<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 24, 1996)
$261,027,642
(APPROXIMATE)
[LOGO OF ICI FUNDING CORPORATION]
MASTER SERVICER AND SELLER
BEAR STEARNS MORTGAGE SECURITIES INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-4
The Mortgage Pass-Through Certificates, Series 1996-4 (collectively, the
"Certificates"), consist of all Classes identified in the chart below (the
"Offered Certificates") as well as certain additional Classes of Other
Certificates (as hereinafter defined) which are not being offered for sale
hereunder. The original principal amount of one or more Classes of
Certificates may be increased or decreased by up to 10% prior to their
issuance, depending on the Mortgage Loans actually delivered to the Trustee
named herein, and may be adjusted as necessary to obtain the required ratings
on the Offered Certificates. It is a condition to their issuance that each
Class of Certificates receive the respective ratings (set forth under "Summary
of Terms--Rating") of Fitch Investors Service, L.P. and Standard & Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc.
(cover continued on next page)
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTERESTS IN BSMSI,
THE TRUSTEE, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, BSMSI, THE MASTER SERVICER
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.
--------------
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.
--------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
$32,198,000 6.750% Class A-I-1 Certificates $ 2,379,494 8.125% Class A-I-11 Certificates
$40,690,000 10.500% Class A-I-2 Certificates $17,658,887 (1) Class A-II Certificates
$21,661,000 7.200% Class A-I-3 Certificates $ 205,517 (2) Class PO Certificates
$22,466,000 7.350% Class A-I-4 Certificates (3) (3) Class X Certificates
$17,673,000 7.650% Class A-I-5 Certificates $ 8,612,000 8.125% Class B-1 Certificates
$23,257,000 7.850% Class A-I-6 Certificates $ 5,300,000 8.125% Class B-2 Certificates
$13,346,000 8.125% Class A-I-7 Certificates $ 3,975,000 8.125% Class B-3 Certificates
$13,670,000 8.125% Class A-I-8 Certificates $ 100 8.125% Class R-1 Certificates
$ 9,035,000 8.125% Class A-I-9 Certificates $ 100 (4) Class R-2 Certificates
$28,900,544 8.125% Class A-I-10 Certificates
</TABLE>
- -------
(1) The Class A-II Certificates will bear interest on their Current Principal
Amount at a variable Pass-Through Rate equal to the weighted average of
the Net Rates (as defined herein) of the Group II Mortgage Loans (i.e.
Mortgage Loans with Net Rates equal to or greater than 9.500% per annum).
The Pass-Through Rate for the Class A-II Certificates for the first
Interest Accrual Period is expected to be approximately 9.85% per annum.
(2) The Class PO Certificates will be principal only Certificates and will not
bear interest.
(3) The Class X Certificates will have a notional principal amount ("Notional
Amount") equal to the aggregate Scheduled Principal Balances (as defined
herein) of all of the Mortgage Loans and will bear interest on their
Notional Amount at a variable Pass-Through Rate equal to the excess of (a)
the weighted average of the Net Rates of all of the Mortgage Loans over
(b) the weighted average of the Pass-Through Rates of all of the
Certificates (other than the Class X Certificates). The Pass-Through Rate
for the Class X Certificates for the first Interest Accrual Period is
expected to be approximately 0.68% per annum.
(4) The Class R-2 Certificates will bear interest on their Current Principal
Amount at a variable Pass-Through Rate equal to the weighted average of
the Net Rates of the Group I Mortgage Loans (as defined herein).
--------------
Each Class of Offered Certificates (other than the Class PO and Class X
Certificates) will be purchased by Bear, Stearns & Co. Inc. and/or Morgan
Stanley & Co. Incorporated (the "Underwriters") from BSMSI as described under
"Method of Distribution" herein and will be offered by the respective
Underwriters 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 100.58% of the aggregate principal balance of such Offered
Certificates plus accrued interest thereon, but before deducting expenses
payable by BSMSI in connection with the Offered Certificates, estimated to be
$380,000.
The Offered Certificates (other than the Class PO and Class X Certificates)
are offered by the respective Underwriters when, as and if issued, delivered
to and accepted by the Underwriters and subject to certain other conditions.
It is expected that delivery of the Class R-1 and Class R-2 Certificates will
be made against payment therefor at the offices of Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, New York 10167 and that delivery of the other
Offered Certificates will be made in book entry form only, through the Same
Day Funds Settlement System of The Depository Trust Company, in each case on
or about September 30, 1996.
--------------
BEAR, STEARNS & CO. INC. MORGAN STANLEY & CO.
INCORPORATED
The date of this Prospectus Supplement is September 25, 1996
<PAGE>
(cover continued from previous page)
The Offered Certificates and the Other Certificates will represent,
in the aggregate, the entire beneficial ownership interest in a trust (the
"Trust") consisting primarily of two groups ("Mortgage Loan Group I" and
"Mortgage Loan Group II" and each, a "Mortgage Loan Group") of
conventional one- to four-family, fully amortizing, fixed rate, first lien
residential mortgage loans with original terms to maturity (based on the
date of origination or any later modification) of up to 30 years ("Group I
Mortgage Loans" and "Group II Mortgage Loans," respectively, and
collectively, the "Mortgage Loans"). All Mortgage Loans in Mortgage Loan
Group I have Net Rates lower than 9.500% per annum and all Mortgage Loans
in Mortgage Loan Group II have Net Rates equal to or greater than 9.500%
per annum. The characteristics of the Mortgage Loans comprising each
Mortgage Loan Group are described herein under "Description of the
Mortgage Loans" and in Annex A hereto. All the Mortgage Loans will be
acquired by Bear Stearns Mortgage Securities Inc. ("BSMSI") on the date of
issuance of the Certificates from ICI Funding Corporation.
Distributions of interest and principal on the Class A-I Certificates
and principal on the Class PO Certificates, on the one hand, and
distributions of interest and principal on the Class A-II Certificates, on
the other, will be equal to an amount based on interest and principal
received or advanced with respect to the Group I Mortgage Loans (the Group
I Discount Loans in the case of the Class PO Certificates) and the Group
II Mortgage Loans, respectively, except under the limited circumstances
described herein. The right of the holders of the Class X and Class B
Certificates (as defined herein) to receive distributions with respect to
the Mortgage Loans will be based upon interest and principal received or
advanced with respect to both Mortgage Loan Groups. Such right in the
case of the Class B Certificates will be subordinate to the rights of the
holders of the Senior Certificates (as defined herein). The rights of
holders of each Class of Class B Certificates will be subordinate to the
rights of any Class of Class B Certificates with a lower numerical
designation.
Principal and interest on the Certificates are payable as described
herein on the 25th day of each month or, if such day is not a Business
Day, then on the next succeeding Business Day, beginning in October 1996
(each, a "Distribution Date"). Interest will accrue on the Certificates
(other than the Class PO Certificates) at the applicable Pass-Through
Rates described above and will be distributed in the amounts as described
under "Description of the Certificates--Distributions on the Certificates-
-Interest" herein. Distributions of principal among the Certificates will
be made as described under "Description of the Certificates--Distributions
on the Certificates--Principal" herein. Realized Losses (as defined under
"Description of the Certificates--Allocation of Losses; Subordination") on
the Mortgage Loans will be allocated to the Certificates as described
under "Description of the Certificates--Allocation of Losses;
Subordination" herein.
There is currently no secondary market for the Offered Certificates
and there can be no assurance that one will develop. Each Underwriter
intends to establish a market in the Offered Certificates being
underwritten by it as described under "Method of Distribution" herein, but
is not obligated to do so. There is no assurance that any such market, if
established, will continue.
