes of Class A
Certificates before other Classes in the same tier, holders of Classes that
receive principal later bear a greater risk of losses on the Mortgage Loans than
holders of Classes in the same tier that receive principal earlier. Similarly,
because principal distributions are paid to the Class B-l Certificates before
the Class B-2 Certificates, holders of the Class B-2 Certificates bear a greater
risk of losses on the Mortgage Loans than holders of the Class B-l Certificates.
Credit Mortgage Loans
A "Credit Mortgage Loan" is a liquidated Mortgage Loan as to which
there is a Credit Loss. A "Credit Loss" is a Realized Loss (as defined under
"--Realized Losses" herein) with respect to any Mortgage Loan; provided,
however, that a Credit Loss does not include Realized Losses or that portion of
a Realized Loss sustained by reason of (i) fraud, misrepresentation or
dishonesty relating to a Mortgage Loan, including misrepresentation by the
Mortgagor or the originator of the Mortgage; (ii) failure to restore the related
Mortgaged Property to its condition (reasonable wear and tear excepted) at the
Cut-off Date following physical loss or damage; (iii) failure to acquire or
convey good and merchantable title to the related Mortgaged Property free and
clear of liens except certain permitted encumbrances described in the Pool
Insurance Policy; (iv) a Deficient Valuation or (v) a Debt Service Reduction,
unless and to the extent in each case the issuer of the Pool Insurance Policy
pays a claim with respect thereto under the terms of the Pool Insurance Policy.
With respect to any Mortgage Loan, a "Deficient Valuation" is a
valuation by a court of competent jurisdiction of the Mortgaged Property in an
amount less than the then outstanding indebtedness under the Mortgage Loan,
which valuation results from a proceeding initiated under the United States
Bankruptcy Code or any applicable insolvency or receivership law.
A "Debt Service Reduction" is any reduction in the amount which a
Mortgagor is obligated to pay on a monthly basis with respect to a Mortgage Loan
as a result of any proceeding initiated under the United States Bankruptcy Code
or any applicable insolvency or receivership law.
Special Hazard Mortgage Loans
A "Special Hazard Mortgage Loan" is a Mortgage Loan that has become a
Liquidated Mortgage Loan as a result of direct physical loss or damage to the
Mortgaged Property, except as described below under "Loss Exclusions," which is
not insured against under the standard hazard insurance policy or blanket policy
insuring against hazard loss which the applicable Master Servicer is required to
cause to be maintained on each Mortgage Loan. See "The Pooling and Servicing
Agreement--Hazard Insurance" herein. A "Liquidated Mortgage Loan" is a defaulted
Mortgage Loan as to which the applicable Master Servicer has determined that all
amounts it expects to recover from or on account of such Mortgage Loan have been
recovered. A "Special Hazard Loss" is a loss relating to a Special Hazard
Mortgage Loan.
Loss Exclusions
Special Hazard Losses will not include any loss or damage resulting
from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet or
dry rot; inherent vice or latent defect; animals, birds, vermin,
insects;
(ii) smog, smoke, vapor, liquid or dust discharge from
agricultural or industrial operations; pollution; contamination;
(iii) settling, subsidence, cracking, shrinkage, bulging or
expansion of pavements, foundations, walls, floors, roofs or ceilings;
(iv) errors in design, faulty workmanship or faulty materials,
unless the collapse of the property or a part thereof ensues and then
only for the ensuing loss;
(v) nuclear or chemical reaction or nuclear radiation or
radioactive or chemical contamination, all whether controlled or
uncontrolled and whether such loss be direct or indirect, proximate or
remote or be in whole or in part caused by, contributed to or
aggravated by a peril as to which the Special Hazard Letter of Credit
protects against;
(vi) hostile or warlike action in time of peace or war, including
action in hindering, combating or defending against an actual,
impending or expected attack by any government or sovereign power, de
jure, or de facto, or by any authority maintaining or using military,
naval or air forces, or by military, naval or air forces, or by an
agent of any such government, power, authority or forces;
(vii) any weapon of war employing atomic fission or radioactive
force whether in time of peace or war; and
(viii) insurrection, rebellion, revolution, civil war, usurped
power or action taken by governmental authority in hindering,
combating or defending against such an occurrence, seizure or
destruction under quarantine or customs regulations, confiscation by
order of any government or public authority, or risks of contraband or
illegal transactions or trade.
Realized Losses
With respect to each Mortgage Loan as to which a Cash Liquidation (as
defined below) has occurred, a "Realized Loss" is defined as an amount equal to
(i) the Outstanding Principal Balance (as defined under "--Credit
Enhancement-Letters of Credit" herein) of the Mortgage Loan as of the date of
Cash Liquidation, and (ii) interest at the Mortgage Rate from the date as to
which interest was last paid up to the date on which the Cash Liquidation
occurred (or if later, the date on which a claim under the Pool Insurance Policy
is paid) on the unpaid principal balance of such Mortgage Loan outstanding
during each Due Period that accrued interest was not paid, minus (iii)
Liquidation Proceeds (as defined below) received during the month in which such
Cash Liquidation occurred, net of amounts that are payable to the related Master
Servicer pursuant to the terms of the Agreement with respect to such Mortgage
Loan (other than unreimbursed Monthly Advances with respect to such Mortgage
Loan) and net of unreimbursed expenses incurred by the applicable Master
Servicer in connection with such Liquidation ("Liquidation Expenses"). With
respect to any Mortgaged Property acquired through foreclosure or deed-in-lieu
of foreclosure (an "REO Property") as to which a disposition has occurred, a
"Realized Loss" is defined as an amount equal to (i) the Outstanding Principal
Balance of the Mortgage Loan as of the date of acquisition of the REO Property,
plus (ii) all related accrued and unpaid interest at the Mortgage Rate from the
date as to which interest was last paid through the date of disposition (or if
later, the date on which a claim under the Pool Insurance Policy is paid), minus
(iii) the total of all net income (net of any income taxes) from the REO
Property and the net proceeds of the disposition transferred to the Certificate
Account. With respect to each Mortgage Loan which has become the subject of a
Deficient Valuation, a "Realized Loss" is defined as (i) the difference between
the Outstanding Principal Balance of the Mortgage Loan immediately prior to such
Deficient Valuation and the secured portion of the Outstanding Principal Balance
of the Mortgage Loan as reduced by the Deficient Valuation, plus interest on the
amount of such difference at the Mortgage Rate from the time of such Deficient
Valuation to the Due Date following the Deficient Valuation, (ii) minus any
related payment under a Letter of Credit (or any alternative credit support).
With respect to each Mortgage Loan which has become the subject of a Debt
Service Reduction, a "Realized Loss" is defined as the amount of such reduction
minus any related payment under a Letter of Credit (or any alternative credit
support). With respect to each Mortgage Loan for which coverage was denied under
any applicable Primary Insurance Policy or the Pool Insurance Policy, or any
endorsement or rider thereto, by reason of an exclusion for fraud,
misrepresentation or dishonesty by the borrower or loan originator, a "Realized
Loss" is defined as the amount by which the Repurchase Price (as defined under
"The Pooling and Servicing Agreement--Assignment of Mortgage Loans" herein) of
the Mortgage Loan exceeds any related payment under a Letter of Credit (or any
alternative credit support) and any payment or substitution by the related
Master Servicer.
As to any defaulted Mortgage Loan other than a Mortgage Loan which
became an REO Property, a "Cash Liquidation" means the recovery of all insurance
proceeds, Liquidation Proceeds and other payments or recoveries which the
applicable Master Servicer expects to be finally recoverable, but excluding any
payments under the Pool Insurance Policy.
"Liquidation Proceeds" are amounts received by the applicable Master
Servicer in connection with the liquidation of a defaulted Mortgage Loan whether
through trustee's sale, foreclosure sale, proceeds of insurance policies,
condemnation proceeds or otherwise. "Net Liquidation Proceeds" with respect to a
Mortgage Loan are Liquidation Proceeds net of Liquidation Expenses.
Non-Mortgage Losses
A "Non-Mortgage Loss" is any tax liability payable by the Trusts, any
indemnification of either Master Servicer by the Trusts, and any other expense
which is not included in a Realized Loss and which results in the Available
Funds for any Distribution Date being insufficient to pay the Certificateholders
any amount they otherwise would be entitled to receive on the related
Distribution Date.
Credit Enhancement
In addition to the Class B Certificates described above, the credit
enhancement for the Certificates initially will consist of (i) three letters of
credit (the "Letters of Credit") issued in favor of the Trustee by [__________]
and (ii) the Pool Insurance Policy described below.
[Letters of Credit. The Bankruptcy Letter of Credit is expected to be
in an initial amount of approximately $__________ and will be available to be
drawn with respect to losses due to bankruptcy proceedings with respect to
Mortgagors. The Mortgage Repurchase Letter of Credit is expected to be in an
initial amount of approximately $__________ and will be available to be drawn
with respect to losses due to failures of [Corporation 1] or [Corporation 2] to
comply with their obligations to repurchase any Mortgage Loans as to which there
was fraud, misrepresentation or dishonesty and denial of coverage under any
applicable Primary Insurance Policy and the Pool Insurance Policy. The Special
Hazard Letter of Credit is expected to be in an initial amount of approximately
$__________ and will be available to be drawn with respect to Special Hazard
Losses. Certain funds will be deposited in an interest-bearing account to
provide for fees relating to the Bankruptcy Letter of Credit and the Mortgage
Repurchase Letter of Credit. Fees relating to the Special Hazard Letter of
Credit will be paid annually from monthly collections on the Mortgage Loans.
Unless drawn in full before such date, the initial stated expiration
date of the Letters of Credit will be [__________], and such Letters of Credit
will be renewed automatically to the extent funds are available thereunder,
generally for periods of 364 days until [__________] in the case of the
Bankruptcy Letter of Credit and the Special Hazard Letter of Credit and until
[__________] in the case of the Mortgage Repurchase Letter of Credit unless the
issuer of the Letter of Credit gives notice to the contrary. In the event any
Letter of Credit is canceled or terminated for any reason (other than the
exhaustion or expiration thereof), the Trustee will, prior to such cancellation
or termination, draw the entire amount then available under such Letter of
Credit, hold such amount in a reserve fund (the "Letter of Credit Replacement
Account"), and draw on the amounts so held under the circumstances and to the
extent that the respective Letter of Credit would have been drawn on had it
remained in place. If funds are so drawn and deposited in the Letter of Credit
Replacement Account, and subsequently replacement credit enhancement is
delivered to the Trustee, the Trustee will cause the funds held in such account
to be distributed to the issuer of the Letter of Credit. All amounts deposited
in the Letter of Credit Replacement Account will be held therein uninvested.
In the event any Letter of Credit is canceled or terminated, the above
drawing will not be required if there is obtained from certain qualified
entities either (i) a replacement letter of credit comparable to such canceled
or terminated Letter of Credit with a total coverage equal to the remaining
coverage of such Letter of Credit or (ii) alternative forms of credit support;
provided, however, that any such replacement letter of credit or alternative
credit support is subject to the condition, among others, to be evidenced by a
writing from __________ and __________, that it will not cause the ratings on
the Certificates to be downgraded or withdrawn; and provided further, that to
the extent permitted by __________ and __________ in writing, so long as the
then current rating(s) of the Certificates will be maintained, coverage under
the Letters of Credit may be canceled or reduced.
The initial Letters of Credit will provide that [__________] may
terminate the Letters of Credit at any time prior to their stated expiration
date upon not less than 60 days' prior notice. If, as of the date 30 days prior
to the expiration date thereof, whether as a result of expiration or termination
under such circumstances, replacement Letters of Credit have not been delivered
to the Trustee, the Agreement provides that the Trustee must draw the full
amount then available and deposit such amounts in the Letter of Credit
Replacement Account. A similar draw will be made if, as a result of the lowering
of the long-term credit rating of the issuer of the Letters of Credit, such
issuer no longer qualifies as a Letter of Credit issuer.
As of any date of determination until the expiration of the Bankruptcy
Letter of Credit, the maximum amount available under the Bankruptcy Letter of
Credit will equal the initial amount of the Bankruptcy Letter of Credit less the
sum of any amounts drawn thereunder for such losses since the Closing Date (net
of any amounts received by the issuer of the Bankruptcy Letter of Credit
following each respective draw as subsequent recoveries on Mortgage Loans with
respect to which such draws were made); provided that the amount of the
Bankruptcy Letter of Credit or the Letter of Credit Replacement Account at any
time shall not exceed the amount required by [__________] and [__________] to
maintain the credit rating of the Certificates, and will not be reinstated once
reduced, except as relates to the recoveries described above, and no draw may
exceed the stated amount of the Bankruptcy Letter of Credit at the time of such
draw.
As of any date of determination prior to _________________, the
maximum amount available under the Mortgage Repurchase Letter of Credit will
equal the initial amount of the Mortgage Repurchase Letter of Credit less the
sum of (a) amounts drawn under the Mortgage Repurchase Letter of Credit since
the Closing Date, net of amounts recovered by the issuer of the Mortgage
Repurchase Letter of Credit in respect of Mortgage Loans to which such draws
relate, and (b) the Repurchase Price paid by [Corporation 1] or [Corporation 2]
for breaches of representations and warranties relating to fraud,
misrepresentation or dishonesty pursuant to the Agreement (net of any amounts
received or collected by [Corporation 1] or [Corporation 2] relating to Mortgage
Loans with respect to which such amounts were paid); provided that no such
reduction will be made with respect to any such Mortgage Loan with respect to
which coverage under the Pool Insurance Policy is denied due to fraud on the
part of the Lenders or [Corporation 2], which Mortgage Loan is required to be
purchased pursuant to the Agreement (such sum, the "Reduction Amount"). On
__________________, the Mortgage Repurchase Letter of Credit will be reduced to
the lesser of (a) __% of the Cut-off Date Scheduled Principal Balance and (b)
the initial amount of the Mortgage Repurchase Letter of Credit less the
Reduction Amount. Thereafter, until the expiration of the Mortgage Repurchase
Letter of Credit, the maximum amount available under the Mortgage Repurchase
Letter of Credit will be the amount determined on ____________ less the sum of
amounts drawn under the Mortgage Repurchase Letter of Credit and the Repurchase
Price paid, net of recoveries received, as aforesaid, in each case after
_________________. Notwithstanding the above, the amount of the Mortgage
Repurchase Letter of Credit or the Letter of Credit Replacement Account at the
time will not exceed the amount required by __________ and __________ to
maintain the credit rating of the Certificates for such period and will not be
reinstated once reduced, except as relates to the recoveries described above,
and no draw may exceed the stated amount of the Mortgage Repurchase Letter of
Credit at the time of such draw.
As of any date of determination prior to _________________, the
maximum amount available under the Special Hazard Letter of Credit will equal
the initial amount of the Special Hazard Letter of Credit less the sum of any
amounts drawn thereunder for such losses since the Closing Date (net of any
amounts received by the issuer of the Special Hazard Letter of Credit following
each respective draw as subsequent recoveries on Mortgage Loans with respect to
which such draws are made).
On each __________, beginning ___________, until the expiration of the
Special Hazard Letter of Credit, the Trustee will calculate the amount available
under the Special Hazard Letter of Credit (the "Special Hazard Letter of Credit
Available Amount") based upon information provided by the Master Servicers and
will confirm such amount with the issuer of the Special Hazard Letter of Credit.
On each such _________, the Special Hazard Letter of Credit Available
Amount shall equal the lesser of (a) the Special Hazard Letter of Credit
Available Amount on the immediately preceding Business Day and (b) the greater
of (A) ___% of the Outstanding Principal Balance of the Mortgage Loans, (B) the
largest zip code concentration of the Mortgage Loans secured by Mortgaged
Properties located in California by aggregate Outstanding Principal Balance and
(C) twice the Outstanding Principal Balance of the Mortgage Loan which has the
largest Outstanding Principal Balance. On any date of determination after
__________ (except with respect to any date of determination for a __________),
the Special Hazard Letter of Credit Available Amount shall be the amount
determined on the prior __________ minus the sum of the aggregate amount of
draws under the Special Hazard Letter of Credit since the prior __________ (net
of any amounts received by the issuer of the Special Hazard Letter of Credit
following each respective draw as subsequent recoveries on Mortgage Loans as to
which draws were made). Notwithstanding the foregoing, the amount of the Special
Hazard Letter of Credit or the Letter of Credit Replacement Account at any time
shall not exceed the amount required by __________ and __________ to maintain
the credit ratings of the Certificates and will not be reinstated once reduced,
except as relates to the recoveries described above, and no draw may exceed the
stated amount of the Special Hazard Letter of Credit at the time of such draw.
As of any time of determination, the "Outstanding Principal Balance"
of a Mortgage Loan is the principal balance of such Mortgage Loan remaining to
be paid by the Mortgagor, or, in the case of an REO Property, the principal
balance of the related Mortgage Loan remaining to be paid by the Mortgagor at
the time such property was acquired by the Trust.
The Letters of Credit will not cover all circumstances under which
there is no coverage under the Pool Insurance Policy, Primary Insurance Policies
or standard hazard insurance policies or as a result of Class B Certificates,
and no assurance can be given that the stated amount of the initial Letters of
Credit or any replacement thereof will be sufficient to provide coverage for all
losses as to which there is an exclusion under any such other forms of credit
enhancement.]
[Letter of Credit Issuer]. [Description of Letter of Credit
Issuer]
The foregoing information relating to [________________________] has
been provided by [__________________]. Accordingly, neither the Underwriter, the
Master Servicers nor any affiliate thereof makes any representation as to the
accuracy or completeness of such information.
[Pool Insurance Policy. The Master Servicers will obtain a mortgage
pool insurance policy (the "Pool Insurance Policy") for the benefit of the
holders of the Class B Certificates to cover losses realized by such holders by
reason of Credit Losses. The Pool Insurance Policy will be in an initial amount
equal to the initial principal amount of the Class B Certificates. The amount
available to be claimed thereunder will decline monthly as a result of the
aggregate dollar amount of claims paid and other payments with respect to
principal on the Class B Certificates so as to equal the then Current Principal
Amount of the Class B Certificates. Premiums for such policy will be paid
annually from monthly collections on the Mortgage Loans. The Master Servicers
will give prompt notice to the Trustee of the incurrence of any losses which are
eligible to be paid by the Pool Insurance Policy. The Trustee will present, or
cause to be presented, claims under the Pool Insurance Policy. Subject to
certain limitations set forth in the Agreement, the Master Servicers will use
their best reasonable efforts to maintain the Pool Insurance Policy during the
term of the Agreement, unless coverage thereunder has been exhausted through the
payment of claims.
The Pool Insurance Policy will be issued by [__________], a
[________________] company incorporated in [__________] with its administrative
offices in [_________________]. [Description of Pool Insurer].