The yield to maturity of each Class of Offered Certificates will be
sensitive in varying degrees to the rate and timing of principal payments
(including prepayments) on the Mortgage Loans generally in the related
Mortgage Loan Group in the case of the Class A Certificates (as defined
herein), the Group I Discount Mortgage Loans in the case of the Class PO
Certificates, and the Mortgage Loans in both Mortgage Loan Groups in the
case of the Class X Certificates and the Class B Certificates. The
Mortgage Loans generally may be prepaid in full or in part at any time
without penalty. The yield to maturity of a Class of Offered Certificates
purchased at a discount or premium will be more sensitive to the rate and
timing of payments thereon. Holders of the Offered Certificates should
consider, in the case of any such Certificates purchased at a discount,
and including the Class PO Certificates in the case of the Group I
Discount Mortgage Loans, the risk that a slower than anticipated rate of
principal payments on the applicable Mortgage Loans could result in an
actual yield that is lower than the anticipated yield and, in the case of
any Offered Certificates purchased at a premium, and including the Class X
Certificates, the risk that a faster than anticipated rate of principal
payments on the applicable
S-2
<PAGE>
Mortgage Loans could result in an actual yield that is lower than the
anticipated yield. Holders of the Class X Certificates should carefully
consider the risk that a rapid rate of principal payments on the Mortgage
Loans could result in the failure of such holders to recover fully their
initial investments. The yield to investors in the Offered Certificates
(particularly the Class B-1, Class B-2 and Class B-3 Certificates) also
will be adversely affected by Realized Losses and Net Interest Shortfalls
(each as defined herein) on all of the Mortgage Loans. No representation
is made as to the anticipated rate of prepayments on any Mortgage Loans,
the amount and timing of Realized Losses or Interest Shortfalls (as
defined herein) or as to the resulting yield to maturity of any Class of
Offered Certificates. See "Summary of Terms--Yield and Prepayment
Considerations" and "Yield and Prepayment Considerations" herein.
As described herein, two separate real estate mortgage investment
conduit ("REMIC") elections will be made in connection with the Trust for
federal income tax purposes. As described more fully herein and in the
Prospectus, all of the Certificates (other than the Class R-1, Class R-2
and Class X Certificates), as well as each of the Separate Components (as
defined herein) comprising the Class X Certificates, will be designated as
"regular interests" in a REMIC and the Class R-1 and Class R-2
Certificates will represent the "residual interests" in such REMICs. See
"Federal Income Tax Considerations" herein and "Certain Federal Income Tax
Consequences" in the Prospectus. The Class R-1 and Class R-2 Certificates
will be subject to certain restrictions on transfer and may have tax
liabilities during the early years of the REMICs that substantially exceed
the principal and interest paid thereon during such period. See
"Restrictions on Purchase and Transfer of the Residual Certificates"
herein.
ICI Funding Corporation (the "Master Servicer") will act as master
servicer of the Mortgage Loans and will make certain limited
representations and warranties concerning the Mortgage Loans. The
obligations of ICI Funding Corporation (and any successor Master Servicer)
to repurchase or substitute for a Mortgage Loan as to which a breach has
occurred and is continuing will constitute the sole remedies available to
Certificateholders with respect to a breach of any representations or
warranties concerning the Mortgage Loans. BSMSI will not make any
representations or warranties for the benefit of the Certificateholders
and will not have any liability to the Certificateholders.
To the extent statements contained herein do not relate to historic
or current information, this Prospectus Supplement may be deemed to
contain forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "1933 Act"), and Section 21E
of the Securities and Exchange Act of 1934, as amended (the "1934 Act").
Actual results could differ materially from those 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 Offered Certificates offered by this Prospectus Supplement
constitute a portion of a separate series of Certificates being offered by
BSMSI pursuant to its Prospectus dated September 24, 1996, which this
Prospectus Supplement is a part of 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.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus Supplement
and in the accompanying Prospectus. Capitalized terms used but not
defined in this summary shall have the meaning assigned elsewhere in the
Prospectus Supplement. See "Index of Principal Definitions" herein.
Title of Series........... Mortgage Pass-Through Certificates, Series
1996-4 (the "Certificates"). The Offered
Certificates and the Other Certificates will
represent in the aggregate the entire
beneficial ownership interest in a trust
(the "Trust") consisting primarily of Group
I Mortgage Loans and Group II Mortgage Loans
having aggregate principal balances as of
the Cut-off Date of approximately
$245,756,681 and $19,246,744, respectively.
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 seller ("BSMSI"), ICI
Funding Corporation, as master servicer (the
"Master Servicer"), and Bankers Trust
Company of California, N.A., as trustee (the
"Trustee").
Offered Certificates...... Class A-I-1 6.750% $32,198,000
Class A-I-2 10.500% $40,690,000
Class A-I-3 7.200% $21,661,000
Class A-I-4 7.350% $22,466,000
Class A-I-5 7.650% $17,673,000
Class A-I-6 7.850% $23,257,000
Class A-I-7 8.125% $13,346,000
Class A-I-8 8.125% $13,670,000
Class A-I-9 8.125% $ 9,035,000
Class A-I-10 8.125% $28,900,544
Class A-I-11 8.125% $ 2,379,494
Class A-II Variable Rate $17,658,887
Class PO (1) $ 205,517
Class X Variable Rate (2)
Class B-1 8.125% $ 8,612,000
Class B-2 8.125% $ 5,300,000
Class B-3 8.125% $ 3,975,000
Class R-1 8.125% $ 100
Class R-2 Variable Rate $ 100
---------------
(1) The Class PO Certificates are principal
only Certificates and will receive no
interest.
(2) The Class X Certificates will have a
Notional Amount equal to the aggregate
scheduled Principal Balances of all of
the Mortgage Loans. For certain purposes
as described herein, the Class X
Certificates are composed of Separate
Components which are not separately
transferable.
S-4
<PAGE>
The original principal amount of one or more
Classes of Certificates may be increased or
decreased by BSMSI by up to 10%, 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. Accordingly, any investor's
commitments with respect to the Certificates
may be correspondingly decreased or
increased.
Other Certificates........ In addition to the Offered Certificates,
the Trust will issue Class B-4, Class B-5
and Class B-6 Certificates (collectively,
the "Other Certificates") in aggregate
original principal amounts of approximately
$1,590,000, $530,000 and $1,855,783,
respectively. Each of the Class B-4, Class
B-5 and Class B-6 Certificates will bear
interest at the rate of 8.125% per annum.
Any information contained herein with respect
to the Other Certificates is provided only to
permit a better understanding of the Offered
Certificates.
Designations
Certificates............. Offered Certificates and Other Certificates.
Offered Certificates..... Class A-I-1, Class A-I-2, Class A-I-3, Class
A-I-4, Class A-I-5, Class A-I-6, Class
A-I-7, Class A-I-8, Class A-I-9, Class
A-I-10, Class A-I-11, Class A-II, Class PO,
Class X, Class B-1, Class B-2, Class B-3,
Class R-1 and Class R-2 Certificates.
Other Certificates....... Class B-4, Class B-5 and Class B-6
Certificates (not offered hereby).
Class A-I Certificates... Class A-I-1, Class A-I-2, Class A-I-3, Class
A-I-4, Class A-I-5, Class A-I-6, Class A-I-7,
Class A-I-8, Class A-I-9, Class A-I-10 and
Class A-I-11 Certificates.
Class A Certificates..... Class A-I and Class A-II Certificates.
Class B Certificates..... Class B-1, Class B-2, Class B-3, Class B-4,
Class B-5 and Class B-6 Certificates.
Senior Certificates...... Class A, Class PO, Class X and Class R-1
and Class R-2 Certificates.
Super Senior
Certificates............ Class A-I-8 and Class A-I-9 Certificates.
Senior Support
Certificates............ Class A-I-11 Certificates.
Subordinate Certificates. Class B Certificates.
S-5
<PAGE>
Regular Certificates..... All Classes of Certificates other than the
Class R-1 and Class R-2 Certificates.
Residual Certificates.... Class R-1 and Class R-2 Certificates.
Physical Certificates.... Class R-1 and Class R-2 Certificates.
Book-Entry Certificates.. All Offered Certificates other than the
Physical Certificates.
Denominations............. Each Class of Book-Entry Certificates will be
registered as a single Certificate held by a
nominee of The Depository Trust Company, and
beneficial interests will be held by
investors through the book-entry facilities
of The Depository Trust Company, as
described herein, in minimum denominations
of $25,000, except for the Class X
Certificates which shall be in minimum
denominations of $1,000,000, and in each
case increments of $1 in excess thereof. One
Certificate of each Class of Book-Entry
Certificates may be issued in a different
principal amount to accommodate the
remainder of the initial principal amount of
the Certificates of such Class.
The Physical Certificates will be issued in
certificated fully-registered form. The
Class R-1 and Class R-2 Certificates will be
issued in a single certificate of $100 each.
Depositor................. BSMSI. See "Bear Stearns Mortgage Securities
Inc." in the Prospectus.
Master Servicer........... ICI Funding Corporation will act as master
servicer with respect to the Mortgage Loans
and is sometimes referred to herein as the
"Master Servicer" or "ICI Funding." The
Mortgage Loans will be subserviced by
Wendover Funding, Inc., a wholly-owned
subsidiary of State Street Bank and Trust
Company ("Wendover"). See "ICI Funding--The
Master Servicer; the Sub-Servicer" herein.