The information set forth above concerning [_________] has been
provided by [__________]. Accordingly, neither the Underwriter, the Master
Servicers nor any affiliate thereof makes any representation as to the accuracy
or completeness of such information.
The Pool Insurance Policy is not a blanket policy against loss, since
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent described
below. The Pool Insurance Policy generally will not cover losses due to a
failure or denial of a claim under a Primary Insurance Policy, irrespective of
the reason therefor.
The Pool Insurance Policy will provide that no claims may be validly
presented thereunder unless, among other things, (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 property
securing such Mortgage Loan has been kept in force and real estate taxes and
other protection and preservation expenses have been paid by the applicable
Master Servicer, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the Cut-off Date, 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,
[__________] generally will 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, net of certain amounts paid or assumed to have been paid under any
related Primary Insurance Policy. [__________]'s obligation will be reduced by
any amount received pursuant to an applicable Primary Insurance Policy.
Since the Pool Insurance Policy will require that the property subject
to a defaulted Mortgage Loan be restored to its original condition prior to
claiming against [__________], such policy will not provide coverage against
hazard losses. The hazard policies covering the Mortgage Loans typically exclude
from coverage physical damage resulting from a number of causes and, even when
the damage is covered, may afford recoveries which are significantly less than
full replacement costs of such losses. Further, no coverage in respect of
special hazard losses will cover all risks, and the amount of any such coverage
will be limited. In addition, if any property securing a defaulted Mortgage Loan
is damaged and proceeds, if any, from the related hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the Pool Insurance Policy, the applicable Master Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to the
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the applicable Master Servicer for its expenses, (ii) that such expenses will be
recoverable by it through proceeds of the sale of the property, proceeds of the
Pool Insurance Policy or any related Primary Insurance Policy or from draws
under the Special Hazard Letter of Credit or (iii) that an insurer has
guaranteed payment thereof.
Pursuant to the Pool Insurance Policy, [__________] will agree to make
any Monthly Advance to the extent the applicable Master Servicer is required but
fails to make such advance and [__________] receives notice thereof as specified
in the Pool Insurance Policy; provided, however, that [__________] will not be
required to advance funds relating to interest shortfalls resulting from
application of the Relief Act. Claims may be submitted under the Pool Insurance
Policy for no more than four consecutive delinquent payments on a Mortgage Loan
prior to the commencement of foreclosure proceedings. [__________] will continue
to make advances so long as such foreclosure proceedings are diligently pursued,
or stayed pursuant to bankruptcy proceedings. Any such advance will be
reimbursable to [__________] by reduction of the amount of the claim payable by
[________] with respect to the related Mortgage Loan or otherwise as provided in
the Pool Insurance Policy. If advances by [__________] exceed the amount of the
claim payable by [__________] with respect to the related Mortgage Loan,
[__________] will be reimbursed for such excess from receipts and recoveries on
unrelated Mortgage Loans prior to distributions to Certificateholders.
If the Pool Insurance Policy is canceled or terminated for any reason
other than the exhaustion of the coverage thereunder, the Master Servicers will
use their best reasonable efforts to obtain a comparable policy from an insurer
that is acceptable to [_________] and [__________]. The replacement policy will
provide coverage in an amount equal to the then remaining coverage amount of the
Pool Insurance Policy; provided, however, that if the premium cost of the
replacement policy would exceed the premium cost of the Pool Insurance Policy,
the covered amount of the replacement policy will be reduced so that the premium
cost therefor will not exceed the premium cost of the Pool Insurance Policy.]
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates
will be affected by the amount and timing of principal payments on the Mortgage
Loans and the allocation of available funds to various Classes of Certificates.
Investors should carefully consider the associated risks discussed under the
headings "Yield and Prepayment Considerations" and "Legal Investment" in the
"Summary of Terms" herein and under the headings "Yield and Prepayment
Considerations" and "Legal Investment" in the Prospectus.
Assumed Final Distribution Date
The "Assumed Final Distribution Date" for distributions on each Class
of Certificates is . The Assumed Final Distribution Date is the Distribution
Date immediately following the latest scheduled maturity date of any Mortgage
Loan in the Mortgage Pool. Since the rate of payment (including prepayments) of
principal on the Mortgage Loans can be expected to exceed the scheduled rate of
payments, and could exceed the scheduled rate by a substantial amount, the
disposition of the last remaining Mortgage Loan in the Trust may be earlier, and
could be substantially earlier, than the Assumed Final Distribution Date. In
addition, [Corporation l] or its designee may, at its option, repurchase all the
Mortgage Loans from the Trust on or after the earlier of ______________ or any
Distribution Date on which the aggregate unpaid principal balance of the
Mortgage Loans is less than ____% of the aggregate unpaid principal balance of
the Mortgage Pool as of the Cut-off Date. See "The Pooling and Servicing
Agreement--Termination" herein.
Weighted Average Lives
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 of such security will be distributed 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 the
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 is paid on the Mortgage Loans. Principal payments of
such Mortgage Loans may be in the form of scheduled amortization or prepayments
including by foreclosure proceedings or by virtue of the purchase of a Mortgage
Loan in advance of its stated maturity as required or permitted by the
Agreement. [All the] Mortgage Loans may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. The actual weighted average
life and term to maturity of each Class of Certificates, in general, will be
shortened if the level of such prepayments of principal on the Mortgage Loans
increases.
SPA Model
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The standard prepayment assumption model used in
this Prospectus Supplement ("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 in the
Mortgage Pool. 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, 225% SPA assumes prepayment rates will be approximately .45% per annum
in month one, approximately .90% per annum in month two, reaching approximately
13.50% per annum in month 30 and remaining constant at approximately 13.5% per
annum thereafter. 0% SPA assumes no prepayments.
Pricing Assumption
The Certificates were structured assuming, among other things, a
prepayment assumption of ____% SPA. The prepayment assumption to be used for
pricing purposes for the respective Classes may vary as determined at the time
of sale. The actual rate of prepayment may vary considerably from the rate used
for any prepayment assumption.
Decrement Table
The following table entitled "Percent of Initial Principal Amount
Outstanding" indicates the percentages of the initial principal amount of each
Class of Certificates that would be outstanding after each of the dates shown at
various constant percentages of SPA and the corresponding weighted average lives
of such Classes of Certificates.
For the purposes of the table, it is assumed that (i) the
characteristics of the Mortgage Loans are as described under "Description of the
Mortgage Pool" herein, (ii) distributions in respect of the Certificates are
received in cash on the day of each month commencing on , (iii) each of the
Mortgage Loans prepays at the specified constant percentages of SPA, (iv) no
defaults in the payment by Mortgagors of principal of and interest on the
Mortgage Loans are experienced, (v) [Corporation 1] does not exercise the option
to repurchase the Certificates described under the caption "The Pooling and
Servicing Agreement--Termination," (vi) scheduled payments on the Mortgage Loans
are received on the first day of each month commencing and are computed prior to
giving effect to prepayments received on the last day of the prior month, (vii)
there are no Interest Shortfalls and prepayments represent prepayments in full
of individual Mortgage Loans and are received on the last day of each month,
commencing in __________, (viii) the initial scheduled monthly payment for each
Mortgage Loan has been calculated based on its outstanding balance, interest
rate and calculated remaining term to maturity such that the Mortgage Loan will
amortize in amounts sufficient to repay the balance of such mortgage Loan by its
calculated remaining term to maturity, (ix) the initial principal amounts of the
Certificates are as indicated on the cover page hereof and interest accrues on
each Class of Certificates (other than the Class P-1 and Class P-2 Certificates)
at the applicable interest rate or amounts described herein and (x) prepayments
are allocated as described herein without giving effect to loss and delinquency
tests. While it is assumed that each of the Mortgage Loans prepays at the
specified constant percentage of SPA, this is not likely to be the case.
Discrepancies may exist between the characteristics of the actual
Mortgage Loans which will be delivered to the Trustee and characteristics of the
Mortgage Loans assumed in preparing the table. To the extent that the Mortgage
Loans have characteristics which differ from those assumed in preparing the
table, the Certificates may mature earlier or later than indicated by the table.
<PAGE>
<TABLE>
Percent of Initial Principal Amount Outstanding
<CAPTION>
Class A-1 Certificates Class A-2 Certificates
% of SPA % of SPA
[0% 100% 225% 300% 450% 0% 100% 225% 300% 450%]
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.....................
[Insert Distribution Dates]
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Weighted Average Life
(years)**.............................
______________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
</TABLE>
<PAGE>
<TABLE>
Percent of Initial Principal Amount Outstanding
<CAPTION>
Class A-3 Certificates Class A-4 Certificates
% of SPA % of SPA
[0% 100% 225% 300% 450% 0% 100% 225% 300% 450%]
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.....................
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Weighted Average Life
(years)**.............................
____________________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
</TABLE>
<PAGE>
<TABLE>
Percent of Initial Principal Amount Outstanding
<CAPTION>
Class A-5 Certificates Class A-6 Certificates
% of SPA % of SPA
[0% 100% 225% 300% 450% 0% 100% 225% 300% 450%]
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.....................
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Weighted Average Life
(years)**.............................
______________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
</TABLE>
<PAGE>
<TABLE>
Percent of Initial Principal Amount Outstanding
<CAPTION>
Class A-7 Certificates Class A-R Certificates
% of SPA % of SPA
[0% 100% 225% 300% 450% 0% 100% 225% 300% 450%]
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.....................
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Weighted Average Life
(years)**.............................
___________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
</TABLE>
<PAGE>
<TABLE>
Percent of Initial Principal Amount Outstanding
<CAPTION>
Class A-X Certificates Class B-1 Certificates
% of SPA % of SPA
[0% 100% 225% 300% 450% 0% 100% 225% 300% 450%]
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.....................
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Weighted Average Life
(years)**.............................
________________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
</TABLE>
<PAGE>
<TABLE>
Percent of Initial Principal Amount Outstanding
<CAPTION>
Class A-8 Certificates Class A-9 Certificates
% of SPA % of SPA
[0% 100% 225% 300% 450% 0% 100% 225% 300% 450%]
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.....................
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Weighted Average Life
(years)**.............................
_________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
</TABLE>
<PAGE>
<TABLE>
Percent of Initial Principal Amount Outstanding
<CAPTION>
Class B-2 Certificates Class P-1 Certificates
% of SPA % of SPA
[0% 100% 225% 300% 450% 0% 100% 225% 300% 450%]
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.....................
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Weighted Average Life
(years)**.............................
_______________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
Class P-2 Certificates
% of SPA
[0% 100% 225% 300% 450%]
-- ---- ---- ---- ----
Initial Percentage.....................
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Weighted Average Life
(years)**.............................
__________________
* Indicates an amount above zero and less than 0.5% of the initial
principal amount is outstanding.
** 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
Distribution Date, (b) summing the results and (c) dividing the sum by
the aggregate amount of the reductions in the principal balance of such
Certificate.
</TABLE>
Yield on Class A-X Certificates
The significance of the effects of prepayments on the aggregate
payments on the Class A-X Certificates is illustrated in the following table
entitled "Class A-X Certificates", which shows the approximate total cash flow
(aggregate amount of principal and interest payments) that would be received by
the holders of such Certificates and the corresponding pre-tax yield (on a
corporate bond equivalent basis) to such holders under different percentages of
SPA. The yields and total cash flows set forth in the following table were
calculated using the assumptions specified above under "--Decrement Table" and
assuming that the purchase price of the Class A-X Certificates is % of their
original principal amount and such Certificates are purchased on .
Based on such assumptions, the following table also shows the constant
prepayment rates at which the yield to maturity on the Class A-X Certificates
would be approximately 0% assuming the foregoing purchase price. Based on the
assumptions described above, if the actual prepayment rate of the [C1] Mortgage
Loans were to exceed such rates for as little as one period (while equaling such
rates for other periods), investors in the Class A-X Certificates would not
recover fully their initial investments. It is not likely that the [C1] Mortgage
Loans will prepay at a constant rate until maturity or that all of such [C1]
Mortgage Loans will prepay at the same rate, and the timing of changes in the
rate of prepayment may affect significantly the total cash flow received, and
yield realized, by a holder of a Class A-X Certificate. No representation is
made as to whether the [C1] Mortgage Loans will prepay at any particular rate.
There can be no assurance that the [C1] Mortgage Loans will prepay at any of the
rates shown in the table or at any other particular rate, or that the pre-tax
yield to a investor in the Class A-X Certificates will correspond to any of the
pre-tax yields shown herein. Each investor must make its own decision as to the
approximate prepayment assumption to be used in deciding whether or not to
purchase a Class A-X Certificate.
Class A-X Certificates
[50% SPA 100% SPA 225% SPA 300% SPA 450% SPA]
------- -------- -------- -------- --------
Approximate Total Cash
Flow (in thousands) (1) $ $ $ $ $
Approximate Pre-Tax
Yield (2) % % % % %
______________________
(1) Per $10,000 original principal amount of the Class A-X Certificates.
(2) Pre-tax yield equals approximately 0% at a constant prepayment rate of
[470%] SPA.
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the Class A-X Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of the Class A-X Certificates indicated above 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 Class A-X Certificates and
consequently does not purport to reflect the return on any investment in Class
A-X Certificates when such reinvestment rates are considered.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Agreement. Reference
is made to the Prospectus for important information additional to that set forth
herein regarding the terms and conditions of the Agreement and the Certificates.
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 Mortgage Loans
At the time of issuance of the Certificates, BSMSI will cause the
Mortgage Loans, together with all principal and interest, due on or with respect
to such Mortgage Loans after the Cut-off Date, other than principal or interest
due and payable on or before the Cut-off Date, to be assigned to the Trustee.
The [C1] and [C2] Mortgage Loans will be identified in separate schedules
appearing as exhibits to the Agreement. Such schedules will include information
as to the principal balance of each Mortgage Loans as of the Cut-off Date, as
well as information including, among other things, the Mortgage Rate, the Net
Rate, the scheduled monthly level payment of principal and interest, the
maturity date of each Mortgage Note, the Servicing Fee and the Loan-to-Value
Ratio.
In addition, BSMSI will deposit with the Trustee, with respect to each
Mortgage Loan, the original Mortgage Note, endorsed without recourse to the
order of the Trustee and showing an unbroken chain of endorsements from the
original payee thereof to the person endorsing it to the Trustee; the original
Mortgage which shall have been recorded, with evidence of such recording
indicated thereon; the assignment (which may be in the form of a blanket
assignment) to the Trustee of the Mortgage, with evidence of recording with
respect to each Mortgage Loan in the name of the Trustee thereon; all
intervening assignments of the Mortgage if any, with evidence of recording
thereon; the original or a copy of the policy or certificate of primary mortgage
guaranty insurance, if any; the original policy of title insurance or
mortgagee's certificate of title insurance; originals of all assumption and
modification agreements and an agreement relating to Buydown Funds; provided,
however, that in lieu of the foregoing, BSMSI may deliver certain other
documents, under the circumstances set forth in the Agreement. The documents
delivered to the Trustee with respect to each Mortgage Loan are referred to
collectively as the "Mortgage File." Each Master Servicer for the related
Mortgage Loan will cause the Mortgage and intervening assignments, if any, and
the assignment of the Mortgage to be recorded not later than 180 days after the
Closing Date.
The Trustee will review each item of the Mortgage File within 45 days
of the Closing Date (and will review each document permitted to be delivered to
the Trustee after the Closing Date, if received by the Trustee after the initial
45 day period, promptly after its delivery to the Trustee). If, as a result of
its review, the Trustee determines that any document is missing, does not appear
regular on its face, or appears to be unrelated to the Mortgage Loans identified
in the Mortgage Loan schedules (a "Material Defect"), the Trustee shall notify
[Corporation 2] or [Corporation 1], as the case may be, of such Material Defect.
[Corporation 2] or [Corporation 1], as the case may be, shall correct or cure
any such Material Defect within 60 days from the date of notice from the Trustee
of the Material Defect and if [Corporation 2] or [Corporation 1], as the case
may be, does not correct or cure such Material Defect within such period,
[Corporation 2] or [Corporation 1], as the case may be, will, within 90 days of
the date of notice, provide the Trustee with a substitute Mortgage Loan (if
within two years of the Closing Date) or purchase the related Mortgage Loan at
the applicable Repurchase Price.
The Trustee also will review the Mortgage Files within 180 days of the
Closing Date. If the Trustee is unable to deliver a final certification due to
any Material Defect, the Trustee shall notify [Corporation 2] or [Corporation
1], as the case may be, of such Material Defect. [Corporation 2] or [Corporation
1], as the case may be, shall correct or cure any such Material Defect within 60
days from the date of notice from the Trustee of the Material Defect and if
[Corporation 2] or [Corporation 1], as the case may be, does not correct or cure
such Material Defect within such period, [Corporation 2] or [Corporation 1], as
the case may be, will, within 90 days of the date of notice, provide the Trustee
with a substitute Mortgage Loan (if within two years of the Closing Date) or
purchase the related Mortgage Loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan
required to be repurchased, an amount equal to (i) 100% of the Outstanding
Principal Balance of such Mortgage Loan as of the date of repurchase, plus
accrued but unpaid interest on the Outstanding Principal Balance at the related
Mortgage Rate through and including the last day of the month of repurchase
reduced by (ii) any portion of the Servicing Amount (as defined under
"--Servicing Compensation and Payment of Expenses" herein) or advances payable
to the purchaser of the Mortgage Loan.
Representations and Warranties
In the purchase agreements pursuant to which BSMSI purchased the [C1]
and [C2] Mortgage Loans, [Corporation 1] and [Corporation 2] made certain
representations and warranties to BSMSI concerning the [C1] and [C2] Mortgage
Loans, as the case may be. BSMSI will assign to the Trustee all of its right,
title and interest in such purchase agreements insofar as it relates to such
representations and warranties, as well as the remedies provided for breach of
such representations and warranties. The representations and warranties of
[Corporation 1] and [Corporation 2] include, among other things, that as of the
Closing Date or such other date as may be specified below:
(a) the information set forth and to be set forth in the Mortgage Loan
schedules delivered and to be delivered to the Trustee was and will be true
and correct in all material respects at the date or dates respecting which
such information is furnished;
(b) each Mortgage is a valid and enforceable first lien on the
property securing the related Mortgage Note and each Mortgaged Property is
owned by the Mortgagor in fee simple or by leasehold for a term longer than
the term of the related Mortgage, subject only to certain permitted
exceptions;
(c) no payment of principal of or interest on or in respect of any
Mortgage Loan is 30 or more days past due;
(d) no Mortgage Loan has been 30 days or more delinquent more than
once during the preceding 12 months, no Mortgage Loan has been delinquent
for 60 days or more during the preceding 12 months and there is no
delinquent tax or assessment lien against the Mortgaged Property;
(e) there is no valid offset, defense or counterclaim to any Mortgage
Note or Mortgage, including the obligation of the Mortgagor to pay the
unpaid principal and interest on such Mortgage Note;
(f) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including,
without limitation, usury, equal credit opportunity and disclosure laws;
(g) a lender's title insurance policy or binder, or other assurance of
title customary in the relevant jurisdiction therefor, in a form acceptable
to FNMA or FHLMC was issued on the date of the origination of each Mortgage
Loan, and each such policy, binder or assurance is valid and remains in
full force and effect;
(h) each Mortgage Loan for which both the original principal and the
outstanding principal as of the Cut-off Date of the related Mortgage Note
exceeded __% of the Original Value is covered by a Primary Insurance Policy
issued by a private mortgage insurer insuring against default under the
Mortgage Note in an amount at least equal to the excess of such original
principal amount over __% of such Original Value until the principal
balance of such Mortgage Loan is reduced below __% of the Original Value
or, based upon a new appraisal, the principal balance of such Mortgage Loan
represents less than __% of the new appraised value;
(i) there has been no fraud, misrepresentation or dishonesty with
respect to any Mortgage Loan which has resulted or will result in the
exclusion from, denial of or defense to coverage under any Primary
Insurance Policy or the Pool Insurance Policy;
(j) on the basis of a representation by the Mortgagor at the time of
origination of the Mortgage Loans, approximately ___% and ___% of the [C2]
Mortgage Loans and [C1] Mortgage Loans, respectively (by aggregate
principal balance), will be secured by Mortgages on owner-occupied primary
residence properties;
(k) as of the closing of each Mortgage Loan, evidence was obtained
that the Mortgaged Property securing such Mortgage Loan is insured by an
insurer acceptable to [Corporation 2] or [Corporation 1], as the case may
be, against loss by fire and such hazards as are covered under a standard
extended coverage endorsement, in an amount which is not less than the
lesser of the maximum insurable value of the improvements securing such
Mortgage Loan and the outstanding principal balance of the Mortgage Loan;
if the Mortgaged Property is a condominium unit, it is included under the
coverage afforded by a blanket policy for the condominium project; if upon
origination of the Mortgage Loan, the improvements on the Mortgaged
Property were in an area identified as a federally designated flood area, a
flood insurance policy is in effect in an amount representing coverage not
less than the least of (i) the outstanding principal balance of the
Mortgage Loan, (ii) the restorable cost of improvements located on such
Mortgaged Property and (iii) the maximum coverage available; and each
Mortgage obligates the Mortgagor thereunder to maintain the insurance
referred to above at the Mortgagor's cost and expense;
(l) there is no material monetary default existing under any Mortgage
or the related Mortgage Note and, to the best of [Corporation 2]'s or
[Corporation 1]'s knowledge, there is no material event which, with the
passage of time or with notice and the expiration of any grace or cure
period, would constitute a default, breach or event of acceleration; and
neither [Corporation 2] or [Corporation 1], as the case may be, nor any of
their affiliates has taken any action to waive any default, breach or event
of acceleration; no foreclosure action is threatened or has been commenced
with respect to the Mortgage Loan; and
(m) to the best of [Corporation 2]'s or [Corporation 1]'s knowledge,
no Mortgagor, at the time of origination of the applicable Mortgage, was a
debtor in any state or federal bankruptcy or insolvency proceeding.
With respect to representations and warranties including those set
forth above that are made to the best of [Corporation 2]'s knowledge or to
[Corporation 1]'s knowledge, if it is discovered by [Corporation 2],
[Corporation 1] or the Trustee that the substance of such representation and
warranty is inaccurate and such inaccuracy materially and adversely affects the
value of the related Mortgage Loan or the interest of the Certificateholders or
Trustee therein then, notwithstanding [Corporation 2]'s or [Corporation 1]'s
lack of knowledge with respect to the substance of such representation and
warranty being inaccurate at the time the representation or warranty was made,
such inaccuracy shall be deemed a breach of the applicable representation or
warranty. Upon any substitution for a Mortgage Loan, the representations and
warranties set forth above shall be deemed to be made as to any substitute
Mortgage Loan as of the date of substitution.
Upon discovery or receipt of notice by [Corporation 2], [Corporation
1], BSMSI or the Trustee of a breach of any representation or warranty set forth
above which materially and adversely affects the value of the interests of the
Certificateholders or the Trustee in any of the Mortgage Loans, the party
discovering or receiving notice of such breach shall give prompt written notice
to the others. In the case of any such breach, within 90 days from the date of
discovery by [Corporation 2] or [Corporation 1], or the date [Corporation 2] or
[Corporation 1] is notified by the party discovering or receiving notice of such
breach (whichever occurs earlier), [Corporation 2] or [Corporation 1], as the
case may be, will (i) cure such breach in all material respects, (ii) purchase
the affected Mortgage Loan at the applicable Repurchase Price or (iii) if within
two years of the Closing Date, substitute a qualifying substitute Mortgage Loan
in exchange for such Mortgage Loan; provided, however, that if such breach is a
breach solely of the representations and warranties set forth above in clause
(i) and relates to fraud, misrepresentation or dishonesty other than that of
[Corporation 2] or [Corporation 1], as the case may be, or any of their
affiliates or clause (m) (to the extent such bankruptcy of the Mortgagor has
resulted or will result in the exclusion from, denial of, or defense to coverage
under, any Primary Insurance Policy or the Pool Insurance Policy), [Corporation
2] or [Corporation 1], as the case may be, shall be required to purchase such
Mortgage Loan only to the extent that the Repurchase Price would not exceed the
amount available to be drawn under the Mortgage Repurchase Letter of Credit
before giving effect to a reduction in the Mortgage Repurchase Letter of Credit
Available Amount as a result of such purchase by [Corporation 2] or [Corporation
1]. The obligations of [Corporation 2] or [Corporation 1] to cure, purchase or
substitute a qualifying substitute Mortgage Loan shall constitute the Trustee's
sole and exclusive remedy respecting a breach of such representations or
warranties, except for the obligation of [Corporation 2] to indemnify BSMSI for
such breach by [Corporation 1] or [Corporation 2], as the case may be.
Collection and Other Servicing Procedures
Each Master Servicer will make its best reasonable efforts to ensure
that all payments required under the terms and provisions of the Mortgage Loans
for which it is acting as Master Servicer are collected, and shall follow, and,
in the case of [Corporation 1], use its best efforts to cause Lenders to follow,
collection procedures comparable to the normal and usual collection procedures
of prudent mortgage lenders servicing mortgage loans for their own account, to
the extent such procedures shall be consistent with the Agreement. Consistent
with the foregoing, each Master Servicer may in its discretion (i) waive or
permit to be waived any late payment or prepayment charge, assumption fee or any
penalty interest in connection with the prepayment of a Mortgage Loan and (ii)
only upon determining that the coverage of such Mortgage Loan by any applicable
insurance policy will not be materially adversely affected, suspend or reduce or
permit to be suspended or reduced regular monthly payments for a period of up to
six months or arrange or permit an arrangement with a Mortgagor for a schedule
for the liquidation of delinquencies. In the event a Master Servicer shall
consent to the deferment of due dates for payments due on a Mortgage Note, such
Master Servicer shall nonetheless continue to make or shall, in the case of
[Corporation 1], cause the related lender to continue to make advances as
described herein to the same extent as if such installment were due, owing and
delinquent and had not been deferred, but the obligation of a Master Servicer to
advance shall apply only to the extent that such Master Servicer believes, in
good faith, that such advances are recoverable from Liquidation Proceeds,
Insurance Proceeds, the Letters of Credit or future payments on any Mortgage
Loans.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor and the related Master Servicer has knowledge thereof, [Corporation 2]
will, in the case of a [C2] Mortgage Loan, and [Corporation 1] will instruct the
related Lender to, in the case of a [C1] Mortgage Loan, accelerate the maturity
of the Mortgage Loan, to the extent permitted by applicable law. If it
reasonably believes that the due-on-sale clause cannot be enforced under
applicable law, [Corporation 2] may enter into, or [Corporation 1] may permit
the related Lender to enter into, an assumption agreement with the person to
whom such property has been or is about to be conveyed, pursuant to which such
person becomes liable under the Mortgage Note and the Mortgagor, to the extent
permitted by applicable law, remains liable thereon. A lender may repurchase a
[C1] Mortgage Loan when [Corporation 1] requires acceleration of such [C1]
Mortgage Loan, but only with [Corporation 1]'s prior approval. [Corporation 1]
will approve such repurchase only if it is satisfied that no adverse tax
consequences will result therefrom to the Trusts or the Certificateholders. Any
fee collected by [Corporation 2], [Corporation 1] or any Lender for entering
into an assumption agreement will be retained by [Corporation 2], [Corporation
1] or such Lender, as the case may be, as additional servicing compensation. In
regard to circumstances in which [Corporation 2] or [Corporation 1] may be
unable to enforce due-on-sale clauses, see "Certain Legal Aspects of Mortgage
Loans--Enforceability of Certain Provisions" in the Prospectus. In connection
with any such assumption, the Mortgage Rate borne by the related Mortgage Note
may not be decreased. No Mortgage Loan may be assumed unless coverage under any
existing Primary Insurance Policy continues as to that Mortgage Loan after such
assumption.
[Corporation 2] and each Lender will establish and maintain, in
addition to the Protected Account described below under "--Protected Account,"
one or more accounts (each a "Servicing Account") in a depository institution
the deposits of which are insured by the FDIC to the maximum extent permitted by
law. [Corporation 2] and the Lenders will deposit and retain therein all
collections from the Mortgagors for the payment of taxes, assessments, insurance
premiums, or comparable items as agent of the Mortgagors and in trust as
provided in the Agreement. Amounts in any Servicing Account may relate to
mortgage loans in more than one mortgage pool or to mortgage loans not yet
included in a mortgage pool. Each Servicing Account shall be fully insured by
the FDIC and to the extent that the balance in such account exceeds the limits
of such insurance, such excess must be transferred to another fully-insured
account in another institution the accounts of which are insured by the FDIC or
must be invested in certain investments permitted by the Agreement ("Permitted
Investments"). Such Permitted Investments must be held in trust by [Corporation
2] or the Lender, as described above. In addition, [Corporation 2] may, and
[Corporation 1] may permit the Lender to, establish Servicing Accounts not
conforming to the foregoing requirements to the extent that such Servicing
Accounts meet the requirements of each of the Rating Agencies for the
maintenance of the ratings on the Certificates. Withdrawals of amounts from the
Servicing Accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse [Corporation
2] or the related Lender for any advances made with respect to such items, to
refund to any Mortgagors any sums as may be determined to be overages, to pay
interest, if required, to Mortgagors on balances in the Servicing Accounts, to
pay earnings not required to be paid to Mortgagors to [Corporation 2] or the
related Lender or to clear and terminate the Servicing Accounts at or at any
time after the termination of the Agreement.
[Corporation 2] will maintain and keep with respect to each [C2]
Mortgage Loan, and [Corporation 1] will maintain and keep, or cause to be
maintained and kept, with respect to each [C1] Mortgage Loan, in full force and
effect a Primary Insurance Policy with respect to the portion of each such
Mortgage Loan, if any, in excess at origination of the percentage of value set
forth under "Description of the Mortgage Pool" herein, at least until such
excess has been eliminated. With the consent of the issuer of the Pool Insurance
Policy and/or pursuant to applicable state law, [Corporation 2] and [Corporation
1] may permit the Primary Insurance Policy to be terminated if a reappraisal of
the Mortgaged Property indicates a new appraised value of which the then
outstanding principal balance of the Mortgage Loan does not exceed __%. Primary
Insurance Policies may be replaced by substantially equivalent insurance but
such replacement is subject to the condition, to be evidenced by a writing from
each Rating Agency, that it would not cause the ratings on the Certificates to
be downgraded or withdrawn.
[Corporation 2] and each Lender will maintain errors and omissions
insurance and fidelity bonds in certain specified amounts.
Hazard Insurance
[Corporation 2] will maintain and keep with respect to each [C2]
Mortgage Loan, and [Corporation 1] will maintain and keep, or cause to be
maintained and kept, with respect to each [C1] Mortgage Loan, in full force and
effect for each Mortgaged Property or property that secured a Mortgage Loan
which has been acquired (and is owned) by the Trust through foreclosure or
deed-in-lieu of foreclosure a hazard insurance policy equal to at least the
lesser of the Outstanding Principal Balance of the Mortgage Loan and the current
replacement cost of the Mortgaged Property and containing a standard mortgagee
clause; provided, however, that the amount of hazard insurance may not be less
than the amount necessary to prevent loss due to the application of any
co-insurance provision of the related policy. Unless a higher deductible is
required by law, the deductible on such hazard insurance policy may be no more
than $1,000 or 1% of the applicable amount of coverage, whichever is less. In
the case of a condominium unit or a unit in a planned unit development, required
hazard insurance will take the form of a multiperil policy covering the entire
condominium project or planned unit development, in an amount equal to at least
100% of the insurable value based on replacement cost. Any amounts collected by
[Corporation 2] or a Lender under any such hazard insurance policy (other than
amounts to be applied to the restoration or repair of the Mortgaged Property or
amounts released to the Mortgagor in accordance with [Corporation 2]'s or the
Lender's normal servicing procedures) shall be deposited in the Protected
Account. Any cost incurred by [Corporation 2], a Lender or [Corporation 1] in
maintaining any such hazard insurance policy shall not be added to the amount
owing under the Mortgage Loan for the purpose of calculating monthly
distributions to Certificateholders, notwithstanding that the terms of the
Mortgage Loan so permit. Such costs shall be recoverable by [Corporation 2], the
Lender or [Corporation 1], as the case may be, out of related late payments by
the Mortgagor or out of Insurance Proceeds, Liquidation Proceeds or credit
support. The right of [Corporation 2], [Corporation 1] or the Lenders to
reimbursement for such costs incurred will be prior to the right of
Certificateholders to receive any related Insurance Proceeds, Liquidation
Proceeds or credit support payments.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties 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 improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss 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 to be maintained on the
improvements securing the Mortgage Loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the property securing a Mortgage Loan is located in a federally
designated flood area, [Corporation 2] will cause with respect to the [C2]
Mortgage Loans, and [Corporation 1] will use its best reasonable efforts to
cause the related Lender to cause with respect to the [C1] Mortgage Loans, flood
insurance to the extent available and in accordance with industry practices to
be maintained. Such flood insurance will be in an amount equal to the greater of
(i) the Outstanding Principal Balance of the related Mortgage Loan and (ii) the
minimum amount required under the terms of coverage to compensate for any damage
or loss on a replacement cost basis, but not more than the maximum amount of
such insurance available for the related Mortgaged Property under either the
regular or emergency programs of the National Flood Insurance Program (assuming
that the area in which such Mortgaged Property is located is participating in
such program). Unless applicable state law requires a higher deductible, the
deductible on such flood insurance may not exceed $1,000 or l% of the applicable
amount of coverage, whichever is less.
[Corporation 2], on behalf of the Trustee and the Certificateholders,
will present with respect to the [C2] Mortgage Loans, and [Corporation 1], on
behalf of the Trustee and Certificateholders, will present, or cause each Lender
to present, with respect to the [C1] Mortgage Loans, claims to the insurer under
any applicable Primary Insurance Policy or hazard insurance policy. As set forth
above, all collections by [Corporation 2], [Corporation 1] or the Lenders under
such policies that are not applied to the restoration or repair of the related
Mortgaged Property or released to the Mortgagor in accordance with [Corporation
1]'s or the Lender's normal servicing procedures are to be deposited in the
Protected Account.
Realization Upon Defaulted Mortgage Loans
[Corporation 2] will, with respect to the [C2] Mortgage Loans, and
[Corporation 1] will direct the related Lender to, with respect to the [C1]
Mortgage Loans, foreclose upon or otherwise comparably convert the ownership of
properties securing defaulted Mortgage Loans as to which no satisfactory
collection arrangements can be made. [Corporation 2] will, with respect to the
[C2] Mortgage Loans, and [Corporation 1] will cause each Lender to, with respect
to the [C1] Mortgage Loans, service the property acquired by the Trust through
foreclosure or deed-in-lieu of foreclosure and will use its best efforts to
maximize the receipt of principal and interest on defaulted Mortgage Loans;
provided, however, that [Corporation 2] and [Corporation 1] will not be required
to expend their own funds in connection with any foreclosure or towards the
restoration of any property unless it determines in good faith (i) that such
foreclosure or restoration will increase the proceeds of liquidation of the
Mortgage Loan to the Certificateholders after reimbursement to itself for such
expenses and (ii) that such expenses will be recoverable to it through
Liquidation Proceeds or Insurance Proceeds (respecting which it shall have
priority for purposes of reimbursements from the Certificate Account).
Since Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by [Corporation 2], [Corporation 1] and Lenders, no insurance
payments will result in a recovery to Certificateholders which exceeds the
principal balance of the defaulted Mortgage Loan together with accrued interest
thereon at its Net Rate.
Servicing Compensation and Payment of Expenses
[Corporation 1] and the Lenders shall be entitled to receive the
Servicing Amount (as defined below) from full payments of accrued interest on
each [C1] Mortgage Loan and [Corporation 2] shall be entitled to receive the
Servicing Amount from full payments of interest on each [Corporation 2] Mortgage
Loan as compensation for their activities under the Agreement and the
Seller/Servicer Contracts, as the case may be. The Servicing Amount for a
Mortgage Loan shall be paid as follows:
(i) To the extent available out of the Servicing Amount and determined
by the related Master Servicer to be due to the Lender or [Corporation 2]
as its servicing fee, the Lender or [Corporation 2] shall receive for the
related Mortgage Loan with respect to each monthly period an amount equal
to one-twelfth of the Lender's or [Corporation 2]'s Servicing Rate (as
defined below) applied to the Scheduled Principal Balance of such Mortgage
Loan as of the first day of the month for which the Servicing Amount was
computed;
(ii) The related Master Servicer (or, at its discretion, its designee)
shall receive the Retained Servicing Amount (as defined below).
In addition to the primary compensation described above, [Corporation
2], [Corporation 1] or the related Lender will retain all prepayment charges, if
any, assumption fees and late payment charges, all to the extent collected from
Mortgagors. [Corporation 2] and [Corporation 1] will also be entitled to retain,
as additional servicing compensation, any income earned on the Certificate
Account and certain other accounts and any Excess Liquidation Proceeds (i.e.,
the amount, if any, by which Liquidation Proceeds with respect to a Liquidated
Mortgage Loan exceed the sum of (i) the Outstanding Principal Balance of such
Mortgage Loan and accrued but unpaid interest at the related Mortgage Rate
through the related Liquidation Date (or, in the case of a Liquidated Mortgage
Loan resulting from a Credit Loss, the date of payment of a claim under the Pool
Insurance Policy), plus (ii) related liquidation expenses, to the extent that
such amount is not required by law to be paid to the related Mortgagor), but
only to the extent that transfers or withdrawals from the Certificate Account
with respect thereto are permitted under the Agreement.