Trustee................... Bankers Trust Company of California, N.A.,
a national banking association located
in Irvine, California.
Cut-off Date.............. September 1, 1996.
Closing Date.............. On or about September 30, 1996.
The Mortgage Loans........ The Mortgage Loans 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") and
having an aggregate principal balance as of
the Cut-off Date of approximately
$265,003,425 (the "Cut-off Date Scheduled
Principal Balance"). The Mortgage Loans are
divided into two groups (Mortgage Loan Group
I and Mortgage Loan Group II) designated as
the Group I Mortgage Loans and the Group II
Mortgage Loans,
S-6
<PAGE>
having aggregate Cut-off Date Scheduled
Principal Balances of $245,756,681 and
$19,246,744, respectively. All of the
Mortgage Loans in Mortgage Loan Group I have
Net Rates lower than 9.500% per annum and all
of the Mortgage Loans in Mortgage Loan Group
II have Net Rates equal to or greater than
9.500% per annum. All of the Mortgage Loans
will be acquired by BSMSI on the date of
issuance of the Certificates from the Master
Servicer.
Group I Mortgage Loans. Approximately
$13,463,229 aggregate principal balance of
the Group I Mortgage Loans have original
terms to stated maturity of up to 15 years
and approximately $232,293,452 aggregate
principal balance of the Group I Mortgage
Loans have original terms to stated maturity
of greater than 15 but not more than 30
years, in each case based on the date of
origination or any later modification. As of
the Cut-off Date, the weighted average
remaining term to maturity of the Group I
Mortgage Loans was approximately 347 months.
The original principal balances of the Group
I Mortgage Loans ranged from approximately
$21,000 to approximately $700,000 and the
average principal balance at origination was
approximately $163,211. As of the Cut-off
Date, the outstanding principal balances of
the Group I Mortgage Loans ranged from
approximately $20,967 to approximately
$699,647, and the average outstanding
principal balance as of the Cut-off Date was
approximately $162,753.
The Mortgage Rates on the Group I Mortgage
Loans are fixed rates ranging from 7.750%%
per annum to 9.750% per annum, with a
weighted average Mortgage Rate as of the Cut-
off Date of approximately 9.107% per annum.
The weighted average Net Rate on the Group I
Mortgage Loans as of the Cut-off Date is
approximately 8.842% per annum.
Approximately 53.16%, 13.64%, 10.23% and 5.98%
of the Group I Mortgage Loans (measured by
Cut-off Date Scheduled Principal Balance) are
secured by Mortgaged Properties located in
California, Florida, New Jersey and New York,
respectively.
Group II Mortgage Loans. Approximately
$301,224 aggregate principal balance of the
Group II Mortgage Loans have original terms
to stated maturity of up to 15 years and
approximately $18,945,520 aggregate principal
balance of the Group II Mortgage Loans have
original terms to stated maturity of greater
than 15 but not more than 30 years, in each
case based on the date of origination or any
later modification. As of the Cut-off Date,
the weighted average remaining term to
maturity of the Group II Mortgage Loans was
approximately 354 months. The original
principal balances of the Group II Mortgage
Loans ranged from
S-7
<PAGE>
approximately $32,000 to approximately
$440,000 and the average principal balance at
origination was approximately $112,580. As
of the Cut-off Date, the outstanding
principal balances of the Group II Mortgage
Loans ranged from approximately $31,959 to
approximately $439,800, and the average
outstanding principal balance as of the Cut-
off Date was approximately $111,900.
The Mortgage Rates on the Group II Mortgage
Loans are fixed rates ranging from 9.875% per
annum to 11.500% per annum, with a weighted
average Mortgage Rate as of the Cut-off Date
of approximately 10.116% per annum. The
weighted average Net Rate on the Group II
Mortgage Loans as of the Cut-off Date is
approximately 9.851% per annum.
Approximately 32.65%, 20.26%, 14.42% and 13.60%
of the Group II Mortgage Loans (measured by
Cut-off Date Scheduled Principal Balance) are
secured by Mortgaged Properties located in
California, Florida, New Jersey and New York,
respectively.
For a further description of the Mortgage
Loans, see "Description of the Mortgage
Loans" herein and Annex A attached hereto.
Net Rate.................. The "Net Rate" for each Mortgage Loan is the
interest rate borne by such Mortgage Loan
(the "Mortgage Rate"), less the sum of the
Master Servicing Fee and the Trustee's Fee
attributable thereto (in each case expressed
as a per annum rate) (the "Aggregate Expense
Rate"). It is expected that with respect to
each Distribution Date, the Master Servicing
Fee (which includes the fee payable to the
Sub-Servicer (as defined herein)) for the
Mortgage Loans will be 0.25% per annum, and
the Trustee's Fee will be 0.015% per annum,
of the Scheduled Principal Balance of each
Mortgage Loan as of the Due Date in the
month preceding the month in which such
Distribution Date occurs. For any
Distribution Date, the "Due Date" will be
the first day of the month in which such
Distribution Date occurs.
The "Scheduled Principal Balance" of a Mortgage
Loan with respect to a Distribution Date is
(i) the unpaid principal balance of such
Mortgage Loan as of the close of business on
the Due Date in the month preceding the month
of the Distribution Date (i.e., taking
account of the principal payment to be made
on such Due Date and irrespective of any
delinquency in its payment), 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 occurring
after the Cut-off Date (other than a
Deficient Valuation, as defined under
"Description of the Certificates--Allocation
of Losses; Subordination" herein) or any
moratorium or similar waiver
S-8
<PAGE>
or grace period) less (ii) any Principal
Prepayments and the principal portion of any
Net Liquidation Proceeds (as defined herein)
received during or prior to the related
Prepayment Period (as defined herein);
provided that the Scheduled Principal Balance
of any Liquidated Mortgage Loan (as defined
herein) is zero.
Distribution Dates........ The 25th day of each month, or if such day is
not a Business Day, then the next succeeding
Business Day, beginning in October 1996
(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 such Distribution Date
occurs.
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,
(i) from the 15th day of the month preceding
such Distribution Date (or, in the case of
the first Distribution Date, the Cut-off
Date) through the 14th day of the month of
such Distribution Date with respect to any
Mortgage Loan that was the subject of a
voluntary prepayment in full or (ii) from
the first day through the last day of the
month preceding the month of such
Distribution Date with respect to any other
unscheduled prepayment of principal (each, a
"Prepayment Period").
Distributions on the
Certificates............. General. On each Distribution Date, (i) the
Senior Certificates will be entitled to
receive all amounts distributable to them
for such Distribution Date before any
distributions are made to the Classes of
Subordinate Certificates on such date and
(ii) the Subordinate Certificates of each
Class will be entitled to receive all
amounts distributable to them for such
Distribution Date before any distributions
are made on such date on any Class of
Subordinate Certificates with a higher
numerical Class designation. In general, an
amount equal to the Group I Available Funds
(as defined herein) for such Distribution
Date will be allocated first, to pay
interest due the holders of the Class A-I
Certificates and the Residual Certificates
and Class X Component I Accrued Certificate
Interest (as defined herein) and then to
reduce the Current Principal Amounts of the
Senior Certificates (other than the Class
A-II Certificates); second, subject to the
limitations described herein, to pay the
Class PO Deferred Amount for such
Distribution Date to the Class PO
Certificates; and third, to pay interest on
and then principal of each Class of
Subordinate Certificates in the order of
their numerical Class
S-9
<PAGE>
designations. In general, an amount equal to
the Group II Available Funds (as defined
herein) for such Distribution Date will be
allocated first, to pay interest due on the
Class A-II Certificates and Class X Component
II Accrued Certificate Interest (as defined
herein) and then to reduce the Current
Principal Amount of the Class A-II
Certificates; and second, to pay interest on
and then principal of each Class of
Subordinate Certificates in the order of
their numerical Class designations. The
Group I Available Funds and the Group II
Available Funds in the aggregate (the
"Available Funds") will be allocated among
the Classes of Certificates in the manner set
forth in "Description of the Certificates--
Distributions on the Certificates--
Allocation of Available Funds" herein. No
distribution of interest or principal from
Group I Available Funds or from Group II
Available Funds will be made on any Class of
Subordinate Certificates on any Distribution
Date until all distributions of interest and
principal have been made on such date on each
Class of Certificates having a higher
priority with respect to the same Available
Funds.