[Corporation 1] will retain any difference between the price at which
it purchases the Mortgage Loans and the net price at which it sells the
Certificates.
[Corporation 2] and [Corporation 1] will pay all expenses incurred in
connection with their servicing responsibilities (subject to limited
reimbursement as described herein). On each Distribution Date, the Trustee will
pay itself its fees for the month of such Distribution Date from amounts in the
Certificate Account.
In the event a successor Trustee is appointed by the
Certificateholders pursuant to the Agreement, that portion, if any, of the
successor Trustee's fees which exceeds the Trustee's fees established at the
time of issuance of the Certificates will be borne by the Certificateholders.
The "Servicing Amount" means, with respect to each Due Period, that
amount, calculated on a monthly basis and on a Mortgage Loan by Mortgage Loan
basis, equal to the aggregate of the product for each Mortgage Loan of (i) the
Scheduled Principal Balance of such Mortgage Loan as of the Due Date immediately
prior to such Due Period and (ii) one-twelfth of the sum of (A), in the case of
the [C1] Mortgage Loans, the Servicing Rate of the related Lender with respect
to such Mortgage Loan and the Retained Servicing Rate (as defined in the
Agreement) of [Corporation 1] or (B), in the case of the [C2] Mortgage Loans,
the Servicing Rate of [Corporation 2] with respect to such Mortgage Loan and the
Retained Servicing Rate of [Corporation 2].
The "Servicing Rate" for each Mortgage Loan is the rate set forth as
such in the schedule of Mortgage Loans attached as an exhibit to the Agreement.
The "Retained Servicing Amount" means that amount with respect to each
Due Period, calculated on a monthly basis and on a Mortgage Loan by Mortgage
Loan basis, equal to the aggregate of the product of (i) the Scheduled Principal
Balance of each Mortgage Loan as of the Due Date immediately prior to such Due
Period and (ii) one-twelfth of the related Retained Servicing Rate.
Protected Account
[Corporation 2] and each Lender will establish and maintain an account
(each a "Protected Account") into which it will deposit all collections of
principal and interest on any Mortgage Loan, including Principal Prepayments,
Insurance Proceeds, Liquidation Proceeds, the Repurchase Price for any Mortgage
Loans repurchased and advances made from the Lender's or [Corporation 2]'s own
funds (less servicing compensation as permitted above). All Protected Accounts
shall be held in a depository institution, the accounts of which are insured by
the FDIC to the maximum extent permitted by law, segregated on the books of such
institution and held in trust; provided that funds in the Protected Accounts
maintained by the Lenders may be combined with similar funds relating to other
pass-through certificates sold by [Corporation 1] and mortgage loans owned by
[Corporation 1] and others for which the Lender is acting as servicer and
[Corporation 1] is acting as master servicer. The amount at any time credited to
a Protected Account shall be fully insured by the FDIC to the maximum extent
permitted by law or, to the extent that such balance exceeds the limits of such
insurance, such excess must be transferred to an account or invested in
permitted investments meeting the requirements of each of the Rating Agencies or
to the Certificate Account. Certain payments may be required to be transferred
into noncommingled accounts on an accelerated basis.
Prior to each Distribution Date, the Master Servicers shall withdraw
or shall cause to be withdrawn from the Protected Accounts and any other
permitted accounts and shall deposit or cause to be deposited in the Certificate
Account amounts representing the following collections and payments (other than
with respect to principal of or interest on the Mortgage Loans due on or before
the Cut-off Date):
(i) Scheduled payments on the related Mortgage Loans received or
advanced by the related Master Servicer or Lenders which were due on the
related Due Date, net of servicing fees due such Master Servicer or
Lenders;
(ii) Full Principal Prepayments and any Liquidation Proceeds received
by (the related Master Servicer or Lenders with respect to such Mortgage
Loans in the related Prepayment Period, with interest to the date of
prepayment or liquidation, net of servicing fees due such Master Servicer
or Lenders; and
(iii) Partial prepayments of principal received by the related Master
Servicer or Lenders for such Mortgage Loans in the related Prepayment
Period.
Certificate Account
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the Certificateholders, an account (the "Certificate
Account") as a non-interest bearing trust account. The Certificate Account shall
have one subaccount for all funds with respect to the [C1] Mortgage Loans and
one subaccount for all funds with respect to the [C2] Mortgage Loans. The
Trustee will deposit in the Certificate Account as received the following
amounts:
(i) Any amounts withdrawn from a Protected Account or other permitted
account;
(ii) Any Monthly Advance;
(iii) Any Insurance Proceeds or Liquidation Proceeds received by a
Master Servicer which were not deposited in a Protected Account or other
permitted account;
(iv) The Repurchase Price with respect to any Mortgage Loans
repurchased and all proceeds of any Mortgage Loans or property acquired in
connection with the optional termination of the Trust;
(v) Any amounts required to be deposited with respect to losses on
Permitted Investments;
(vi) Any amounts received by either Master Servicer or the Trustee in
connection with the Bankruptcy Letter of Credit, the Mortgage Repurchase
Letter of Credit, the Special Hazard Letter of Credit, the Pool Insurance
Policy or any Letter of Credit Replacement Account; and
(vii) Any other amounts received by either Master Servicer or the
Trustee and required to be deposited in the Certificate Account pursuant to
the Agreement, when so required to be deposited.
All amounts deposited to the Certificate Account shall be held by the
Trustee in the name of the Trustee in trust for the benefit of the
Certificateholders in accordance with the terms and provisions of the Agreement,
subject to the right of either Master Servicer to require the Trustee to make
withdrawals therefrom as provided below. The amount at any time credited to the
Certificate Account shall be (i) fully insured by the FDIC to the maximum
coverage provided thereby or (ii) at the written direction of each Master
Servicer with respect to funds related to the [C1] Mortgage Loans or the [C2]
Mortgage Loans, as the case may be, invested, in the name of the Trustee, in
such Permitted Investments as the related Master Servicer may direct or
deposited in demand deposits with such depository institutions as designated by
the related Master Servicer, provided that time deposits of such depository
institutions would be a Permitted Investment.
The Trustee will, from time to time on demand of the related Master
Servicer, make or cause to be made such withdrawals or transfers from the
Certificate Account as the related Master Servicer has designated for such
transfer or withdrawal for the following purposes:
(i) to reimburse [__________] for any advances made by it in excess of
claims appropriately payable under the terms of the Pool Insurance Policy;
(ii) to reimburse the related Master Servicer or any Lender for any
Monthly Advance of its own funds or any advance of such Lender's or Master
Servicer's own funds, the right of the related Master Servicer or any
Lender or Master Servicer to reimbursement pursuant to this subclause (ii)
being limited to amounts received on a particular Mortgage Loan (including,
for this purpose, the Repurchase Price therefor, Insurance Proceeds and
Liquidation Proceeds) which represent late payments or recoveries of the
principal of or interest on such Mortgage Loan respecting which such
Monthly Advance or advance was made;
(iii) to reimburse the related Master Servicer or any Lender from
Insurance Proceeds or Liquidation Proceeds relating to a particular
Mortgage Loan for amounts expended by such Master Servicer or Lender in
good faith in connection with the restoration of the related Mortgaged
Property which was damaged by an uninsured cause or in connection with the
liquidation of a Mortgage Loan;
(iv) to reimburse the related Master Servicer or any Lender to the
extent permitted by the Agreement from Insurance Proceeds relating to a
particular Mortgage Loan for expenses incurred with respect to such
Mortgage Loan and to reimburse such Master Servicer or Lender from
Liquidation Proceeds from a particular Mortgage Loan for Liquidation
Expenses incurred with respect to such Mortgage Loan;
(v) to pay the related Master Servicer or any Lender to the extent
permitted by the Agreement from Liquidation Proceeds or Insurance Proceeds
received in connection with the liquidation of any Mortgage Loan, the
amount which such Master Servicer or Lender would have been entitled to
receive under subclause (x) below as servicing compensation on account of
each defaulted scheduled payment on such Mortgage Loan if paid in a timely
manner by the related Mortgagor;
(vi) to pay the related Master Servicer or any Lender to the extent
permitted by the Agreement from the Repurchase Price for any Mortgage Loan,
the amount which such Master Servicer or Lender would have been entitled to
receive under subclause (x) below as servicing compensation;
(vii) to reimburse the related Master Servicer or any Lender for
certain advances of funds made to protect a Mortgaged Property, the right
to reimbursement pursuant to this subclause being limited to amounts
received on the related Mortgage Loans (including, for this purpose, the
Repurchase Price therefor, Insurance Proceeds and Liquidation Proceeds)
which represent late recoveries of the payments for which such advances
were made;
(viii) to pay the related Master Servicer or a Lender with respect to
each Mortgage Loan that has been repurchased, all amounts received thereon
representing recoveries of principal that reduce the Outstanding Principal
Balance of the related Mortgage Loan below the Outstanding Principal
Balance used in calculating the Repurchase Price or representing interest
included in the calculation of the Repurchase Price or accrued after the
end of the month during which such repurchase occurs;
(ix) to reimburse the related Master Servicer or a Lender for any
advance, after a Realized Loss has been allocated with respect to the
related Mortgage Loan, if the advance has not been reimbursed pursuant to
clause (ii);
(x) to pay the related Master Servicer and any Lender servicing
compensation as set forth above;
(xi) to reimburse the related Master Servicer for legal expenses
incurred by and reimbursable to it pursuant to the Agreement;
(xii) to pay to the related Master Servicer, as additional servicing
compensation, any Excess Liquidation Proceeds; and
(xiii) to clear and terminate the Certificate Account.
On each Distribution Date, the Trustee shall make the following
payments from the funds in the Certificate Account:
(i) First, the Trustee's Fees shall be paid to the Trustee and the
Certificate Administrator's Fee shall be paid to the Certificate
Administrator named in the Agreement;
(ii) Second, the fees payable to the issuers of the Pool Insurance
Policy and the Special Hazard Letter of Credit shall be deposited in the
account established for such purpose; and
(iii) Third, the amount distributable to the Certificateholders shall
be payable in accordance with the provisions set forth under "Description
of the Certificates--Distributions of Interest" and "--Distributions of
Principal."
Certain Matters Regarding the Master Servicers
The Agreement will provide that neither Master Servicer may resign
from its obligations and duties thereunder, except upon determination that the
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Trustee or a successor has
assumed the obligations and duties of such Master Servicer under the Agreement.
The Agreement will further provide that neither the Master Servicers
nor any of their directors, officers, employees and agents shall be under any
liability to the Trustee, the Trusts or the Certificateholders for taking any
action or for refraining from taking any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicers 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 negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Master Servicers
and their directors, officers, employees and agents are entitled to
indemnification from the Certificate Account and will be held harmless thereby
against any loss, liability or expense incurred in connection with any legal
proceeding relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loans (except as otherwise
reimbursable under the Agreement) or incurred by reason of willful misfeasance,
bad faith or negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Agreement will provide that the Master Servicers are under no obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties under the Agreement and which in its opinion may involve it in any
expense or liability. The Master Servicers may, however, in their discretion
undertake any such action which they may deem necessary or desirable in respect
of 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 Trusts and the Master Servicers will be
entitled to be reimbursed therefor from the Certificate Account.
Any corporation into which a Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which a Master Servicer is a party, or any corporation
succeeding to the business of a Master Servicer will be the successor of such
Master Servicer under the Agreement, provided that any such successor to a
Master Servicer shall be qualified to service Mortgage Loans on behalf of FNMA
and FHLMC.
Events of Default
"Events of Default" under the Agreement consist of (i) failure by a
Master Servicer to cause to be deposited in the Certificate Account amounts
required to be deposited pursuant to the Agreement, and such failure continues
unremedied for two Business Days, (ii) failure by a Master Servicer to observe
or perform in any material respect any other material covenants and agreements
set forth in the Certificates or the Agreement, and such failure continues
unremedied for [60] days after the date on which written notice of such failure
has been given to such Master Servicer by the Trustee or to such Master Servicer
and the Trustee by the holders of Certificates aggregating ownership of not less
than [25%] of the Trust, (iii) the entry against a Master Servicer of a decree
or order by a court or agency or supervisory authority having jurisdiction in
the premises for the appointment of a conservator, receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding up or liquidation of its affairs, and
the continuance of any such decree or order is unstayed and in effect for a
period of [60] consecutive days, or the commencement of an involuntary case
against a Master Servicer under any applicable insolvency or reorganization
statute which case is not dismissed within [60] days, (iv) consent by a Master
Servicer to the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to a Master Servicer or substantially all of
its property, admission by a Master Servicer in writing of its inability to pay
its debts generally as they become due, filing of a petition to take advantage
of any applicable insolvency or reorganization statute, any assignment for the
benefit of its creditors, or voluntary suspension of payment of its obligations,
(v) assignment or delegation or attempted assignment or delegation by a Master
Servicer of its duties or rights under the Agreement (except as provided in the
Agreement) or attempts to do so, or (vi) failure by a Master Servicer to
purchase or substitute for a Mortgage Loan pursuant to the Agreement.
In each and every such case, so long as such Event of Default with
respect to a Master Servicer shall not have been remedied, either the Trustee or
the holders of Certificates aggregating ownership of not less than [25%] of the
Trust, by notice in writing to such Master Servicer (and to the Trustee if given
by such Certificateholders), with a copy to the Rating Agencies, may terminate
all of the rights and obligations (but not the liabilities) of such Master
Servicer under the Agreement and in and to the Mortgage Loans serviced by such
Master Servicer and the proceeds thereof. Upon the receipt by such Master
Servicer of such written notice, all authority and power of such Master Servicer
under the Agreement, whether with respect to the Certificates, the Mortgage
Loans or under any other related agreements (but only to the extent that such
other agreements relate to the Mortgage Loans) shall, subject to the provisions
of the Agreement, automatically and without further action pass to and be vested
in the Trustee.
Upon the receipt by either Master Servicer of a notice of termination
or an opinion of counsel to the effect that such Master Servicer is legally
unable to act or to delegate its duties to a person which is legally able to
act, the Trustee shall automatically become the successor in all respects to
such Master Servicer in its capacity under the Agreement and the transactions
set forth or provided for therein and shall thereafter be subject to all the
responsibilities, duties, liabilities and limitations on liabilities relating
thereto placed on such Master Servicer by the terms and provisions hereof;
provided, however, that the Trustee (i) shall be under no obligation to
repurchase any Mortgage Loan; and (ii) shall have no obligation whatsoever with
respect to any liability incurred by such Master Servicer at or prior to the
time of receipt by such Master Servicer of such notice or of such opinion of
counsel. As compensation therefor, the Trustee shall be entitled to all funds
relating to the Mortgage Loans which such Master Servicer would have been
entitled to retain if such Master Servicer had continued to act as such, except
for those amounts due such Master Servicer as reimbursement for advances
previously made. Notwithstanding the above, the Trustee may, if it shall be
unwilling so to act, or shall, if it is legally unable so to act, appoint, or
petition a court of competent jurisdiction to appoint, any established housing
and home finance institution which is a FNMA- or FHLMC-approved servicer and
having a net worth of not less than [$10,000,000], as the successor to such
Master Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of such Master Servicer under the
Agreement. Pending appointment of a successor to either Master Servicer
hereunder, the Trustee shall act in such capacity as hereinabove provided. In
connection with such appointment and assumption, the Trustee may make such
arrangements for the compensation of such successor out of payments on Mortgage
Loans as it and such successor shall agree; provided, however, that no such
compensation shall be in excess of that permitted the Trustee as provided above,
and that such successor shall undertake and assume the obligations of the
Trustee to pay compensation to any third person acting as an agent or
independent contractor in the performance of master servicing responsibilities
under the Agreement.
Monthly Advances
If the aggregate of scheduled payments on the [C1] Mortgage Loans or
[C2] Mortgage Loans that were due on the Due Date in the month of a Distribution
Date and are delinquent other than as a result of application of the Relief Act
exceeds the amount deposited in the Certificate Account which will be used for a
Certificate Account Advance (as defined below) with respect to the [C1] Mortgage
Loans or [C2] Mortgage Loans, respectively, the related Master Servicer will
deposit in the Certificate Account not later than the third Business Day
immediately preceding the Distribution Date to which such Determination Date
relates an amount equal to such deficiency net of the related Servicing Amount
except to the extent the related Master Servicer determines any such advance to
be nonrecoverable from Liquidation Proceeds, Insurance Proceeds, future payments
on any Mortgage Loan or Letters of Credit. Any amount used as a Certificate
Account Advance shall be replaced by the related Master Servicer by deposit in
the Certificate Account on or before any future date to the extent that funds in
the Certificate Account on such date are less than the amount required to be
transferred to the Certificate Account. If applicable, on each Determination
Date, the related Master Servicer shall present an Officer's Certificate to the
Trustee stating that (i) the related Master Servicer elects not to make a
Monthly Advance in a stated amount and detailing the reason it deems the advance
to be nonrecoverable and (ii) if the related Master Servicer determines not to
make a Monthly Advance when required to do so, stating the amount thereof. At
least two Business Days prior to the related Distribution Date, the Trustee
shall make a claim to [__________] under the servicer backup claim payment
advance endorsement to the Pool Insurance Policy for the amount set forth in
such Officer's Certificate as not being advanced by the related Master Servicer
pursuant to clause (ii) and shall deposit such amount in the Certificate
Account.
As of any Determination Date, a "Certificate Account Advance" is the
amount on deposit in a Protected Account or another permitted account which is
not required to be transferred to the Certificate Account for distribution
during the calendar month in which such Determination Date occurs but which is
used to make a distribution to Certificateholders during such calendar month on
account of scheduled payments on the Mortgage Loans due on the Due Date for such
month not being paid on or before the Determination Date except insofar as such
unpaid amounts are the result of application of the Relief Act.
Reports to Certificateholders
On each Distribution Date, a written report will be provided to each
holder of Certificates setting forth certain information with respect to the
composition of the payment being made, the Current Principal Amount of an
individual Certificate following the payment and certain other information
relating to the Certificates and the Mortgage Loans.
Termination
The obligations of the Master Servicers and the Trustee created by the
Agreement will terminate upon (i) the later of the making of the final payment
or other liquidation, or any advance with respect thereto, of the last Mortgage
Loan subject thereto or the disposition of all property acquired upon
foreclosure or acceptance of a deed in lieu of any such Mortgage Loans and (ii)
the payment to Certificateholders of all amounts required to be paid to them
pursuant to such Agreement.
On the earlier of ______ or any Distribution Date on which the
aggregate unpaid principal balance of the Mortgage Loans is less than __% of the
Cut-off Date Scheduled Principal Balance, [Corporation 1] or its designee may
repurchase from the Trust all Mortgage Loans remaining outstanding at a purchase
price equal to (a) the the unpaid principal balance of such Mortgage Loans
(other than Mortgage Loans related to REO Property), net of the principal
portion of any unreimbursed Monthly Advances made by the purchaser, plus accrued
but unpaid interest thereon at the applicable Mortgage Rate to the next Due
Date, plus (b) the appraised value of any REO Property (but not more than the
unpaid principal balance of the related Mortgage Loan, together with accrued but
unpaid interest on that balance at the applicable Mortgage Rate to the next Due
Date), less the good faith estimate of the Master Servicer of liquidation
expenses to be incurred in connection with its disposal thereof. The Trust may
also be terminated and the Certificates retired on any Distribution Date upon
BSMSI's determination, based upon an opinion of counsel, that the REMIC status
of the Trust has been lost or that a substantial risk exists that such status
will be lost for the then current taxable year. Upon termination, the
Certificateholders will receive the Current Principal Amount of the
Certificates, plus accrued interest thereon.
The Trustee
The Trustee may resign at any time, in which event the Master
Servicers will be obligated to appoint a successor Trustee. The Master Servicers
may also remove the Trustee if the Trustee ceases to be eligible to continue as
such under the Agreement or if the Trustee becomes incapable of acting,
bankrupt, insolvent or if a receiver or public officer takes charge of the
Trustee or its property. Upon becoming aware of such circumstances, the Master
Servicers will be entitled to appoint a successor Trustee. The Trustee may also
be removed at any time by the holders of Certificates evidencing ownership of
not less than __% of the Trust. In the event that the Certificateholders remove
the Trustee, the compensation of any successor Trustee shall be paid by the
Certificateholders to the extent that such compensation exceeds the amount
agreed to by the Master Servicers and the Trustee. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat certain of the assets of the Trust
as a REMIC for federal income tax purposes. The Certificates (other than the
Class A-R Certificates) will be designated as "regular interests" in the REMIC
(the "REMIC Regular Certificates") and the Class A-R Certificates will be
designated as the "residual interest" (the "REMIC Residual Certificates") in the
REMIC. See "Certain Federal Income Tax Consequences" in the Prospectus.
Because the Certificates (other than the Class A-R Certificates) will
be considered REMIC regular interests, they generally will be taxable as debt
obligations under the Code, and interest paid or accrued on such Certificates,
including original issue discount with respect to any such Certificates issued
with original issue discount, will be taxable to Certificateholders in
accordance with the accrual method of accounting, regardless of the
Certificateholder's usual method of accounting. It is expected that some or all
of the interest payments on the Variable Strip Certificates, and that all of the
payments on the Class P-l and Class P-2 Certificates, will be treated as part of
the stated redemption price at maturity of such Certificates and, therefore,
will be subject to original issue discount provisions. Other Classes of
Certificates also may be subject to original issue discount provisions. See
"Certain Federal Income Tax Consequences-REMIC Regular Certificates--Current
Income on REMIC Regular Certificates--Original Issue Discount" in the
Prospectus. The prepayment assumption that will be used in determining the rate
of accrual of original issue discount with respect to the Certificates is ___%
SPA. However, no representation is made as to the rate at which prepayments
actually will occur.
The Certificates (including the Class A-R Certificates) will be
treated as "regular" or "residual interests in a REMIC" for domestic building
and loan associations, and "real estate assets" for real estate investment
trusts ("REITs"), subject to the limitations described in "Certain Federal
Income Tax Consequences-REMIC Certificates--Status of REMIC Certificates as Real
Property Loans" in the Prospectus. Similarly, interest on the Certificates will
be considered as "interest on obligations secured by mortgages on real property"
for REITs, subject to the limitations described in "Certain Federal Income Tax
Consequences--REMIC Certificates--Status of REMIC Certificates as Real Property
Loans" in the Prospectus.
The Class A-R Certificates generally will not be treated as evidences
of indebtedness for federal income tax purposes. Instead, the Class A-R
Certificates will be considered as "residual interests in a REMIC," representing
rights to the taxable income or net loss of the REMIC. Holders of the Class A-R
Certificates will be required to report and will be taxed on their pro rata
share of such income or loss, and such reporting requirements will continue
until there are no Certificates of any Class outstanding, even though Class A-R
Certificateholders previously may have received full payment of their stated
interest and principal. The taxable income of Class A-R Certificateholders
attributable to the Class A-R Certificates may exceed the principal and interest
payments received by such Certificateholders during the corresponding period,
which could result in a negligible (or even negative) after-tax return, in
certain circumstances.
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 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
(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. ss. 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 or the Master Servicers to the
fiduciary investment 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. BSMSI believes that each Class of Certificates may
be considered subordinated to other Classes of Certificates and thus may fail to
satisfy one of the general conditions of both PTCE 83-1 and PTE 90-30 with
respect to mortgage pass-through certificates. PTCE 84-14 (relating to
transactions effected by a "qualified professional asset manager") and PTCE
92-23 (relating to transactions effected by "in-house asset managers") will also
not apply as they do not cover transactions governed by PTCE 83-1. However, PTCE
91-38 (relating to bank maintained collective funds), PTCE 95-60 (relating to
insurance company general accounts) and PTCE 90-1 (relating to insurance company
pooled separate accounts) or some other exemption may apply with respect to an
investing Plan. See "ERISA Considerations" in the Prospectus. Certificates may
not be acquired (directly or indirectly) by or on behalf of a "benefit plan
investor" described in or subject to the Plan Asset Regulations unless a Benefit
Plan Opinion is provided to the Trustee and the Certificate Administrator.
A "Benefit Plan Opinion" is an opinion of counsel satisfactory to the
Certificate Administrator (and upon which the Certificate Administrator, the
Master Servicers and the Trustee are authorized to rely) to the effect that the
proposed transfer and/or holding of the Certificate will not (i) give rise to
any fiduciary duty under ERISA on the part of the Master Servicers, the Trustee
or the Seller or (ii) be treated as a prohibited transaction under Section 406
of ERISA or Section 4975 of the Code.
RESTRICTIONS ON PURCHASE AND TRANSFER
OF THE CLASS A-R CERTIFICATES
The Class A-R Certificates are not offered for sale to any investor
that is (i) a "disqualified organization" as described in "Certain Federal
Income Tax Consequence--REMIC Residual-Certificate--Tax on Disposition of REMIC
Residual Certificates; Restrictions on Transfer; Holding by Pass-Through
Entities" in the Prospectus or (ii) a "benefit plan investor" described in or
subject to the Plan Asset Regulations unless such plan provides the Trustee and
the Certificate Administrator with a Benefit Plan Opinion.
Class A-R Certificates (or interests therein) may not be transferred
without the prior express written consent of the Tax Matters Person. The Tax
Matters Person will not give its consent to any proposed transfer to a
disqualified organization except under the conditions specified in the related
Agreement. As a prerequisite to such consent to any other transfer, the proposed
transferee must provide (i) the Tax Matters Person and the Trustee with an
affidavit that the proposed transferee is not a disqualified organization and
(ii) the Certificate Administrator and the Trustee either (a) an affidavit that
the proposed transferee is not, and is not acquiring the Class A-R Certificates
directly or indirectly for or on behalf of a "benefit plan investor" described
in or subject to the Plan Asset Regulations or (b) a Benefit Plan Opinion.
Notwithstanding the fulfillment of the prerequisites described above, the Tax
Matters Person may withhold its consent to a transfer, but only to the extent
necessary to avoid a risk of REMIC disqualification or REMIC-level tax. In the
event that legislation is enacted which would subject the Trusts to tax (or
disqualify the REMIC as a REMIC) on the transfer of an interest in a Class A-R
Certificate to any other person or persons, the Tax Matters Person may, without
action on the part of Holders, amend the Agreement to restrict or prohibit
prospectively such transfer. A transfer in violation of the restrictions set
forth herein may subject a Class A-R Certificateholder to taxation. See "Certain
Federal Income Tax Consequences--REMIC Residual Certificates--Tax on Disposition
of REMIC Residual Certificates; Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus. Further, unless [Corporation 1]
consents in writing (which consent may be withheld in [Corporation 1]'s sole
discretion), the Class A-R Certificates (including a beneficial interest
therein) may not be purchased by or transferred to any person who is not a
"United States person," as such term is defined in Section 7701(a)(30) of the
Code.
RESTRICTIONS ON PURCHASE AND TRANSFER OF THE
CERTIFICATES (OTHER THAN CLASS A-R CERTIFICATES)
Certificates (other than Class A-R Certificates), or interests
therein, will not be offered for sale and may not be transferred to any investor
who is, or who is acquiring such Certificate(s) directly or indirectly for or on
behalf of, a "benefit plan investor" described in or subject to the Plan Asset
Regulations unless the proposed transferee supplies the Certificate
Administrator and the Trustee with a Benefit Plan Opinion.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Certificates (other than the Class P-l and Class P-2
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. Proceeds to BSMSI will be ___% of the aggregate
principal balance of the Certificates (other than the Class P-l and Class P-2
Certificates), as of the Cut-off Date, plus accrued interest at the initial
weighted average Pass-Through Rate from the Cut-off Date to but not including
the Closing Date, but before deducting expenses payable by BSMSI. 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 Securities Act of 1933, as amended,
or will contribute to payments the Underwriter may be required to make in
respect thereof.
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
It is a condition to their issuance that the Certificates be rated
"[___]"' by [__________] and "[___]" by __________. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. A security rating
does not represent any assessment of the likelihood of principal prepayments on
the Mortgage Loans or of the degree to which such prepayments might differ from
those originally anticipated. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield or that if there
is a rapid rate of principal payments (including prepayments) on the [C1]
Mortgage Loans, investors in the Class A-X Certificates could fall to recover
their initial investments.
BSMSI has not requested a rating of the Certificates by any rating
agency other than [__________] and [__________]. 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 [__________] and
[----------].
TARGETED PRINCIPAL PERCENTAGES
Class A-1 Class A-2 Class A-3
Targeted Targeted Targeted
Principal Principal Principal
Distribution Date Percentage Percentage Percentage
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
Agreement.............................................................. S-7
Assumed Final Distribution Date........................................ S-87
Available Funds........................................................ S-73
Bankruptcy Letter of Credit............................................ S-24
Benefit Plan Opinion................................................... S-122
BSMSI.................................................................. S-2
Business Day........................................................... S-66
Buydown Account........................................................ S-65
Buydown Funds.......................................................... S-64
Buydown Mortgage Rate.................................................. S-65
Cash Liquidation....................................................... S-80
Certificate Account.................................................... S-112
Certificate Account Advance............................................ S-119
Certificate Register................................................... S-66
Certificate Value...................................................... S-12
Certificates........................................................... S-1
Class A Certificates................................................... S-8
Class A Percentage..................................................... S-74
Class A Prepayment Percentage.......................................... S-74
Class A Principal Amount............................................... S-70
Class A Principal Distribution Amount.................................. S-73
Class A Unrecovered Portion............................................ S-75
Class A-X Percentage................................................... S-74
Class B Certificates................................................... S-8
Class B Percentage..................................................... S-74
Class B Prepayment Percentage.......................................... S-75
Class B Principal Amount............................................... S-70
Class B Principal Distribution Amount.................................. S-73
Class P Deferred Amount................................................ S-23
Class P Principal Amount............................................... S-71
Class P-l Deferred Amount.............................................. S-23
Class P-2 Deferred Amount.............................................. S-23
Closing Date........................................................... S-24
Code................................................................... S-42
[C1] Mortgage Loans.................................................... S-2
[C2] Mortgage Loans.................................................... S-2
[Corporation 1]........................................................ S-2
[Corporation 2]........................................................ S-2
Credit Loss............................................................ S-77
Credit Mortgage Loan................................................... S-77
Current Principal Amount............................................... S-15
Cut-off Date........................................................... S-2
Cut-off Date Scheduled Principal Balance............................... S-46
Debt Service Reduction................................................. S-77
Deficient Valuation.................................................... S-77
Delinquency Amount..................................................... S-75
Discount Mortgage Loan................................................. S-12
Distribution Date...................................................... S-2
Due Date............................................................... S-46
Due Period............................................................. S-13
ERISA.................................................................. S-41
Events of Default...................................................... S-117
Excess Principal....................................................... S-12
FDIC................................................................... S-58
FHA.................................................................... S-46
First Tier Certificates................................................ S-8
First Tier Percentage.................................................. S-74
First Tier Principal Distribution Amount............................... S-18
Guide.................................................................. S-58
HEM.................................................................... S-59
Insurance Proceeds..................................................... S-73
Interest Accrual Period................................................ S-13
Interest Shortfall..................................................... S-16
Lenders................................................................ S-57
Letter of Credit Replacement Account................................... S-81
Letters of Credit...................................................... S-24
Liquidated Mortgage Loan............................................... S-78
Liquidation Expenses................................................... S-79
Liquidation Proceeds................................................... S-80
Loan-to-Value Ratio.................................................... S-58
Master Servicer(s)..................................................... S-9
Material Defect........................................................ S-101
Monthly Advance........................................................ S-41
Mortgage File.......................................................... S-101
Mortgage Loans......................................................... S-2
Mortgage Pool.......................................................... S-1
Mortgage Rates......................................................... S-10
Mortgage Repurchase Letter of Credit................................... S-24
Mortgaged Properties................................................... S-9
Mortgagor.............................................................. S-16
Net Liquidation Proceeds............................................... S-80
Net Rate............................................................... S-11
Non-Credit Losses...................................................... S-25
Non-Mortgage Loss...................................................... S-80
Non-P Percentage....................................................... S-75
Outstanding Principal Balance.......................................... S-84
Original Value......................................................... S-10
PAC.................................................................... S-37
Permitted Investments.................................................. S-106
Plan(s) ............................................................... S-42
Pool Insurance Policy.................................................. S-24
Prepayment Period...................................................... S-13
Primary Insurance Policy............................................... S-10
Principal Prepayment................................................... S-75
Protected Account...................................................... S-111
Rating Agencies........................................................ S-44
Realized Loss.......................................................... S-80
Record Date............................................................ S-12
Reduced Documentation Program.......................................... S-64
Reduction Amount....................................................... S-83
Regular Certificates................................................... S-8
Relief Act............................................................. S-16
Relocation Loans....................................................... S-64
REMIC.................................................................. S-3
REMIC Regular Certificates............................................. S-41
REMIC Residual Certificates............................................ S-41
REO Property........................................................... S-79
Repurchase Price....................................................... S-101
Repurchase Proceeds.................................................... S-74
Residual Certificates.................................................. S-8
Retained Servicing Amount.............................................. S-111
Scheduled Principal Balance............................................ S-11
Second Tier Certificates............................................... S-8
Second Tier Percentage................................................. S-74
Second Tier Principal Distribution Amount.............................. S-18
Seller/Servicer Contract............................................... S-58
Servicing Account...................................................... S-106
Servicing Amount....................................................... S-111
Servicing Rate......................................................... S-111
SMMEA.................................................................. S-44
SPA.................................................................... S-91
Special Hazard Letter of Credit........................................ S-24
Special Hazard Letter of Credit Available Amount....................... S-83
Special Hazard Loss.................................................... S-78
Special Hazard Mortgage Loan........................................... S-78
TAC.................................................................... S-33
Targeted Principal Percentages......................................... S-126
Tax Matters Person..................................................... S-43
Temporary Buydown Loans................................................ S-64
Trust.................................................................. S-1
Trust Assets........................................................... S-42
Trustee................................................................ S-7
Underwriter ........................................................... S-4
VA..................................................................... S-46
Variable Strip Certificates............................................ S-2
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS MORTGAGE SECURITIES INC.
SELLER
This Prospectus relates to Mortgage Pass-Through Certifi cates (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 , 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
<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 AND THE ACCOMPANYING PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY BSMSI OR THE UNDERWRITER. 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
PAGE
Summary of Terms....................................................S-7
Description of the Mortgage Pool........................... ........S-46
Description of the Certificates............................. .......S-65
Yield and Prepayment Considerations.......................... ......S-87
The Pooling and Servicing Agreement.................................S-100
Federal Income Tax Considerations...................................S-120
ERISA Considerations................................................S-123
Restrictions on Purchase and Transfer of the
Class A-R Certificates............................................S-124
Restrictions on Purchase and Transfer of the
Certificates (other than Class A-R Certificates)..................S-125
Method of Distribution..............................................S-125
Legal Matters.......................................................S-125
Certificate Rating..................................................S-125
Targeted Principal Percentages......................................S-127
Index of Principal Definitions......................................S-128
(Back cover continued
on next page)
<PAGE>
PROSPECTUS
Prospectus Supplement ............................................ 4
Available Information ............................................ 4
Reports to Certificateholders..................................... 5
Summary of Terms ................................................. 6
The Trust Fund ................................................... 29
Use of Proceeds .................................................. 47
The Seller ....................................................... 47
Mortgage Loan Program ............................................. 47
Description of the Certificates ................................... 52
Credit Enhancement ................................................ 63
Yield and Prepayment Considerations ............................... 74
The Pooling and Servicing Agreement ............................... 77
Certain Legal Aspects of the
Mortgage Loans ................................................. 96
Certain Federal Income Tax Consequences .......................... 110
ERISA Considerations ............................................. 138
Legal Investment ................................................. 143
Method of Distribution ........................................... 146
Legal Matters ................................................... 147
Financial Information............................................ 148
Rating........................................................... 148
Glossary......................................................... 149
(Back cover continued
on next page)
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The estimated expenses in connection with the offering, all of which will
be borne by the Registrant are as follows:
SEC Registration Fee...................... $ 1,515,151.52
Printing and Engraving Fees............... 50,000.00
Legal Fees and Expenses .................. 150,000.00
Accounting Fees and Expenses.............. 40,000.00
Trustee Fees and Expenses................. 25,000.00
Rating Agency Fees........................ 50,000.00
Miscellaneous............................. 10,000.00
Total..................................... $ 1,840,151.52
*All amounts except the SEC Registration Fee are estimates of expenses
incurred or to be incurred in connection with the issuance and distribution of a
Series of Certificates in an aggregate principal amount assumed for these
purposes to be the entire $5,000,000,000 of Certificates registered hereby.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 7 of the form of Underwriting Agreement, the Underwriters are
obligated under certain circumstances to indemnify certain controlling persons
of the Registrant against certain liabilities, including liabilities under the
Securities Act of 1933.
The Registrant's By-laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in substance,
that Delaware corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they are or were such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding.
The Pooling and Servicing Agreements may provide that no director, officer,
employee or agent of the Registrant is liable to the Trust Fund or the
Certificateholders, except for such person's own willful misfeasance, bad faith,
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreements may provide further
that, with the exemptions stated above, a director, officer, employee or agent
of the Registrant is entitled to be indemnified against any loss, liability or
expenses incurred in connection with legal actions relating to such Pooling and
Servicing Agreements and the related Certificates, other than such expenses
relating to particular Mortgage Loans.