Interest. Interest will accrue during the
preceding Interest Accrual Period for each
interest-bearing Class of Certificates at the
related rate described below (each, a "Pass-
Through Rate") on the Current Principal
Amount (as defined below) or Notional Amount
of such Class immediately preceding such
Distribution Date. The Class PO Certificates
are principal only Certificates and will not
bear interest. With respect to each
Distribution Date, the "Interest Accrual
Period" for each Class of interest-bearing
Certificates will be the calendar month
preceding the month in which the Distribution
Date occurs, commencing in September 1996.
Interest will be calculated on the basis of a
360-day year comprised of twelve 30-day
months.
Each interest-bearing Class of Certificates
(other than the Class A-II, Class X and Class
R-2 Certificates) will bear interest at the
fixed Pass-Through Rates set forth on the
cover page hereof.
The Class A-II Certificates will bear interest
on their Current Principal Amount at a
variable Pass-Through Rate equal to the
weighted average of the Net Rates of the
Group II Mortgage Loans. The Pass-Through
Rate for the Class A-II Certificates for the
first Interest Accrual Period is expected to
be approximately 9.85% per annum. See "--
Yield and Prepayment Considerations--Class A-
II Certificates."
The Class X Certificates will bear interest on
their Notional Amount at a variable Pass-
Through Rate equal to the excess of (a) the
weighted average of the Net Rates of all of
the Mortgage Loans over (b) the weighted
average of the Pass-Through Rates of all of
the Certificates (other than the Class
S-10
<PAGE>
X Certificates). The Pass-Through Rate for
the Class X Certificates for the first
Interest Accrual Period is expected to be
approximately 0.68% per annum.
In order to calculate the source of interest
due on the Class X Certificates and for REMIC
purposes, the Class X Certificates are deemed
to consist of separate components (each, a
"Separate Component"), certain of which
correspond to the Class A-I Certificates, the
Class R-1 Certificates and a principal amount
of the Class B Certificates which derives its
distributions from the Group I Mortgage Loans
(collectively, "Component I") and one which
corresponds to the principal amount of the
Class B Certificates which derives its
distributions from the Group II Mortgage
Loans ("Component II").
Since interest on the Class X Certificates is
based on amounts paid on both the Group I
Mortgage Loans and the Group II Mortgage
Loans, the Accrued Certificate Interest for
the Class X Certificates may also be
expressed as the sum of the Class X Component
I Accrued Certificate Interest and the Class
X Component II Accrued Certificate Interest
(each as defined herein.)
The Class R-2 Certificates will bear interest
on their Current Principal Amount at a
variable Pass-Through Rate equal to the
weighted average of the Net Rates of the
Group I Mortgage Loans.
On each Distribution Date, interest will be
distributable on each interest-bearing Class
of Certificates from the Group I Available
Funds and/or Group II Available Funds, as
described above, for such Distribution Date
in an aggregate amount equal to the Accrued
Certificate Interest for such Class on such
Distribution Date, plus any Accrued
Certificate Interest thereon remaining
undistributed from previous Distribution
Dates.
The "Accrued Certificate Interest" for any
interest-bearing Certificate for any
Distribution Date will equal the interest
accrued during the related Interest Accrual
Period at the applicable Pass-Through Rate on
the Current Principal Amount (or, in the case
of the Class X Certificates, the Notional
Amount) of such Certificate immediately prior
to such Distribution Date less (i) in the
case of an interest-bearing Senior
Certificate, such Certificate's share of any
Net Interest Shortfall and the interest
portion of any Excess Losses (each as defined
herein) and, after the Distribution Date on
which the Current Principal Amounts of the
Subordinate Certificates are reduced to zero
(the "Cross-Over Date"), the interest portion
of any Realized Losses and (ii) in the case
of a Subordinate Certificate, such
Certificate's share
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<PAGE>
of any Net Interest Shortfall and the
interest portion of any Realized Losses.
Such shortfalls and losses will be allocated
among the Senior Certificates in proportion
to the amount of Accrued Certificate Interest
that would have been allocated thereto in the
absence of such shortfalls or losses, except
that after the Cross-Over Date, the Class A-
I-11 Certificates will be allocated the
interest portion of any Realized Losses
(other than Excess Losses) otherwise
allocable to the Super Senior Certificates.
See "Description of the Certificates--
Distributions on the Certificates--Interest"
and "--Allocation of Losses; Subordination"
herein.
Any Interest Shortfalls resulting from
prepayments in full from the 15th day through
the last day of the month preceding the
applicable Distribution Date or prepayments
in part from the first through the last day
of such month will be offset by the Master
Servicer to the extent such Interest
Shortfalls do not exceed the lesser of (i)
the Master Servicing Fee in connection with
such Distribution Date or (ii) 1/12 of 0.125%
of the Scheduled Principal Balances of the
Mortgage Loans with respect to such
Distribution Date (the amount of such fee so
used, a "Compensating Interest Payment"). No
assurance can be given that the servicing
compensation available to cover Interest
Shortfalls will be sufficient therefor. See
"The Pooling and Servicing Agreement--
Servicing Compensation and Payment of
Expenses" herein.
The "Current Principal Amount" of any
Certificate (other than a Class X
Certificate) as of any Distribution Date will
equal such Certificate's initial principal
amount on the Closing Date as reduced by (i)
all amounts distributed on previous
Distribution Dates on such Certificate on
account of principal (and the Class PO Cash
Shortfall with respect to a Class PO
Certificate), (ii) the principal portion of
all Realized Losses previously allocated to
such Certificate and (iii) in the case of a
Subordinate Certificate, such Certificate's
share, if any, of the Subordinate Certificate
Writedown Amount and the Class PO Deferred
Payment Writedown Amount (each, as defined
herein) for previous Distribution Dates.
The Class X Certificates will have a Notional
Amount equal to the aggregate Scheduled
Principal Balances of all of the Mortgage
Loans.
Principal. Principal will be distributable
monthly on the Senior Certificates (other
than the Class X Certificates) on each
Distribution Date in an aggregate amount
equal to the sum of the Group I Senior
Optimal Principal Amount, the Class PO
Principal Distribution Amount and the Group
II Senior Optimal Principal Amount (each as
defined herein) for such
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<PAGE>
Distribution Date to the extent of the Group
I Available Funds or Group II Available
Funds, as applicable, subject to certain
limited exceptions, for such Distribution
Date, remaining after distributions of
interest are made on the related interest-
bearing Senior Certificates on such date.
Subject to such limitation, the Group I
Senior Optimal Principal Amount, the Class PO
Principal Distribution Amount and the Group
II Senior Optimal Principal Amount will be
allocated among the Senior Certificates in
the manner described herein.
Principal will be distributed monthly on each
Class of Subordinate Certificates on each
Distribution Date in an aggregate amount
equal to such Class's Allocable Share (as
defined herein) for such Distribution Date to
the extent of the sum of the Group I
Available Funds and the Group II Available
Funds remaining after (i) distributions of
interest and principal have been made on each
Senior Certificate entitled thereto as
described herein, (ii) subject to the
limitations described herein, the Class PO
Deferred Amount for such Distribution Date
has been distributed in respect of the Class
PO Certificates, (iii) distributions of
interest and principal have been made on each
Class of Subordinate Certificates, if any,
with a lower numerical Class designation than
such Class and (iv) distributions of interest
have been made on such Class of Subordinate
Certificates.
Distributions of principal on a Class of
Certificates will be made on a pro rata basis
among all outstanding Certificates of such
Class. See "Description of the Certificates
--Distributions on the Certificates" herein.
Class PO Deferred Amount. On each Distribution
Date, the PO Percentage (as defined herein)
of the principal portion of any Realized Loss
in respect of a Group I Discount Mortgage
Loan (as defined herein) will be allocated to
the Class PO Certificates. See "Description
of the Certificates--Allocation of Losses;
Subordination" herein. On each Distribution
Date through the Cross-Over Date, the Class
PO Certificates will be entitled to receive,
to the extent of Group I Available Funds
remaining after distributions of interest and
principal on the Senior Certificates (other
than the Class A-II Certificates and the
Class X Component II Accrued Certificate
Interest on the Class X Certificates) have
been made from such funds on such
Distribution Date, any Class PO Deferred
Amount for such Distribution Date; provided,
that distributions in respect of the Class PO
Deferred Amount on any Distribution Date will
not exceed the excess, if any, of (x) the
Available Funds (as defined herein) remaining
after giving effect to the distributions
pursuant to priorities (A) first through
third and (B) first through third under
"Description of the Certificates--
Distributions on the Certificates" herein
over
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<PAGE>
(y) the amount of Accrued Certificate
Interest for such Distribution Date and
Accrued Certificate Interest remaining
undistributed from previous Distribution
Dates on all Classes of Subordinate
Certificates. Distributions in respect of
the Class PO Deferred Amount shall not reduce
the Current Principal Amount of the Class PO
Certificates. The "Class PO Deferred Amount"
means, as to each Distribution Date through
the Cross-Over Date, the aggregate of all
amounts allocable on such date to the Class
PO Certificates in respect of the principal
portion of Realized Losses (other than Excess
Losses) and Class PO Cash Shortfall and all
amounts previously allocated in respect of
such losses (other than Excess Losses) and
Class PO Cash Shortfall to the Class PO
Certificates and not distributed on prior
Distribution Dates.