<PAGE>
ITEM 16. LIST OF EXHIBITS
(a) Any required financial statements of a provider of credit enhancement
will be included as an appendix to the related Prospectus Supplement.
(b)
1.1**- Form of Underwriting Agreement
3.1* - Certificate of Incorporation of Registrant
3.2* - By-laws of Registrant
4.1* - Form of Pooling and Servicing Agreement
5.1**- Opinion of Stroock & Stroock & Lavan as to legality of the Certificates
8.1**- Opinion of Stroock & Stroock & Lavan as to certain tax matters
(included in Exhibit 5.1)
23.1**-Consent of Stroock & Stroock & Lavan (included as part of Exhibit 5.1)
24** - Powers of Attorney (included as part of signature page).
___________________
* Previously filed as an exhibit to Registration Statement (No. 33-62710)
on Form S-3 and incorporated herein by reference.
** Filed herewith.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change of such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is contained
in periodic reports filed by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing by the Registrant of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 7th day of
October, 1996.
BEAR STEARNS MORTGAGE SECURITIES INC.
By:
By:
Name: Joseph T. Jurkowski, Jr.
Title: Vice President/Assist Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Jeffrey Mayer, William J. Montgoris, Paul
M. Friedman, Michael H. Hellenbrand, Thomas M. Flexner and Joseph T. Jurkowski,
Jr., and each of them, his true and lawful attorney-in-fact and agent wit h full
power of substitution and resubstitution, for him or her and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorney-in-fact and agent and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or any of them, or their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on October 7, 1996.
SIGNATURE TITLE
/s/ Jeffrey Mayer Chairman of the Board/Chief Executive Officer
Jeffrey Mayer (Principal Executive Officer), President
and Director
/s/ William J. Montgoris Secretary/Treasurer (Principal Financial
William J. Montgoris and Accounting Officer)
/s/ Paul M. Friedman Vice President/Assistant Secretary and Director
Paul M. Friedman
/s/ Michael H. Hellenbrand Senior Vice President and Director
Michael H. Hellenbrand
/s/ Thomas M. Flexner Director
Thomas M. Flexner
/s/ Joseph t. Jurkowski, Jr. Vice President/Assist Secretary
Joseph T. Jurkowski, Jr.
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1996
REGISTRATION STATEMENT NO. 33-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
EXHIBITS
TO
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
________________
BEAR STEARNS MORTGAGE SECURITIES INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3633241
State of Incorporation IRS Employer Identification Number
245 Park Avenue
New York, New York 10167
(212) 272-2000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive office)
William J. Montgoris
Treasurer and Secretary
Bear Stearns Mortgage Securities Inc.
245 Park Avenue
New York, New York 10167
(212) 272-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Lois Weinroth, Esq.
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004-2696
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NO. DESCRIPTION NO.
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement.
(b)
1.1** Form of Underwriting Agreement
3.1* Form of Certificate of Incorporation of Registrant
4.1* By-laws of Registrant
4.1* Form of Pooling and Servicing Agreement
5.1** Opinion of Stroock & Stroock & Lavan as to legality of the
Certificates..........................................
8.1** Opinion of Stroock & Stroock & Lavan as to certain tax matters
(included in Exhibit 5.1)
23.1** Consent of Stroock & Stroock & Lavan (included in Exhibit 5.1)
24** Powers of Attorney (included as part of signature page)
___________________
* Previously filed as an exhibit to Registration Statement (No. 33-62710) on
Form S-3 and incorporated herein by reference.
**Filed herewith.
Exhibit 1.1
Form of Underwriter Agreement
BEAR STEARNS MORTGAGE SECURITIES INC.
MORTGAGE PASS-THROUGH CERTIFICATES
UNDERWRITING AGREEMENT
_______, 199_
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
1. INTRODUCTION. Bear Stearns Mortgage Securities Inc., a Delaware
corporation (the "Company"), from time to time proposes to issue and sell
Mortgage Pass-Through Certificates ("Certificates") in various series (each a
"Series"), and, within each Series, in various classes, in one or more offerings
on terms determined at the time of sale. The Certificates of each series will be
issued pursuant to a pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") among the Company, as depositor, one or more master
servicers which may include the Company and a third-party trustee (the
"Trustee"). Upon issuance, the Certificates of each series will evidence
undivided interests in the Trust Fund (as defined in the Pooling and Servicing
Agreement) established for such series containing mortgages or, in the event the
Trust Fund, or a portion thereof, constitutes the upper tier of a two-tier real
estate mortgage investment conduit ("REMIC"), the Trust Fund may contain
interests issued by a lower tier trust which will contain mortgages, all as
described in the Prospectus (as defined below). Terms not defined herein which
are defined in the Pooling and Servicing Agreement shall have the meanings
ascribed to them in the Pooling and Servicing Agreement.
Whenever the Company determines to make an offering of a Series of
Certificates (an "Offering") through you or an underwriting syndicate managed or
co-managed by you, it will offer to enter into an agreement ("Terms Agreement")
providing for the sale of such Certificates to, and the purchase and offering
thereof by, you and such other co-managers and underwriters, if any, which have
been selected by you and have authorized you to enter into such Terms Agreement
and other related documentation on their behalf (the "Underwriters," which term
shall include you whether acting alone in the sale of Certificates or as a
co-manager or as a member of an underwriting syndicate). The Terms Agreement
relating to each Offering shall specify the principal amount of Certificates to
be issued and their terms not otherwise specified in the Pooling and Servicing
Agreement, the price at which the Certificates are to be purchased by each of
the Underwriters from the Company and the initial public offering price or the
method by which the price at which the Certificates are to be sold will be
determined. The Terms Agreement, which shall be substantially in the form of
Exhibit A hereto, may take the form of an exchange of any standard form of
written telecommunication between you and the Company. Each Offering governed by
this Agreement, as supplemented by the applicable Terms Agreement, shall inure
to the benefit of and be binding upon the Company and each of the Underwriters
participating in the Offering of such Certificates.
The Company hereby agrees with the Underwriters as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to you as of the date hereof, and to the Underwriters named in the
applicable Terms Agreement as of the date of such Terms Agreement, as follows:
(a) A registration statement, including a prospectus, and such amendments
thereto as may have been required to the date hereof, relating to the
Certificates and the offering thereof from time to time in accordance with
Rule 415 under the Securities Act of 1933, as amended ("Act"), have been filed
with the Securities and Exchange Commission ("Commission") and such registration
statement as amended has become effective. Such registration statement as
amended and the prospectus relating to the sale of Certificates constituting a
part thereof as from time to time amended or supplemented (including any
prospectus filed with the Commission pursuant to Rule 424 of the rules and
regulations of the Commission ("Rules and Regulations") under the Act, including
any documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Act which were filed under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") on or before the Effective Date of the Registration
Statement or the date of the Prospectus Supplement, are respectively referred to
herein as the "Registration Statement" and the "Prospectus"; provided, however,
that a supplement to the Prospectus (a "Prospectus Supplement") prepared
pursuant to Section 5(a) hereof shall be deemed to have supplemented the
Prospectus only with respect to the Offering of the Series of Certificates to
which it relates. The conditions of Rule 415 under the Act have been satisfied
with respect to the Company and the Registration Statement.
(b) On the effective date of the Registration Statement, the Registration
Statement and the Prospectus conformed in all material respects to the
requirements of the Act and the Rules and Regulations, and did not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
and on the date of each Terms Agreement, the Registration Statement and the
Prospectus will conform in all material respects to the requirements of the Act
and the Rules and Regulations, and the Prospectus will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading; provided, however,
that the foregoing does not apply to (i) statements or omissions in such
documents based upon written information furnished to the Company by any
Underwriter specifically for use therein or (ii) any Current Report (as defined
in Section 5(b) below) or in any amendment thereof or supplement thereto,
incorporated by reference in such Registration Statement or such Prospectus (or
any amendment thereof or supplement thereto).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus except as otherwise stated therein,
(A) there has been no material adverse change in the condition, financial or
otherwise, earnings, affairs, regulatory situation or business prospects of the
Company whether or not arising in the ordinary course of business and (B) there
have been no transactions entered into by the Company which are material, other
than those in the ordinary course of business.
(d) This Agreement has been, and the Pooling and Servicing Agreement, when
executed and delivered as contemplated hereby and thereby will have been, duly
executed and delivered by the Company and each constitutes, or will constitute
when so executed and delivered, a legal, valid and binding instrument
enforceable against the Company in accordance with its terms, subject, as to the
enforceability of remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium and other laws affecting the rights of creditors
generally, and to general principles of equity and the discretion of the court
(regardless of whether enforceability of such remedies is considered in a
proceeding in equity or at law).
(e) At the applicable Closing Date, each applicable Terms Agreement will
have been duly authorized, executed and delivered by the Company and will be a
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, subject to the effect of bankruptcy, insolvency, moratorium,
fraudulent conveyance and other laws affecting the rights of creditors
generally, and to general principles of equity and the discretion of the court
(regardless of whether enforceability of such remedies is considered in a
proceeding in equity or at law).
(f) The issuance of the Certificates has been duly authorized by the
Company and, when such Certificates are executed and authenticated in accordance
with the Pooling and Servicing Agreement and delivered against payment pursuant
to this Agreement, such Certificates will be validly issued and outstanding; and
the Certificates will be entitled to the benefits provided by the Pooling and
Servicing Agreement. The Certificates are in all material respects in the form
contemplated by the Pooling and Servicing Agreement.
(g) Neither the Company nor the Trust Fund is or, as a result of the offer
and sale of the Certificates as contemplated in this Agreement will become, an
"investment company" as defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"), or an "affiliated person" of any such
"investment company" that is registered or is required to be registered under
the Investment Company Act (or an "affiliated person" of any such "affiliated
person"), as such terms are defined in the Investment Company Act.
(h) The representations and warranties made by the Company in the Pooling
and Servicing Agreement and made in any Officer's Certificate of the Company
delivered pursuant to the Pooling and Servicing Agreement will be true and
correct at the time made and on the Closing Date.
3. PURCHASE, SALE AND DELIVERY OF CERTIFICATES. Delivery of and payment for
the Certificates shall be made at your office or at such other location as you
shall make known at such time as shall be specified in the applicable Terms
Agreement, each such time being herein referred to as a "Closing Date." Delivery
of the Certificates shall be made by the Company to the Underwriters against
payment of the purchase price specified in the applicable Terms Agreement in
Federal Funds by wire or check. Unless delivery is made through the facilities
of the Depository Trust Company, the Certificates so to be delivered will be in
definitive, fully registered form, in such denominations and registered in such
names as you request, and will be made available for inspection and packaging at
your office at least twenty-four hours prior to the applicable Closing Date.
4. OFFERING BY UNDERWRITERS. It is understood that the Underwriters propose
to offer the Certificates for sale to the public as set forth in the Prospectus.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with you and
the several Underwriters participating in the Offering of any Series of
Certificates that:
(a) In connection with the execution of each Terms Agreement, the Company
will prepare a Prospectus Supplement to be filed under the Act setting forth the
principal amount of Certificates covered thereby and their terms not otherwise
specified in the Prospectus, the price at which the Certificates are to be
purchased by the Underwriters from the Company, either the initial public
offering price or the method by which the price at which the Certificates are to
be sold will be determined, the selling concession and reallowance, if any, any
delayed delivery arrangements, and such other information as you and the Company
deem appropriate in connection with the offering of the Certificates, but the
Company will not file any amendments to the Registration Statement or any
amendments or supplements to the Prospectus, unless it shall first have
delivered copies of such amendments or supplements to you, and you shall not
have objected thereto promptly after receipt thereof. The Company will advise
you or your counsel promptly (i) when notice is received from the Commission
that any post-effective amendment to the Registration Statement has become or
will become effective, and (ii) of any order or communication suspending or
preventing, or threatening to suspend or prevent, the offer and sale of the
Certificates, or of any proceedings or examinations that may lead to such an
order or communication, whether by or of the Commission or any authority
administering any state securities or Blue Sky law, as soon as the Company is
advised thereof, and will use its best efforts to prevent the issuance of any
such order or communication and to obtain as soon as possible its lifting, if
issued.
(b) The Company will cause any Computational Materials and any Structural
Term Sheets (each as defined in Section 8 below) with respect to each Series of
Certificates that are delivered by the Underwriters to the Company pursuant to
Section 8 to be filed with the Commission on a Current Report on Form 8-K (a
"Current Report") pursuant to Rule 13a-11 under the Securities Exchange Act of
1934, as amended (the "Exchange Act") on the business day immediately following
the day on which such Computational Materials and Structural Term Sheets are
delivered to counsel for the Company by any of the Underwriters prior to 10:30
a.m. (and will use its best efforts to cause such Computational Materials and
Structural Term Sheets to be so filed prior to 2:00 p.m., New York time, on such
business day), and will promptly advise you when such Current Report has been so
filed. The Company will cause one Collateral Term Sheet (as defined in Section 9
below) with respect to an Offering of a Series that is delivered by any of the
Underwriters to the Company in accordance with the provisions of Section 9 to be
filed with the Commission on a Current Report pursuant to Rule 13a-11 under the
Exchange Act on the business day immediately following the day on which such
Collateral Term Sheet is delivered to counsel for the Company by any of the
Underwriters prior to 10:30 a.m. In addition, if at any time prior to the
availability of the related Prospectus Supplement, any of the Underwriters has
delivered to any prospective investor a subsequent Collateral Term Sheet that
reflects, in the reasonable judgment of such Underwriter and the Company, a
material change in the characteristics of the Mortgage Loans for the related
Series from those on which a Collateral Term Sheet with respect to the related
Series previously filed with the Commission was based, the Company will cause
any such Collateral Term Sheet that is delivered by such Underwriter to the
Company in accordance with the provisions of Section 9 to be filed with the
Commission on a Current Report on the business day immediately following the day
on which such Collateral Term Sheet is delivered to counsel for the Company by
such Underwriter prior to 2:00 p.m. In each case, the Company will promptly
advise you when such Current Report has been so filed. Notwithstanding the four
preceding sentences, the Company shall have no obligation to file any materials
provided by any of the Underwriters pursuant to Sections 8 and 9 which (i) in
the reasonable determination of the Company are not required to be filed
pursuant to the Kidder Letters or the PSA Letter (each as defined in Section 8
below), or (ii) contain erroneous information or contain any untrue statement of
a material fact or, when read in conjunction with the Prospectus and Prospectus
Supplement, omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; it being understood,
however, that the Company shall have no obligation to review or pass upon the
accuracy or adequacy of, or to correct, any Computational Materials or ABS Term
Sheets (as defined in Section 9 below) provided by such Underwriter to the
Company pursuant to Section 8 or Section 9 hereof. The Company shall give notice
to you and such Underwriter of its determination not to file any materials
pursuant to clause (i) of the preceding sentence and agrees to file such
materials if such Underwriter or you reasonably object to such determination
within one business day after receipt of such notice.
(c) If at any time when a prospectus relating to the Certificates is
required to be delivered under the Act any event occurs as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company promptly will prepare and file with the
Commission an amendment or supplement which will correct such statement or
omission or an amendment which will effect such compliance; provided, however,
that the Company will not be required to file any such amendment or supplement
with respect to any Computational Materials, Structural Term Sheets or
Collateral Term Sheets incorporated by reference in the Prospectus other than
any amendments or supplements of such Computational Materials or Structural Term
Sheets that are furnished to the Company by the Underwriter pursuant to Section
8(e) hereof or any amendments or supplements of such Collateral Term Sheets that
are furnished to the Company by the Underwriter pursuant to Section 9(d) hereof
which are required to be filed in accordance therewith.
(d) With respect to each Series of Certificates, the Company will make
generally available to the holders of the Certificates and will deliver to you,
in each case as soon as practicable, an earnings statement covering the
twelve-month period beginning after the date of the Terms Agreement in respect
of such series of Certificates, which will satisfy the provisions of Section
11(a) of the Act with respect to the Certificates.
(e) The Company will furnish to you copies of the Registration Statement
(two of which will be signed and will include all documents and exhibits thereto
or incorporated by reference therein), each related preliminary prospectus, the
Prospectus, and all amendments and supplements to such documents, in each case
as soon as available and in such quantities as you request.
(f) The Company will arrange for the qualification of the Certificates for
sale and the determination of their eligibility for investment under the laws of
such jurisdictions as you reasonably designate and will continue such
qualifications in effect so long as reasonably required for the distribution;
provided, however, that the Company shall not be required to qualify to do
business in any jurisdiction where it is not qualified on the date of the
related Terms Agreement or to take any action which would subject it to general
or unlimited service of process in any jurisdiction in which it is not, on the
date of the related Terms Agreement, subject to such service of process.
(g) The Company will pay all expenses incidental to the performance of its
obligations under this Agreement and any Terms Agreement and will reimburse the
Underwriters for any expenses (including fees and disbursements of counsel and
accountants) incurred by them in connection with qualification of the
Certificates and determination of their eligibility for investment under the
laws of such jurisdictions as you designate and the printing of memoranda
relating thereto, for any fees charged by the nationally recognized statistical
rating agencies for the rating of the Certificates, for the filing fee of the
National Association of Securities Dealers, Inc. relating to the Certificates,
if applicable, and for expenses incurred in distributing preliminary
prospectuses to the Underwriters.
(h) During the period when a prospectus is required by law to be delivered
in connection with the sale of the Certificates pursuant to this Agreement, the
Company will file or cause to be filed, on a timely and complete basis, all
documents that are required to be filed by the Company with the Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(i) So long as the Certificates of a Series shall be outstanding, the
Company will deliver to you the annual statement of compliance delivered to the
Trustee pursuant to the Pooling and Servicing Agreement and the annual statement
of a firm of independent public accountants furnished to the Trustee pursuant to
the Pooling and Servicing Agreement as soon as such statements are furnished to
the Trustee.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
the Underwriters named in any Terms Agreement to purchase and pay for the
Certificates will be subject to the accuracy of the representations and
warranties on the part of the Company as of the date hereof, the date of the
applicable Terms Agreement and the applicable Closing Date, to the accuracy of
the statements made in any officers' certificates (each an "Officer's
Certificate") pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions
precedent:
(a)(i) At the time the applicable Terms Agreement is executed, ___________
and/or any other firm of certified independent public accountants acceptable to
you shall have furnished to you a letter, addressed to you, and in form and
substance satisfactory to you in all respects, stating in effect that using the
assumptions and methodology used by the Company, all of which shall be described
in such letter or the Prospectus Supplement, they have recalculated such
numbers, percentages and weighted average lives set forth in the Prospectus as
you may reasonably request, compared the results of their calculations to the
corresponding items in the Prospectus, and found each such number, percentage,
and weighted average life set forth in the Prospectus to be in agreement with
the results of such calculations. To the extent historical financial delinquency
or related information is included with respect to one or more master servicers,
such letter or letters shall also relate to such information.
(a)(ii) At the Closing Date, __________ and/or any other firm of certified
independent public accountants acceptable to you shall have furnished to you a
letter, addressed to you, and in form and substance satisfactory to you in all
respects, relating to the extent such information is not covered in the letter
or letters provided pursuant to clause (a)(i), to a portion of the information
set forth on the Mortgage Loan Schedule attached to the Pooling and Servicing
Agreement and the characteristics of the mortgage loans, as presented in the
Prospectus Supplement or the Form 8-K relating thereto, or if a letter relating
to the same information is provided to the Trustee, indicating that you are
entitled to rely upon its letter to the Trustee.
(b) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall not have been any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its affiliates the effect of
which, in any case, is, in your judgment, so material and adverse as to make it
impracticable or inadvisable to proceed with the Offering or the delivery of the
Certificates as contemplated by the Registration Statement and the Prospectus.
All actions required to be taken and all filings required to be made by the
Company under the Act and the Exchange Act prior to the sale of the Certificates
shall have been duly taken or made; and prior to the applicable Closing Date, no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted, or
to the knowledge of the Company or you, shall be contemplated by the Commission
or by any authority administering any state securities or Blue Sky law.
(c) Unless otherwise specified in any applicable Terms Agreement for a
Series, the Certificates shall be rated in one of the four highest grades by one
or more nationally recognized statistical rating agencies specified in said
Terms Agreement.
(d) You shall have received the opinion of counsel for the Company, dated
the applicable Closing Date, to the effect that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its assets and conduct its business as
described in the Prospectus, and the Company is duly qualified as a foreign
corporation to transact business and is in good standing under the laws of the
State of New York. The Company has no subsidiaries.
(ii) Each of this Agreement and the applicable Terms Agreement have been
duly authorized, executed and delivered by the Company and assuming due and
valid authorization and execution by the other parties thereto, constitutes the
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, subject to the effect of bankruptcy, insolvency, moratorium,
fraudulent conveyance and other similar laws relating to or affecting creditors'
rights generally and court decisions with respect thereto and to the application
of equitable principles in any proceeding, whether at law or in equity. Such
counsel's opinion may be qualified, in the case of the indemnity provisions in
this Agreement, to applicable law or judicial policy.
(iii) The Pooling and Servicing Agreement has been duly and validly
authorized, executed and delivered by the Company and assuming due and valid
authorization and execution by the other parties thereto, constitutes the valid
and binding agreement of the Company, enforceable in accordance with its terms,
subject to the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance and other similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto and to the application of
equitable principles in any proceeding, whether at law or in equity.
(iv) The Certificates are in a form authorized by the Pooling and Servicing
Agreement, have been duly and validly authorized by all necessary corporate
action and, when executed and authenticated as specified in the Pooling and
Servicing Agreement and delivered against payment pursuant to this Agreement and
the related Terms Agreement, will be validly issued and outstanding; and the
Certificates will be entitled to the benefits of the Pooling and Servicing
Agreement.
(v) The Registration Statement has become effective under the Act, and, to
the best of such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the Act, and
the Registration Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates, complied as to form in
all material respects with the requirements of the Act and the Rules and
Regulations thereunder; such counsel has no reason to believe that either the
Registration Statement as of its effective date contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading, or
the Prospectus as of the date of any Terms Agreement contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion as to the financial
statements or other financial data or notes thereto or any statistical or
tabular data contained or incorporated by reference in the Registration
Statement or the Prospectus).
(vi) The statements in the Prospectus and Prospectus Supplement under the
heading "Certain Federal Income Tax Consequences," to the extent that they
constitute matters of law or legal conclusions, have been prepared or reviewed
by such counsel and provide a fair summary of such law or conclusions; the
statements in the Prospectus to the extent modified by the statements in the
Prospectus Supplement under the headings "Summary of Terms," "Description of the
Certificates" and "The Pooling and Servicing Agreement" and such other headings
as you may request, insofar as such statements constitute a summary of the
proposed transaction and of the provisions of the Certificates or the Pooling
and Servicing Agreement, constitute a fair and accurate summary of such
transaction and provisions.
(vii) Neither the Company nor the Trust Fund is, or as a result of the
offer and sale of the Certificates as contemplated in the Prospectus and in this
Agreement will become, an "investment company" as defined in the Investment
Company Act, or an "affiliated person" of any such "investment company" that is
registered or is required to be registered under the Investment Company Act (or
an "affiliated person" of any such "affiliated person"), as such terms are
defined in the Investment Company Act.
(viii) The Certificates offered pursuant to the Registration Statement and
indicated as such in the Prospectus Supplement will be mortgage related
securities, as defined in Section 3(a)(41) of the Exchange Act, so long as such
Certificates are rated in one of the two highest grades by at least one
nationally recognized statistical rating agency.
(ix) The Pooling and Servicing Agreement is not required to be qualified
under the Trust Indenture Act of 1939, as amended.
Each opinion also shall relate to such other matters as may be specified in
the related Terms Agreement or as to which you reasonably may request. In
rendering any such opinion, counsel for the Company may rely on certificates of
responsible officers of the Company, the Trustee, and public officials or, as to
matters of law other than New York or Federal law, on opinions of other counsel
(copies of which opinions shall be delivered to you), provided that, in cases of
opinions of other counsel, counsel for the Company shall include in its opinion
a statement of its belief that both it and you are justified in relying on such
opinions.
(e) You shall have received from counsel for the Company a letter, dated as
of the Closing Date, stating that you may rely on the opinions delivered by such
firm under the Pooling and Servicing Agreement and to the rating agency or
agencies rating the Certificates as if such opinions were addressed directly to
you (copies of which opinions shall be delivered to you).
(f) You shall have received from counsel for the Underwriters, if such
counsel is different from counsel to the Company, such opinion or opinions,
dated as of the Closing Date, with respect to the validity of the Certificates,
the Registration Statement, the Prospectus and other related matters as the
Underwriters may require, and the Company shall have furnished to such counsel
such documents as they may have requested from it for the purpose of enabling
them to pass upon such matters.
(g) You shall have received Officer's Certificates signed by such of the
principal executive, financial and accounting officers of the Company as you may
request, dated as of the Closing Date, in which such officers, to the best of
their knowledge after reasonable investigation, shall state that the
representations and warranties of the Company in this Agreement are true and
correct; that the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Closing
Date; that no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are contemplated; that, subsequent to the respective dates as of
which information is given in the Prospectus, and except as set forth or
contemplated in the Prospectus, there has not been any material adverse change
in the general affairs, business, key personnel, capitalization, financial
condition or results of operations of the Company; that except as otherwise
stated in the Prospectus, there are no material actions, suits or proceedings
pending before any court or governmental agency, authority or body or, to their
knowledge, threatened, affecting the Company or the transactions contemplated by
this Agreement; and that attached thereto are true and correct copies of a
letter or letters from the one or more nationally recognized statistical rating
agencies specified in the applicable Terms Agreement confirming that, unless
otherwise specified in said Terms Agreement, the Certificates have been rated in
one of the four highest grades by each of such agencies and that such rating has
not been lowered since the date of such letter.
The Company will furnish you with such conformed copies of such opinions,
certificates, letters and documents as you reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects with respect to a particular Offering when
and as provided in this Agreement and the related Terms Agreement, or if any of
the opinions and certificates mentioned above or elsewhere in this Agreement and
the related Terms Agreement shall not be in all material respects reasonably
satisfactory in form and substance to you, this Agreement (with respect to the
related Offering) and the related Terms Agreement and all obligations of the
Underwriters hereunder (with respect to the related Offering) and thereunder may
be canceled at, or at any time prior to, the related Closing Date by the
Underwriter. Notice of such cancellation shall be given to the Company in
writing, or by telephone or telegraph confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act against any and all losses,
claims, damages, liabilities and expenses whatsoever (including but not limited
to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act, or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement relating to the applicable
Series of Certificates (the "Applicable Registration Statement") as it became
effective or in any amendment or supplement thereof, or in the Applicable
Registration Statement or the related Prospectus, or in any amendment thereof,
or arise out of or are based upon the omission or alleged omission (in the case
of any Computational Materials or ABS Term Sheets in respect of which the
Company agrees to indemnify the Underwriters, as set forth below, when such are
read in conjunction with the related Prospectus and Prospectus Supplement) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that (i) the Company
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein (A) in
reliance upon and in conformity with written information furnished to the
Company as herein stated by or on behalf of the Underwriters specifically for
use in connection with the preparation thereof or (B) in any Current Report or
any amendment or supplement thereof, except to the extent that any untrue
statement or alleged untrue statement therein or omission therefrom results (or
is alleged to have resulted) directly from an error (a "Mortgage Pool Error") in
the information concerning the characteristics of the Mortgage Loans furnished
by the Company to the Underwriters in writing or by electronic transmission that
was used in the preparation of either (x) any Computational Materials or ABS
Term Sheets (or amendments or supplements thereof) included in such Current
Report (or amendment or supplement thereof) or (y) any written or electronic
materials furnished to prospective investors on which the Computational
Materials (or amendments or supplements) were based, (ii) such indemnity with
respect to any Corrected Statement (as defined below) in such Prospectus (or
Prospectus Supplement thereto) shall not inure to the benefit of the
Underwriters (or any person controlling any Underwriter) from whom the person
asserting any loss, claim, damage or liability purchased the Certificates of the
related Series that are the subject thereof if such person did not receive a
copy of a Prospectus Supplement to such Prospectus at or prior to the
confirmation of the sale of such Certificates and the untrue statement or
omission of a material fact contained in such Prospectus (or Prospectus
Supplement thereto) was corrected (a "Corrected Statement") in such other
supplement and such supplement was furnished by the Company to the Underwriters
prior to the delivery of such confirmation, and (iii) such indemnity with
respect to any Mortgage Pool Error shall not inure to the benefit of the
Underwriters (or any person controlling any Underwriter) from whom the person
asserting any loss, claim, damage or liability received any Computational
Materials (or any written or electronic materials on which the Computational
Materials are based) or ABS Term Sheets that were prepared on the basis of such
Mortgage Pool Error, if, prior to the time of confirmation of the sale of the
applicable Series of Certificates to such person, the Company notified the
Underwriters in writing of the Mortgage Pool Error or provided in written or
electronic form information superseding or correcting such Mortgage Pool Error
(in any such case, a "Corrected Mortgage Pool Error"), and the Underwriters
failed to notify such person thereof or to deliver to such person corrected
Computational Materials (or underlying written or electronic materials) or ABS
Term Sheets. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) The Underwriters severally, and not jointly, agree to indemnify and
hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Applicable Registration
Statement, and each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any losses, claims, damages, liabilities and expenses whatsoever (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon (A) any untrue statement or alleged untrue
statement of a material fact contained in the Applicable Registration Statement,
as originally filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that any such loss, claim, damage, liability or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company, by or on behalf of such Underwriter
expressly for use therein; or (B) any Computational Materials or ABS Term Sheets
(or amendments or supplements thereof) furnished to the Company by such
Underwriter pursuant to Section 8 and incorporated by reference in such
Registration Statement or the related Prospectus, Prospectus Supplement or any
amendment or supplement thereof (except that no such indemnity shall be
available for any losses, claims, damages or liabilities, or actions in respect
thereof resulting from any Mortgage Pool Error, other than a Corrected Mortgage
Pool Error). This indemnity will be in addition to any liability which the
Underwriters may otherwise have. The Company acknowledges that, unless otherwise
set forth in the applicable Terms Agreement, the statements set forth in the
last paragraph of the cover page and under the caption "Method of Distribution"
and the stabilization legend required by Item 502(d)(1) under Regulation S-K of
the Act included in the Prospectus Supplement relating to a Series of
Certificates constitute the only information furnished in writing by or on
behalf of any Underwriter expressly for use in the Applicable Registration
Statement or the Prospectus or in any amendment thereof or supplement thereto,
as the case may be (other than any Computational Materials or ABS Term Sheets
(or amendments or supplements thereof) furnished to the Company by such
Underwriter), and each Underwriter confirms, on its behalf, that such statements
are correct.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under such subsection, notify each party against whom indemnification is to be
sought in writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the extent
that it may elect by written notice delivered to the indemnified party promptly
after receiving the aforesaid notice from such indemnified party, to assume the
defense thereof, with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld.
(d) In order to provide for contribution in circumstances in which the
indemnification provided for in Section 7 hereof is for any reason held to be
unavailable, on grounds of public policy or otherwise, from the Company or the
Underwriters or is insufficient to hold harmless a party indemnified
thereunder, the Company and the Underwriters shall contribute to the aggregate
losses, claims, damages, liabilities and expenses of the nature contemplated by
such indemnification provision (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claims asserted, but after deducting in the
case of losses, claims, damages, liabilities and expenses suffered by the
Company any contribution received by the Company from persons, other than the
Underwriters, who may also be liable for contribution, including persons who
control the Company within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, officers of the Company who signed the Applicable
Registration Statement and directors of the Company) to which the Company and
the Underwriters may be subject (i) in the case of any losses, claims, damages
and liabilities (or actions in respect thereof) which do not arise out of or are
not based upon any untrue statement or omission of a material fact in any
Computational Materials or ABS Term Sheets (or any amendments or supplements
thereof), in such proportions as is appropriate to reflect the relative benefits
received by the Company on one hand and the Underwriters on the other from the
Offering of the Certificates as to which such loss, liability, claim, damage or
expense is claimed to arise or, if such allocation is not permitted by
applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 7(c)
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company on one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabili- ties or
expenses, as well as any other relevant equitable considerations or (ii) in the
case of any losses, claims, damages and liabilities (or actions in respect
thereof) which arise out of or are based upon any untrue statement or omission
of a material fact in any Computational Materials or ABS Term Sheets (or any
amendments or supplements thereof) or in any written or electronic materials
distributed to prospective investors on which the Computational Materials are
based, in such proportion as is appropriate to reflect the relative fault of the
Company on the one hand and the Underwriter that furnished such Computational
Materials or ABS Term Sheets on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof) as well as any other relevant equitable
considerations; provided, however, that in no case shall such Underwriter be
responsible under this subparagraph (ii) for any amount in excess of the
aggregate Purchase Price for the Offered Certificates.
The relative benefits received by the Company on one hand and the
Underwriters on the other shall be deemed to be in the same proportion as (x)
the total proceeds from the Offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the Terms Agreement in respect of the
Offering of the Certificates as to which such loss, liability, claim, damage or
expense is claimed to arise. The relative fault of the Company on one hand and
the Underwriters on the other shall be determined by reference to, among other
things, (A) in the case of clause (i) of the preceding paragraph, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on one hand or the Underwriters on the other, (B) in the case of clause (ii) of
the preceding paragraph, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to any untrue statement or omission of a material fact in any
Computational Materials or ABS Term Sheets (or any amendments or supplements
thereof) or in any written or electronic materials distributed by the applicable
Underwriter to prospective investors on which the Computational Materials are
based, and (C) in the case of either clause (i) or clause (ii) of the preceding
paragraph, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 7(d) were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 7(d), (x) except as otherwise provided in Section 7(d)(ii), in no case
shall the Underwriters be liable or responsible for any amount in excess of the
underwriting discount set forth in the Terms Agreement relating to the
Certificates as to which such losses, claims, damages, liabilities or expenses
are claimed to arise, and (y) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7(d), each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Applicable Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 7(d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties under this Section 7(d), notify such party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 7(d) or otherwise. No
party shall be liable for contribution with respect to any action or claim
settled without its consent; provided, however, that such consent was not
unreasonably withheld.
8. COMPUTATIONAL MATERIALS AND STRUCTURAL TERM SHEETS. (a) Not later than
2:00 p.m., New York time, on the business day before the date on which the
Current Report relating to the Certificates of a Series is required to be filed
by the Company with the Commission pursuant to Section 5(b) hereof, you and any
other applicable Underwriter shall deliver to the Company, and unless otherwise
agreed to by the Company, in a form reasonably convertible to an EDGAR filing
format, a copy of all materials provided by the Underwriters to prospective
investors in such Certificates which constitute (i) "Computational Materials,
within the meaning of the no-action letter dated May 20, 1994 issued by the
Division of Corporation Finance of the Commission to Kidder, Peabody Acceptance
Corporation I, Kidder, Peabody & Co. Incorporated, and Kidder Structured Asset
Corporation and the no-action letter dated May 27, 1994 issued by the Division
of Corporation Finance of the Commission to the Public Securities Association
(together, the "Kidder Letters") and the filing of such material is a condition
of the relief granted in such letter (such materials being the "Computational
Materials"), and (ii) "Structural Term Sheets" within the meaning of the
no-action letter dated February 17, 1995 issued by the Division of Corporation
Finance of the Commission to the Public Securities Association (the "PSA
Letter") and the filing of such material is a condition of the relief granted in
such letter (such materials being the "Structural Term Sheets"). Each delivery
of Computational Materials and Structural Term Sheets to the Company by you and
any other applicable Underwriter pursuant to this paragraph (a) shall be
effected by delivering a copy of such materials to counsel for the Company on
behalf of the Company at the address specified by the Company and one copy of
such materials to the Company.
(b) You and each other Underwriter, by virtue of its having executed and
delivered the related Terms Agreement, which shall incorporate this Section 8(b)
by reference, represents and warrants to and agrees with the Company, as of the
date of the related Terms Agreement and as of the Closing Date, that:
(i) the Computational Materials furnished to the Company pursuant
to Section 8(a) constitute (either in original, aggregated or
consolidated form) all of the materials furnished to prospective
investors by such Underwriter prior to the time of delivery thereof to
the Company that are required to be filed with the Commission with
respect to the Offering of the Certificates in accordance with the
Kidder Letters, and such Computational Materials comply with the
requirements of the Kidder Letters;
(ii) the Structural Term Sheets furnished to the Company pursuant
to Section 8(a) constitute all of the materials furnished to
prospective investors by such Underwriter prior to the time of
delivery thereof to the Company that are required to be filed with the
Commission as "Structural Term Sheets" with respect to the related
Offering of the Certificates in accordance with the PSA Letter, and
such Structural Term Sheets comply with the requirements of the PSA
Letter;
(iii) on the date any such Computational Materials or Structural
Term Sheets with respect to the Offering of the Certificates (or any
written or electronic materials furnished to prospective investors on
which the Computational Materials are based) were last furnished to
each prospective investor and on the date of delivery thereof to the
Company pursuant to Section 8(a) and on the related Closing Date, such
Computational Materials (or such other materials) or Structural Term
Sheets did not and will not include any untrue statement of a material
fact or, when read in conjunction with the related Prospectus and
Prospectus Supplement, omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and
(iv) all Computational Materials (or underlying materials
distributed to prospective investors on which the Computational
Materials were based) or Structural Term Sheets furnished to
prospective investors contained and will contain a legend, prominently
displayed on the first page thereof, to the effect that the Company
has not prepared, reviewed or participated in the preparation of such
materials and is not responsible for the accuracy thereof.