Additional Rights of the
Residual Certificates.... In addition to distributions of principal and
interest, the holders of the Residual
Certificates will be entitled to receive (i)
the amount, if any, of Available Funds
remaining on any Distribution Date after
distributions of interest and principal are
made on the Certificates on such date and
(ii) the proceeds, if any, of the assets of
the Trust remaining after the Current
Principal Amount of each Class of
Certificates has been reduced to zero. It
is not anticipated that any material assets
will be remaining for such distributions at
any such time.
Credit Enhancement--
General.................. Credit enhancement for the Senior Certificates
will be provided by the Subordinate
Certificates. In addition, after the
Cross-Over Date, additional credit
enhancement will be provided to the Super
Senior Certificates by the Senior Support
Certificates. Credit enhancement for each
Class of Subordinate Certificates will be
provided by the Class or Classes of
Subordinate Certificates with higher
numerical Class designations.
Credit Enhancement--
Subordination............ The rights of the holders of each Class of
Subordinate Certificates to receive
distributions with respect to the Mortgage
Loans will be subordinated to such rights of
the holders of the related Senior
Certificates and of each Class of
Subordinate Certificates having a lower
numerical Class designation than such Class.
The subordination of the Subordinate
Certificates to Senior Certificates, and the
further subordination among the Subordinate
Certificates, are each intended to increase
the likelihood of timely receipt by the
holders of Certificates with higher relative
payment priority of the maximum amount to
which they are entitled on any Distribution
Date and to provide such holders protection
against losses resulting from defaults on
Mortgage Loans to the extent described
herein. The Subordinate Certificates also
S-14
<PAGE>
provide protection to a lesser extent against
Special Hazard Losses, Fraud Losses and
Bankruptcy Losses (each as defined herein) to
the extent described herein. However, in
certain circumstances, the amount of
available subordination (including the
limited subordination provided for certain
types of losses) may be exhausted and
shortfalls in distributions on the Offered
Certificates could result. Except with
respect to the Class PO Certificates as
described below, holders of Senior
Certificates will bear their pro rata share
of any Realized Losses with respect to
Mortgage Loans in both Mortgage Loan Groups
in excess of the available total
subordination amount, provided, that on and
after the Cross-Over Date, the Senior Support
Certificateholders will bear Realized Losses,
other than Excess Losses, disproportionately
with the Super Senior Certificateholders due
to the credit enhancement provided by the
Senior Support Certificates. See
"Description of the Certificates--
Distributions on the Certificates," "--
Allocation of Losses; Subordination" and "--
Subordination" herein.
Since the Subordinate Certificates will absorb
Realized Losses on Mortgage Loans in both
Mortgage Loan Groups, a disproportionate
amount of Realized Losses with respect to
Mortgage Loans in either Mortgage Loan Group
will adversely impact the availability of
subordination to the Certificates related to
the other Mortgage Loan Group.
As of the Closing Date, the aggregate Current
Principal Amounts of all classes of
Subordinate Certificates and of the Other
Certificates will equal approximately 8.25%
and 1.50%, respectively, of the aggregate
Current Principal Amounts of all Classes of
Certificates.
In addition, to extend the period during which
the Subordinate Certificates remain available
as credit enhancement for the Senior
Certificates, the entire amount of any
prepayments and certain other unscheduled
recoveries of principal with respect to the
Mortgage Loans will be allocated to the
related Senior Certificates to the extent
described herein during the first five years
after the Cut-off Date (with such allocation
being subject to reduction thereafter as
described herein). This allocation has the
effect of accelerating the amortization of
the related Senior Certificates as a whole
while, in the absence of losses in respect of
the Mortgage Loans, increasing the percentage
interest in the principal balance of the
Mortgage Loans in both Mortgage Loan Groups
evidenced by the Subordinate Certificates.
See "Description of the Certificates--
Distributions on the Certificates" and "--
Subordination" herein.
In certain other instances as described in
paragraph (D) under "Description of the
Certificates--Distributions on the
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<PAGE>
Certificates--Allocation of Available
Funds," Principal Prepayments otherwise
distributable to the Class B Certificates
will in lieu thereof be distributed to Senior
Certificates.
Monthly Advances.......... The Master Servicer will be obligated to
advance delinquent scheduled payments of
principal and interest on the Mortgage Loans
under certain circumstances (each such
advance, a "Monthly Advance"). See "The
Pooling and Servicing Agreement--Monthly
Advances" herein.
Allocation of Losses...... Subject to the limitations set forth below,
Realized Losses on the Mortgage Loans will
be allocated as follows: first, among the
Subordinate Certificates in the inverse
order of their numerical Class designations
beginning with the Class B-6 Certificates
and second, pro rata to the Classes of
Senior Certificates as described herein,
until, in each case, the Current Principal
Amount of each such Class of Certificates is
reduced to zero. The Senior Support
Certificates will, however, bear Realized
Losses (other than Excess Losses) otherwise
allocable to the Super Senior Certificates.
The aggregate amounts of Realized Losses
which may be allocated by means of
Subordination to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses
are initially limited to $2,650,034,
$5,300,069 and $100,000, respectively. All
of the foregoing amounts are subject to
periodic reduction as described herein.
Any Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the respective
amounts of coverage therefor ("Excess Special
Hazard Losses," "Excess Fraud Losses" and
"Excess Bankruptcy Losses," respectively, and
collectively, "Excess Losses") on Non-
Discount Mortgage Loans in Mortgage Loan
Group I will be allocated on a pro rata basis
among the Senior Certificates (other than the
Class PO Certificates) and Subordinate
Certificates (any such Realized Losses so
allocated to such Senior Certificates will be
allocated pro rata without priority among the
various Classes thereof). The principal
portion of such losses on Group I Discount
Mortgage Loans will be allocated to the Class
PO Certificates in an amount equal to the
related PO Percentage thereof, and the
remainder of such losses on Discount Mortgage
Loans will be allocated among the remaining
Senior Certificates on a pro rata basis as
described above. After the Cross-Over Date,
all Realized Losses (including, without
limitation, all Special Hazard Losses, Fraud
Losses and Bankruptcy Losses) on Group I
Mortgage Loans will be allocated among the
Senior Certificates as described above,
except that the Senior Support Certificates
will bear Realized Losses (other than Excess
Losses) otherwise allocable to the Super
Senior Certificates. The amount of any
Realized Loss (other than an Excess Loss)
allocated to the Class PO
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<PAGE>
Certificates on or prior to the Cross-Over
Date will be treated as Class PO Deferred
Amount. Prior to the Cross-Over Date, Excess
Losses on Group II Mortgage Loans, and after
the Cross-Over Date, all Realized Losses on
Group II Mortgage Loans will be allocated on
a pro rata basis among the Senior
Certificates (other than the Class PO
Certificates). See "Description of the
Certificates--Allocation of Losses;
Subordination" herein.
Neither the Offered Certificates nor the
Mortgage Loans are insured or guaranteed by
any governmental agency or instrumentality or
by BSMSI, the Trustee, the Master Servicer or
any affiliate thereof or any other person.
Yield and Prepayment
Considerations........... General Considerations. The yield to maturity
of each Class of Offered Certificates will
be affected by the amount and timing of
principal payments on the related Mortgage
Loans, the allocation of Group I Available
Funds and/or Group II Available Funds, as
applicable, to such Class of Certificates,
the applicable Pass-Through Rate for such
Class of Certificates and the purchase price
paid for such Certificates. In addition, the
yields to investors in the Certificates will
be adversely affected by Realized Losses and
Net Interest Shortfalls allocated thereto.
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 any Mortgage Loans, the
amount or timing of Realized Losses or Net
Interest Shortfalls or 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, 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 or warranties
and optional termination of the Trust also
affect the receipt of principal on the
Mortgage Loans. In general, the Mortgage
Loans may be prepaid at
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<PAGE>
any time without penalty. In addition, the
rate of prepayments will be affected by the
rate and timing of the sale of the Mortgaged
Properties because all of the Mortgage Loans
contain due-on-sale clauses.