Notwithstanding the foregoing, you and each such Underwriter make no
representation or warranty as to whether any Computational Materials or
Structural Term Sheets (or any written or electronic materials on which the
Computational Materials are based) included or will include any untrue statement
resulting directly from any Mortgage Pool Error (except any Corrected Mortgage
Pool Error, with respect to materials prepared after the receipt by the
Underwriters from the Company of notice of such Corrected Mortgage Pool Error or
materials superseding or correcting such Corrected Mortgage Pool Error).
(c) Each Underwriter delivering Computational Materials shall cause a firm
of public accountants to furnish to the Company a letter, dated as of the date
on which such Underwriter delivers any Computational Materials (which term shall
be deemed to include, for purposes of this paragraph (c), calculated statistical
information delivered to prospective investors in the form of a Structural Term
Sheet) to the Company pursuant to Section 8(a), in form and substance
satisfactory to the Company, stating in effect that they have verified the
mathematical accuracy of any calculations performed by such Underwriter and set
forth in such Computational Materials.
(d) The Underwriters acknowledge and agree that the Company has not
authorized and will not authorize the distribution of any Computational
Materials (or any written or electronic materials on which the Computational
Materials are based) or Structural Term Sheets to any particular prospective
investor, and agrees that any Computational Materials or Structural Term Sheets
with respect to any Series of Certificates furnished to prospective investors
shall include a disclaimer in the form described in paragraph (b) (iv) above.
The Underwriters agree that they will not represent to prospective investors
that any Computational Materials or Structural Term Sheets were prepared or
disseminated on behalf of the Company.
(e) If, at any time when a prospectus relating to the Certificates of a
Series is required to be delivered under the Act, it shall be necessary to amend
or supplement the related Prospectus or Prospectus Supplement as a result of an
untrue statement of a material fact contained in any Computational Materials or
Structural Term Sheets provided by an Underwriter pursuant to this Section 8 or
the omission to state therein a material fact required, when considered in
conjunction with the related Prospectus and Prospectus Supplement, to be stated
therein or necessary to make the statements therein, when read in conjunction
with the related Prospectus and Prospectus Supplement, not misleading, or if it
shall be necessary to amend or supplement any Current Report relating to any
Computational Materials or Structural Term Sheets to comply with the Act or the
rules thereunder, such Underwriter promptly will prepare and furnish to the
Company for filing with the Commission an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Such Underwriter will deliver an Officer's Certificate to the
Company representing and warranting to the Company that, as of the date of
delivery of such amendment or supplement to the Company, such amendment or
supplement will not include any untrue statement of a material fact or, when
read in conjunction with the related Prospectus and Prospectus Supplement, omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that such Underwriter will
make no representation or warranty as to whether any such amendment or
supplement will include any untrue statement resulting directly from any
Mortgage Pool Error (except any Corrected Mortgage Pool Error, with respect to
any such amendment or supplement prepared after the receipt by such Underwriter
from the Company of notice of such Corrected Mortgage Pool Error or materials
superseding or correcting such Corrected Mortgage Pool Error). The Company shall
have no obligation to file such amendment or supplement if (i) the Company
determines that such amendment or supplement contains any untrue statement of a
material fact or, when read in conjunction with the related Prospectus and
Prospectus Supplement, omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; it being
understood, however, that the Company shall have no obligation to review or pass
upon the accuracy or adequacy of, or to correct, any such amendment or
supplement provided by such Underwriter to the Company pursuant to this
paragraph (e) or (ii) the Company reasonably determines that such filing is not
required under the Act and such Underwriter does not object as provided below.
The Company shall give notice to such Underwriter of its determination not to
file an amendment or supplement pursuant to clause (ii) of the preceding
sentence and agrees to file such amendment or supplement if such Underwriter
reasonably objects to such determination within one business day after receipt
of such notice.
9. COLLATERAL TERM SHEETS. (a) Prior to the delivery of any "Collateral
Term Sheet" within the meaning of the PSA Letter, the filing of which material
is a condition of the relief granted in such letter (such material being the
"Collateral Term Sheets"), to a prospective investor in the Certificates, the
applicable Underwriter shall notify the Company and its counsel by telephone of
its intention to deliver such materials and the approximate date on which the
first such delivery of such materials is expected to occur. Not later than 10:30
a.m., New York time, on the business day immediately following the date on which
any Collateral Term Sheet was first delivered to a prospective investor in the
Certificates of an offered series, such applicable Underwriter shall deliver to
the Company, and unless otherwise agreed to by the Company, in a form reasonably
convertible to an EDGAR format, a complete copy of all materials provided by
such Underwriter to prospective investors in such Certificates which constitute
"Collateral Term Sheets." Each delivery of a Collateral Term Sheet to the
Company pursuant to this paragraph (a) shall be effected by delivering a copy of
such materials to counsel for the Company on behalf of the Company at the
address specified by the Company and one copy of such materials to the Company.
(Collateral Term Sheets and Structural Term Sheets are, together, referred to
herein as "ABS Term Sheets.") At the time of each such delivery, such
Underwriter shall indicate in writing that the materials being delivered
constitute Collateral Term Sheets, and, if there has been any prior such
delivery with respect to the related Series, shall indicate whether such
materials differ in any material respect from any Collateral Term Sheets
previously delivered to the Company with respect to such Series pursuant to this
Section 9(a) as a result of the occurrence of a material change in the
characteristics of the related Mortgage Loans.
(b) You and each other Underwriter, by virtue of its having executed and
delivered the related Terms Agreement, which shall incorporate this Section 9(b)
by reference, represents and warrants to and agrees with the Company as of the
date of the related Terms Agreement and as of the Closing Date, that:
(i) The Collateral Term Sheets furnished to the
Company pursuant to Section 9(a) constitute all of the
materials furnished to prospective investors by such
Underwriter prior to time of delivery thereof to the
Company that are required to be filed with the
Commission as "Collateral Term Sheets" with respect to
the related Offering of the Certificates in accordance
with the PSA Letter, and such Collateral Term Sheets
comply with the requirements of the PSA Letter;
(ii) On the date any such Collateral Term Sheets
with respect to the Offering of the Certificates were
last furnished to each prospective investor and on the
date of delivery thereof to the Company pursuant to
Section 9(a) and on the related Closing Date, such
Collateral Term Sheets did not and will not include any
untrue statement of a material fact or, when read in
conjunction with the Prospectus and Prospectus
Supplement, omit to state a material fact required to be
stated therein or necessary to make the statements
therein not misleading; and
(iii) such Underwriter has not represented to any
prospective investor that any Collateral Term Sheets
with respect to any Series were prepared or disseminated
on behalf of the Company, and, except as otherwise
disclosed by such Underwriter to the Company in writing
prior to the date hereof, all Collateral Term Sheets
previously furnished to prospective investors included a
disclaimer to the effect set forth in Section 8(b)(iv).
Notwithstanding the foregoing, you and each such Underwriter make no
representation or warranty as to whether any Collateral Term Sheet included or
will include any untrue statement or material omission resulting directly from
any Mortgage Pool Error (except any Corrected Mortgage Pool Error, with respect
to materials prepared after the receipt by such Underwriter from the Company of
notice of such Corrected Mortgage Pool Error or materials superseding or
correcting such Corrected Mortgage Pool Error).
(c) Each Underwriter delivering Collateral Term Sheets acknowledges and
agrees that any Collateral Term Sheets with respect to any Series of
Certificates furnished to prospective investors from and after the date hereof
shall include a disclaimer to the effect set forth in Section 8(d) hereof, and
to the effect that the information contained in such materials supersedes the
information contained in any prior Collateral Term Sheet with respect to such
Series of Certificates being offered and will be superseded by the description
of the related Mortgage Loans in the related Prospectus Supplement. The
Underwriters agree that they will not represent to any prospective investors
that any Collateral Term Sheets were prepared or disseminated on behalf of the
Company.
(d) If, at any time when a prospectus relating to the Certificates of a
Series is required to be delivered under the Act, it shall be necessary to amend
or supplement the related Prospectus as a result of an untrue statement of a
material fact contained in any Collateral Term Sheets provided by an Underwriter
pursuant to this Section 9 or the omission to state therein a material fact
required, when considered in conjunction with the related Prospectus and
Prospectus Supplement, to be stated therein or necessary to make the statements
therein, when read in conjunction with the related Prospectus and Prospectus
Supplement, not misleading, or if it shall be necessary to amend or supplement
any Current Report relating to any Collateral Term Sheets to comply with the Act
or the rules thereunder, such Underwriter promptly will prepare and furnish to
the Company for filing with the Commission an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Such Underwriter will deliver an Officer's Certificate to the
Company representing and warranting to the Company that, as of the date of
delivery of such amendment or supplement to the Company, such amendment or
supplement will not include any untrue statement of a material fact or, when
read in conjunction with the related Prospectus and Prospectus Supplement, omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, such Underwriter will make
no representation or warranty as to whether any such amendment or supplement
will include any untrue statement resulting directly from any Mortgage Pool
Error (except any Corrected Mortgage Pool Error, with respect to any such
amendment or supplement prepared after the receipt by such Underwriter from the
Company of notice of such Corrected Mortgage Pool Error or materials superseding
or correcting such Corrected Mortgage Pool Error). The Company shall have no
obligation to file such amendment or supplement if the Company determines that
(i) such amendment or supplement contains any untrue statement of a material
fact or, when read in conjunction with the related Prospectus and Prospectus
Supplement, omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; it being understood,
however, that the Company shall have no obligation to review or pass upon the
accuracy or adequacy of, or to correct, any such amendment or supplement
provided by such Underwriter to the Company pursuant to this paragraph (d) or
(ii) such filing is not required under the Act. The Company shall give notice to
such Underwriter of its determination not to file an amendment or supplement
pursuant to clause (ii) of the preceding sentence.
10. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters
participating in an Offering of Certificates default in their obligations to
purchase Certificates hereunder and under the Terms Agreement and the aggregate
purchase price of Certificates which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10% of the aggregate purchase
price of the Certificates then being purchased, you may make arrangements
satisfactory to the Company for the purchase of such Certificates by other
persons, including any of the Underwriters, but if no such arrangements are made
by the Closing Date the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective total commitments as set forth in
the applicable Terms Agreement (for all classes of Certificates), to purchase
the Certificates which such defaulting Underwriter or Underwriters agreed but
failed to purchase. If any Underwriter or Underwriters so default and the
aggregate purchase price of Certificates with respect to which such default or
defaults occur is more than 10% of the aggregate purchase price of Certificates
then being purchased, and arrangements satisfactory to you and the Company for
the purchase of such Certificates by other persons are not made within 36 hours
after such default, the Terms Agreement as to which such offering relates will
terminate without liability on the part of any non-defaulting Underwriter or the
Company, except as provided in Section 11. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
11. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties, and other statements of
the Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the result thereof, made by or on behalf
of any Underwriter or the Company or any of its officers or directors or any
controlling person, and will survive delivery of and payment for the
Certificates and any termination of this Agreement or any Terms Agreement,
including any termination pursuant to Section 10.
12. TERMINATION. You shall have the right to terminate any Terms Agreement
at any time prior to the applicable Closing Date if any domestic or
international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, securities markets; or
if trading on the New York or American Stock Exchanges shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the New
York or American Stock Exchanges by the New York or American Stock Exchanges or
by order of the Commission or any other governmental authority having
jurisdiction; or if the United States shall have become involved in a war or
major hostilities; or if a banking moratorium has been declared by a state or
Federal authority, or if a banking moratorium in foreign exchange trading by
major international banks or persons has been declared; or if any new
restriction materially and adversely affecting the distribution of the series of
Certificates as to which such Terms Agreement relates shall have become
effective; or if there shall have been such change in the market for securities
in general or in political, financial or economic conditions as in your judgment
would be so materially adverse as to make it inadvisable to proceed with the
Offering, sale and delivery of the Series of Certificates as to which such Terms
Agreement relates on the terms contemplated in such Terms Agreement. Any notice
of termination pursuant to this Section 12 shall be by telephone, telex, or
telegraph, confirmed in writing by letter.
13. NOTICES. All communications hereunder will be in writing, and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
you at 245 Park Avenue, New York, New York 10167, Attention: General Counsel or
if sent to the Company, will be mailed, delivered or telegraphed and confirmed
to it at 245 Park Avenue, New York, New York 10167, Attention: Michael
Hellenbrand; provided, however, that any notice to an Underwriter pursuant to
Section 7 will be mailed, delivered or telegraphed to such Underwriter at the
address furnished by it.
14. SUCCESSORS. This Agreement and the Terms Agreement will inure to the
benefit of and be binding upon the parties hereto and thereto, and their
respective successors and the officers and directors and controlling persons
referred to in Section 7, and no other person will have any right or obligation
hereunder or thereunder.
15. REPRESENTATION OF UNDERWRITERS. You will act for the several
Underwriters in connection with each Offering of Certificates governed by this
Agreement, and any action under this Agreement and any Terms Agreement taken by
you will be binding upon all the Underwriters identified in such Terms
Agreement.
16. CONSTRUCTION. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to principles of conflict of laws.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicate hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters in
accordance with its terms.
Very truly yours,
BEAR STEARNS MORTGAGE SECURITIES INC.
By: Name:______________________
______________________
Title
The foregoing Underwriting Agreement
hereby is confirmed and accepted
as of the date first above written.
BEAR, STEARNS & CO. INC.
By:_______________________
Title
<PAGE>
EXHIBIT A
BEAR STEARNS MORTGAGE SECURITIES INC.
Mortgage Pass-Through Certificates
FORM OF TERMS AGREEMENT
To: BEAR STEARNS [AND _____________]
Re: Underwriting Agreement dated June __, l996
Series Designation: Series 19 __ - __
Class Designation Schedule:
TERMS OF THE CERTIFICATES:
ORIGINAL
PRINCIPAL INTEREST PRICE TO
CLASS AMOUNT RATE PUBLIC(1)(2)
____________________________
(1) Do not include if the Certificates will be offered from time to time by
the Underwriter in negotiated transactions at varying prices to be determined at
the time of sale.
(2) Plus accrued interest, if any, at the applicable rate from
_____________ .
DISTRIBUTION DATES: The __th day of each month or, if such __th day is not
a business day, the next succeeding business day commencing ________________ .
CERTIFICATE RATING:
MORTGAGE ASSETS: The initial amounts to be included in any Reserve Account
and other accounts are as set forth, and the Mortgage Loans to be included in
the Trust Fund are as described, in Annex A hereto.
PURCHASE PRICE: The aggregate purchase price payable by the Underwriter for
the Certificates covered by this Agreement will be $_________________. [Purchase
price may also be separately stated by class.]
CREDIT ENHANCEMENT:
[Include pool policies, letters of credit, bonds, subordination and similar
arrangements.]
CLOSING DATE: ______, 19__, ____ a.m., N.Y. Time
The undersigned, agrees, subject to the terms and provisions of
the above-referenced Underwriting Agreement, which is incorporated
herein in its entirety and made a part hereof, to purchase the
respective principal amounts of the Classes of the above-
referenced Series of Certificates set forth [herein] [on Schedule
I attached hereto].
BEAR, STEARNS & CO. INC.
By: _________________________
Senior Managing Director
[ADDITIONAL UNDERWRITERS]
By: __________________________
__________________________
Title:
Accepted:
BEAR STEARNS MORTGAGE SECURITIES INC.
By: _________________________
<PAGE>
SCHEDULE I (FOR MULTIPLE UNDERWRITERS)
Underwriters
<TABLE>
<CAPTION>
Name Class Class Class Class Class
<S> <C> <C> <C> <C> <C>
Bear, Stearns $ $ $ $ $
& Co. Inc.
[Other
Underwriters]
_____ _____ _____ _____ _____
Total
</TABLE>
Exhibit 5.1
Opinion of Stroock & Stroock & Lavan
as to Legality of the Certificates
212-806-5400
October 7, 1996
Bear Stearns Mortgage
Securities Inc.
245 Park Avenue
New York, New York 10167
Re: BEAR STEARNS MORTGAGE SECURITIES INC.
REGISTRATION STATEMENT ON FORM S-3
We have acted as counsel for Bear Stearns Mortgage Securities Inc. (the
"Company"), in connection with the authorization and issuance from time to time
in one or more series of up to $5,000,000,000 aggregate principal amount of
Mortgage Pass-Through Certificates issuable in series (the "Certificates"). A
Registration Statement on Form S-3 relating to the Certificates (the
"Registration Statement") is being filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. As set forth in the
Registration Statement, the Certificates will be issued from time to time in
series by separate trusts established by the Company pursuant to the conditions
of a separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") for each such series between the Company and an independent trustee.
We have examined original or reproduced or certified copies of the
Certificate of Incorporation and By-laws of the Company, records of actions
taken by the Company's Board of Directors, a form of Pooling and Servicing
Agreement, forms of Certificates and the prospectus and the prospectus
supplement (the "Prospectus") forming a part of the Registration Statement and
the other agreements and documents filed as exhibits thereto. We also have
examined such other documents, papers, statutes and authorities as we deem
necessary as a basis for the opinions hereinafter set forth. In our examination
of such material, we have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us as certified or
reproduced copies. We have also assumed for purposes of the opinion given in
paragraph 2 below, that the Pooling and Servicing Agreement has been duly and
validly authorized, executed and delivered by all parties thereto other than the
Company. As to various matters material to such opinions, we have relied upon
the representations and warranties in the form of Pooling and Servicing
Agreement and statements and certificates of officers and representatives of the
Company and others.
Based upon the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement has been duly and validly
authorized, executed and delivered by the Company, it will constitute a legal,
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms.
2. When the Certificates have been duly and validly authorized by all
necessary action on the part of the Company and when executed as specified in,
and delivered pursuant to a Pooling and Servicing Agreement, and when sold as
described in the Registration Statement, they will be validly issued and
outstanding and entitled to the benefits of the Pooling and Servicing Agreement,
and will evidence the entire beneficial ownership of the applicable Trust Fund.
3. The information in the Prospectus under the caption "Certain Federal
Income Tax Consequences," to the extent that it constitutes matters of law or
legal conclusions, is correct in all material respects.
In rendering the foregoing opinions, we express no opinion as to laws of
any jurisdiction other than the State of New York and the Federal law of the
United States of America. Our opinions expressed in paragraphs 1 and 2 are
subject to the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws affecting creditors' rights generally and court
decisions with respect thereto, and we express no opinion with respect to the
application of equitable principles in any proceeding, whether at law or in
equity.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the reference to us in the Prospectus and to the
filing of this opinion as an exhibit to any application made by or on behalf of
the Company or any dealer in connection with the registration of the
Certificates under the securities or blue sky laws of any state or jurisdiction.
In giving such permission, we do not admit hereby that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933 or the General Rules and Regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
STROOCK & STROOCK & LAVAN