Timing of Payments and Distributions. Unlike
certain corporate bonds, the timing and
amount of principal payments on the
Certificates are not fixed because they are
generally determined by the timing and amount
of principal payments on the applicable
Mortgage Loans. The timing of payments on
the applicable Mortgage Loans may
significantly affect an investor's yield. In
general, the earlier a prepayment of
principal on the applicable 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 holders of interest-
bearing Certificates 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 such Certificate from the
first day of the month, the distribution of
such interest will not be made earlier than
the 25th day of the month following the month
of accrual. Moreover, to the extent any Net
Interest Shortfall or the interest portion of
any Realized Loss is allocated to a Class of
Certificates the yield to investors in such
Class will be reduced.
Discounts and Premiums. In the case of any
Class PO Certificates or any other
Certificates purchased at a discount, a
slower than anticipated rate of principal
payments on the applicable Mortgage Loans
could result in an actual yield that is lower
than the anticipated yield. In the case of
any Class X Certificates or any other
Certificates purchased at a premium, a faster
than anticipated rate of principal payments
on the applicable Mortgage Loans 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
S-18
<PAGE>
lower, than yields on the Certificates.
Generally, when prevailing interest rates
increase, prepayment rates on mortgage loans
tend to decrease, resulting in a reduced rate
of 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 rate of return of
principal to investors at a time when
reinvestment at 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.
Subordination of Certain Classes of
Certificates. The rights of the holders of
the Subordinate Certificates to receive
distributions with respect to each Mortgage
Loan will be subordinated to such rights of
the holders of the applicable Senior
Certificates, and to the rights of the
holders of the Subordinate Certificates
having a lower numerical Class designation,
in each case, to the extent described herein.
The level of subordination available as
support to the Senior Certificates will be
directly affected by the rate and timing of
prepayments and the occurrence of Realized
Losses.
Between Senior Certificates, on the one hand,
and Subordinate Certificates, on the other,
prepayments on each Mortgage Loan will be
allocated solely to the related Senior
Certificates during at least the first five
years after the Closing Date, and then such
allocation will decrease subject to meeting
certain loss and delinquency tests during the
next four years until Senior Certificates and
Subordinate 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 applicable Senior Certificates while
increasing the percentage interest in the
related Mortgage Loans evidenced by
Subordinate Certificates.
As among the Senior Certificates (other than
the Class PO Certificates and the Class A-II
Certificates), amounts equal to the
prepayments on Group I Mortgage Loans
generally will be allocated solely to such
classes of Senior Certificates other than the
Class A-I-10 and A-I-11 Certificates during
the first five years after the Closing Date,
and then such allocation will be reduced over
the next two years at which time such Senior
Certificates will share pro rata in such
allocations. Consequently, during the first
seven years after the Closing Date,
prepayments will have the effect of
accelerating the amortization of such Senior
Certificates other than the Class A-I-10 and
Class A-I-11 Certificates, while increasing
the percentage interest in the Group I
Mortgage Loans evidenced by the Class A-I-10
and Class A-I-11 Certificates.
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<PAGE>
To the extent that Realized Losses are
incurred, the allocation of such Realized
Losses to the Subordinate Certificates will
have the effect of increasing the percentage
interest in the Mortgage Loans, evidenced by
the Senior Certificates in the aggregate.
See "Description of the Certificates--
Distributions on the Certificates" and "--
Allocation of Losses; Subordination" herein.
Sequential Pay Senior Certificates. The Class
A-I Certificates are subject to various
priorities for payment of principal as
described herein. Distributions on Classes
currently entitled to receive principal
payments will be immediately affected by the
prepayment rate of the related 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 on
the related Mortgage Loans experienced both
before and after the commencement of
principal distributions on such Classes. In
addition, because principal distributions are
paid to certain Classes of Class A-I
Certificates before other Classes of Class A-
I Certificates, holders of Class A-I
Certificates that receive principal later
bear a greater risk of being allocated
Realized Losses than holders of such Classes
that receive principal earlier.
Class A-II Certificates. As a result of the
allocation after the Cross-Over Date of the
principal portion of Realized Losses, if any,
applicable to Group II Mortgage Loans to all
Senior Certificates (other than the Class PO
Certificates), pro rata, the Current
Principal Amount of the Class A-II
Certificates may exceed the outstanding
balance of the Group II Mortgage Loans.
Consequently, the Class A-II Certificates may
not be assured of receipt of interest on
their Current Principal Amount equal to the
weighted average of the Net Rates of the
Group II Mortgage Loans. As described in
paragraph (F) under "Description of the
Certificates--Distributions on the
Certificates--Allocation of Available
Funds," certain excess payments of interest
on the Group I Mortgage Loans over the
amounts needed to pay interest on the Senior
Certificates (other than the Class A-II and
Class PO Certificates) and the interest on
Component I of the Class X Certificates will
be available to pay some or all of such
shortfall in interest on the Class A-II
Certificates.
Class PO Certificates. The amounts payable
with respect to the Class PO Certificates
generally will be equal only to the amount of
certain principal payments on the Group I
Discount Mortgage Loans. As a result, the
yield on the Class PO Certificates will be
adversely affected by slower than
S-20
<PAGE>
expected payments of principal (including
prepayments, defaults and liquidations) on
the Group I Discount Mortgage Loans. Because
the Group I Discount Mortgage Loans have
lower Net Rates than the Non-Discount
Mortgage Loans in Mortgage Loan Group I, and
because the Mortgage Loans with lower Net
Rates are likely to have lower Mortgage
Rates, the Group I Discount Mortgage Loans
are generally likely to prepay at a slower
rate than the Non-Discount Mortgage Loans.
See "Yield and Prepayment Considerations,"
especially "--Yield on Class PO Certificates"
herein.
Class X Certificates. Because the Notional
Amount of the Class X Certificates will equal
the aggregate Scheduled Principal Balances of
all of the Mortgage Loans, the yield on the
Class X Certificates will be sensitive to the
rate and timing of principal prepayments on
all of the Mortgage Loans. A rapid rate of
principal prepayments on the Mortgage Loans
will have a materially negative effect on the
yield to investors in the Class X
Certificates. Investors should fully
consider the associated risks, including the
risk that a rapid rate of principal
prepayments could result in the failure of
investors in the Class X Certificates to
recover fully their initial investments. See
"Yield and Prepayment Considerations--Yield
on Class X Certificates" herein.
Since the Pass-Through Rate applicable to the
Class X Certificates will be based upon the
weighted average of the Net Rates of the
Mortgage Loans, disproportionate prepayments
of Mortgage Loans with higher Net Rates will
adversely affect the yield on the Class X
Certificates.
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 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. Each Underwriter
intends to establish a market in the Classes
of Offered Certificates being underwritten
by it, but it is not obligated to do so.
There is no assurance that any such market,
if established, will continue. Each
Certificateholder will receive monthly
reports pertaining to the Certificates as
described under "The Pooling and Servicing
Agreement--Reports to Certificateholders" in
the Prospectus. There are a limited number
of sources which provide certain 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.
S-21
<PAGE>
Investors should consider the effect of
limited information on the liquidity of the
Certificates.
Optional Termination...... On any Distribution Date on which the aggregate
unpaid principal balance of the Mortgage
Loans is less than 10% of the aggregate
Scheduled Principal Balance of the Mortgage
Loans as of the Cut-off Date, the Master
Servicer or its designee may repurchase from
the Trust all Mortgage Loans remaining
outstanding and any REO Property remaining
in the Trust at the purchase price set forth
in the Agreement. The Trust may also be
terminated and the Certificates retired on
any Distribution Date upon the Master
Servicer's determination, based upon an
opinion of counsel, that the REMIC status of
REMIC I or REMIC II (as defined below) has
been lost or that a substantial risk exists
that such status will be lost for the then
current taxable year. Upon termination, the
holders of Certificates (other than the
Class X Certificates) will receive the
Current Principal Amount of their
Certificates and any accrued but unpaid
interest and the holders of the Class X
Certificates will receive accrued but unpaid
interest on their Certificates. See "The
Pooling and Servicing
Agreement--Termination" herein.
Certain Federal Income Tax
Consequences............. An election will be made to treat the Mortgage
Loans, the Certificate Account and certain
other assets owned by the Trust as a real
estate mortgage investment conduit ("REMIC
II") for federal income tax purposes. REMIC
II will issue "regular interests" and one
"residual interest." An election will be
made to treat the "regular interests" in
REMIC II and certain other assets owned by
the Trust as a REMIC ("REMIC I"). The
Certificates (other than the Class R-1,
Class R-2 and Class X Certificates), as well
as each of the Separate Components
comprising the Class X Certificates, will be
designated as regular interests in REMIC I.
The Certificates (other than the Class R-1
and Class R-2 Certificates) and, where the
context so requires, each of the separate
components of the Class X Certificates (in
lieu of the Class X Certificates) are herein
referred to as the "Regular Certificates" or
the "REMIC Regular Certificates." The Class
R-2 Certificates will be designated as the
residual interest in REMIC II, and the Class
R-1 Certificates will be designated as the
residual interest in REMIC I (collectively,
the "Residual Certificates" or the "REMIC
Residual Certificates"). See "Federal
Income Tax Considerations" herein and
"Certain Federal Income Tax Consequences" in
the Prospectus and "Restrictions on Purchase
and Transfer of the Residual Certificates"
herein.
ERISA Considerations...... Fiduciaries of employee benefit plans subject
to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
should consider the ERISA fiduciary
S-22
<PAGE>
investment standards before authorizing an
investment by a plan in the Certificates. In
addition, fiduciaries of employee benefit
plans or other retirement arrangements (such
as individual retirement accounts or certain
Keogh plans) which are subject to Title I of
ERISA, and/or Section 4975 of the Internal
Revenue Code of 1986, as amended (the
"Code"), as well as any entity, including an
insurance company general account, whose
underlying assets include plan assets by
reason of a plan or account investing in such
entity (collectively, "Plan(s)"), should
consult with their legal counsel to determine
whether an investment in the Certificates
will cause the assets of the Trust ("Trust
Assets") to be considered plan assets
pursuant to the plan asset regulations set
forth in 29 C.F.R. (S) 2510.3-101, thereby
subjecting the Plan to the prohibited
transaction rules with respect to the Trust
Assets and the Trustee or the Master Servicer
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
acquisition, holding or transfer of the
Certificates.
Subject to the considerations set forth under
"ERISA Considerations" herein and in the
Prospectus, the purchase or holding of the
Senior Certificates (other than the Class A-
I-11, Class PO and Class X Certificates) by,
on behalf of, or with plan assets of, a Plan
may qualify for exemptive relief under
Prohibited Transaction Exemption 90-30 and
Prohibited Transaction Exemption 90-24 (the
"Exemptions").
The Class A-I-11, Class PO, Class X and Class B
Certificates generally may be purchased by,
on behalf of, or with plan assets of, a Plan,
if the proposed transferee provides the
Trustee with a satisfactory "Benefit Plan
Opinion" to the effect that a prohibited
transaction class exemption based on the
identity of the fiduciary making the decision
to acquire such Certificates on behalf of the
Plan is applicable to the acquisition,
holding and transfer of the Class A-I-11,
Class PO, Class X and Class B Certificates as
further described in "ERISA Considerations"
herein.
Restrictions on Purchase
and Transfer of the
Residual Certificates.... The Residual 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
Residual Certificates. Further, neither the
Residual Certificates nor any beneficial
interest
S-23
<PAGE>
therein may be sold or otherwise transferred
without the express written consent of
Bankers Trust Company of California, N.A.,
acting as the "Tax Matters Person" (as
defined in the Code), which may be withheld
to avoid a risk of REMIC disqualification or
REMIC-level tax. 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 Residual
Certificates" herein. Finally, unless the
Tax Matters Person consents in writing (which
consent may be withheld in the Tax Matters
Person's sole discretion), the Residual
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.
For certain additional tax-related
restrictions on the transfer of Residual
Certificates, See "Certain Federal Income Tax
Consequences--REMIC Residual Certificates--
Mismatching of Income and Deductions; Excess
Inclusions" and "Certain Federal Income Tax
Consequences--Foreign Investors--REMIC
Residual Certificates" in the Prospectus.
Rating.................... It is a condition to their issuance that each
Class of Offered Certificates receives the
ratings set forth below from Standard &
Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") and
Fitch Investors Service, L.P. ("Fitch"). S&P
and Fitch are referred to herein as the
"Rating Agencies."
Rating
----------------
Class S&P Fitch
----- --- -----
Class A-I-1 AAA AAA
Class A-I-2 AAA AAA
Class A-I-3 AAA AAA
Class A-I-4 AAA AAA
Class A-I-5 AAA AAA
Class A-I-6 AAA AAA
Class A-I-7 AAA AAA
Class A-I-8 AAA AAA
Class A-I-9 AAA AAA
Class A-I-10 AAA AAA
Class A-I-11 AAA AAA
Class A-II AAA AAA
Class PO AAAr AAA
Class X AAAr AAA
Class B-1 -- AA
Class B-2 -- A
Class B-3 -- BBB
Class R-1 AAA AAA
Class R-2 AAA AAA
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<PAGE>
The "r" symbol is appended to the rating by S&P
of those Certificates that S&P believes may
experience high volatility or high
variability in expected returns due to non-
credit risks. The absence of an "r" symbol in
the ratings of the other Offered Certificates
should not be taken as an indication that
such Certificates will exhibit no volatility
or variability in total return.
The ratings of the Offered Certificates of any
Class should be evaluated independently from
similar ratings on other types of securities.
A rating is not a recommendation to buy, sell
or hold securities and may be subject to
revision or withdrawal at any time by the
Rating Agencies. See "Ratings" herein.
BSMSI has not requested a rating of the Offered
Certificates by any rating agency other than
the Rating Agencies. However, there can be
no assurance as to whether any other rating
agency will rate the Offered Certificates or,
if it does, what rating would be assigned by
such other rating agency. The rating
assigned by such other rating agency to the
Offered Certificates could be lower than the
respective ratings assigned by the Rating
Agencies.
Legal Investment.......... The Senior Certificates and the Class B-1
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated
in one of the two highest rating categories
by at least one nationally recognized
statistical rating organization, 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 enacted legislation
overriding the legal investment provisions
of SMMEA. The remaining Classes of
Certificates will not constitute "mortgage
related securities" under SMMEA (the "Non-
SMMEA Certificates"). The appropriate
characterization of the Non-SMMEA
Certificates under various legal investment
restrictions, and thus the ability of
investors subject to these restrictions to
purchase Non-SMMEA Certificates, may be
subject to significant interpretive
uncertainties.
All investors 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
and in the Prospectus.
S-25
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
General
All of the Mortgage Loans are conventional (neither insured by
the Federal Housing Administration ("FHA") nor guaranteed by the Veterans'
Administration ("VA")) fully amortizing, fixed-rate Mortgage Loans secured
by first liens on one- to four-family residential Mortgaged Properties.
The aggregate principal balance of the Mortgage Loans as of the Cut-off
Date is referred to as the "Cut-off Date Scheduled Principal Balance." The
Cut-off Date Scheduled Principal Balance set forth below is subject to a
permitted variance of up to 5%. The following paragraphs and tables
contained in Annex A set forth certain additional information with respect
to the Mortgage Loans./*/
All of the Mortgage Loans will have been sold to BSMSI by ICI
Funding Corporation ("ICI Funding" or the "Master Servicer"), pursuant to
a mortgage loan purchase agreement among BSMSI, as purchaser, ICI Funding,
as seller, and ICI Funding's parent, Imperial Credit Mortgage Holdings,
Inc., as guarantor. The Mortgage Loans will have been acquired by ICI
Funding in accordance with the underwriting criteria described herein.
All of the Mortgage Loans have monthly payments due on the first day of
each month. Each Mortgage Rate will be fixed for the life of the related
Mortgage Loan.
The Cut-off Date Scheduled Principal Balance of all of the
Mortgage Loans is approximately $265,003,425. The Mortgage Loans are
divided into Mortgage Loan Group I and Mortgage Loan Group II, with the
Group I Mortgage Loans and Group II Mortgage Loans having Cut-off Date
Scheduled Principal Balances of $245,756,681 and $19,246,744,
respectively. All of the Group I Mortgage Loans have Net Rates lower than
9.500% per annum and all of the Group II Mortgage Loans have Net Rates
equal to or greater than 9.500% per annum. Group I Mortgage Loans with
Cut-off Date Scheduled Principal Balances of approximately $13,463,229 and
$232,293,452 have original terms to stated maturity of up to 15 years, or
greater than 15 but not more than 30 years, respectively, and Group II
Mortgage Loans with Cut-off Date Scheduled Principal Balances of
approximately $301,224 and $18,945,520 have original terms to stated
maturity of up to 15 years, or greater than 15 but not more than 30 years,
respectively, in each case based upon the date of origination or any later
modification.
Each Mortgage Loan with a Loan-to-Value Ratio at origination in
excess of 80% (except for one Group I Mortgage Loan with a Cut-off Date
Scheduled Principal Balance of approximately $125,137 and one Group II
Mortgage Loan with a Cut-off Date Scheduled Principal Balance of
approximately $431,059) is insured by a primary mortgage insurance policy
("Primary Insurance Policy"). Each such Primary Insurance Policy provides
coverage in an amount equal at least to the excess of the original
principal balance of the Mortgage Loan covered thereby, plus accrued
interest thereon and related foreclosure expenses over 75% of the value of
the related Mortgaged Property as determined at the time of origination of
the related Mortgage Loan. For these purposes Loan-to-Value Ratio means
the ratio, expressed as a percentage, of the principal balance of the
Mortgage Loan at origination to the original value of the Mortgaged
Property (i.e., the value at origination based upon an appraisal or the
selling price, whichever is less, or in the case of certain refinancings,
the value set forth in an appraisal). There can be no assurance that the
Loan-to-Value Ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original Loan-to-Value Ratio.
------------------------------
* The description herein of the Mortgage Loans is based upon estimates
of the composition of the Mortgage Loans 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 as a result of (i) Principal Prepayments thereof in full
prior to September 16, 1996, (ii) requirements of S&P or Fitch or (iii)
delinquencies or otherwise. In any such event, other mortgage loans may
be included in the Trust. BSMSI believes that the estimated information
set forth herein with respect to the Mortgage Loans as presently
constituted is representative of the characteristics of the Mortgage
Loans at the time the Certificates are issued, although certain
characteristics of the Mortgage Loans may vary.
S-26
<PAGE>
None of the Mortgage Loans will be assumable. None of the
Mortgage Loans will be 30 or more days delinquent in payment as of the
Closing Date, or will have been 30 or more days delinquent more than once
during the 12 months preceding the Closing Date.
Pursuant to its terms, each Mortgage Loan is required to be
covered by a standard hazard insurance policy in an amount equal to the
lower of the original principal loan amount or the replacement value of
the improvements on the Mortgaged Property. See "The Pooling and
Servicing Agreement--Hazard Insurance" in the Prospectus.
No assurance can be given that the values of the Mortgaged
Properties have remained or will remain at the levels in effect on the
date of origination of the related Mortgage Loan. Approximately 53.16%
and 32.65% of the Group I Mortgage Loans and Group II Mortgage Loans,
respectively, (by Cut-off Date Scheduled Principal Balance) are secured by
Mortgaged Properties located in the State of California. Property values
of residential real estate in California have declined in recent years.
If the California residential real estate market should continue to
experience an overall decline in property values after the dates of
origination of the Mortgage Loans, the rates of delinquencies,
foreclosures, bankruptcies and losses on the Mortgage Loans may be
expected to increase substantially.
Characteristics of the Mortgage Loans
Certain additional expected characteristics (as of the Cut-off
Date) of the Mortgage Loans by Mortgage Loan Group are set forth in the
tables appearing as Annex A to this Prospectus Supplement.
ICI FUNDING
General
ICI Funding, a California corporation, is a mortgage banking
conduit that acquires conventional one- to four-family residential
mortgage loans nationwide. ICI Funding is a non-consolidating subsidiary
of Imperial Credit Mortgage Holdings, Inc., a publicly traded real estate
investment trust. ICI Funding primarily acquires mortgage loans from
approved correspondents.
Prior to November 1995, ICI Funding was a division of Imperial
Credit Industries, Inc. ("ICII"). In November 1995, ICII restructured its
operations pursuant to which ICI Funding became a separate corporation and
ICII contributed, among other things, all of the outstanding nonvoting
preferred stock of ICI Funding, which represents 99% of the economic
interest in ICI Funding, to Imperial Credit Mortgage Holdings, Inc., in
exchange for approximately 10% of Imperial Credit Mortgage Holdings,
Inc.'s common stock. All of the outstanding shares of common stock of ICI
Funding were retained by ICII.
ICI Funding had sub-contracted with ICII to perform its mortgage
loan servicing, which includes the processing and administration of
mortgage loan payments, in return for a sub-servicing fee through June 30,
1996. At March 31, 1996, ICII serviced approximately $1.8 billion
outstanding principal amount of mortgage loans. Subsequently, ICII sold
substantially all of its loan servicing operations. Consequently,
commencing on July 1, 1996, Wendover Funding, Inc., a wholly-owned
subsidiary of State Street Bank and Trust Company ("Wendover"), undertook
to perform ICI Funding's mortgage loan servicing for a sub-servicing fee.
At June 30, 1996, Wendover serviced approximately $8.7 billion outstanding
principal amount of mortgage loans. Wendover is hereinafter at times
referred to herein as the "Sub-Servicer." See "--The Master Servicer; the
Sub-Servicer."
At June 30, 1996, ICI Funding had approximately 81 employees.
ICI Funding's executive offices are located at 20371 Irvine Avenue, Santa
Ana Heights, California 92707, and its telephone number is (714) 556-0122.
S-27
<PAGE>
Underwriting Standards
All of the Mortgage Loans were acquired by ICI Funding. With
respect to the Group I Mortgage Loans and by Cut-off Date Scheduled
Principal Balance, approximately 95.19% were underwritten pursuant to, or
in accordance with the standards of, the Progressive Series I Program,
3.23% pursuant to, or in accordance with the standards of, the Progressive
Series II Program and 1.58% pursuant to, or in accordance with the
standards of, the Progressive Series III Program. The comparable
percentages with respect to the Group II Mortgage Loans are 66.02%, 16.24%
and 17.74%.
The Progressive Series Program Underwriting Guidelines
General. The underwriting guidelines utilized in the
Progressive Series Program, as developed by ICI Funding, are intended to
assess the borrower's ability and willingness to repay the mortgage loan
obligation and to assess the adequacy of the mortgaged property as
collateral for the mortgage loan. The Progressive Series Program is
designed to meet the needs of borrowers with excellent credit, as well as
those whose credit has been adversely affected. The Progressive Series
Program consists of six mortgage loan programs. Each program has
different credit criteria, reserve requirements, qualifying ratios and
Loan-to-Value Ratio restrictions. Series I is designed for credit history
and income requirements typical of "A" credit borrowers. In the event a
borrower does not fit the Series I criteria, the borrower's mortgage loan
is placed into either Series II, III, III+, IV or V, depending on which
series' mortgage loan parameters meets the borrower's unique credit
profile. Series II, III, III+, IV and V allow for less restrictive
standards because of certain compensating or offsetting factors such as a
lower Loan-to-Value Ratio, verified liquid assets, job stability, pride of
ownership and, in the case of refinance mortgage loans, length of time
owning the mortgaged property. The philosophy of the Progressive Series
Program is that no single borrower characteristic should automatically
determine whether an application for a mortgage loan should be approved or
disapproved. Lending decisions are based on a risk analysis assessment
after the review of the entire mortgage loan file. Each mortgage loan is
individually underwritten with emphasis placed on the overall quality of
the mortgage loan. The Progressive Series I Program utilizes an average
annual salary to calculate the debt service-to-income ratio. Salaried
borrowers are evaluated based on a 12 month salary history, and self-
employed and commission borrowers are evaluated on a 24 month basis. The
debt service-to-income ratio for Series I borrowers is required to be
within the range of 36% to 50%. The Progressive Series II and III Program
borrowers are required to have debt service-to-income ratios within the
range of 45% to 50% calculated on the basis of monthly income and
depending on the Loan-to-Value Ratio of the Mortgage Loan.
Under the Progressive Series Program, ICI Funding underwrites
one- to four-family mortgage loans with Loan-to-Value Ratios at
origination of up to 95%, depending on, among other things, a borrower's
credit history, repayment ability and debt service-to-income ratio, as
well as the type and use of the mortgaged property. Second lien financing
of the mortgaged properties may be provided by lenders other than ICI
Funding at origination; however, the combined Loan-to-Value Ratio ("CLTV")
generally may not exceed 95% for mortgage loan amounts up to $400,000 and
90% for mortgage loan amounts above $400,000. In certain circumstances,
ICI Funding may allow second lien financing with CLTVs of up to 100%. The
mortgage loans in the Progressive Series Program generally bear rates of
interest that are greater than those which are originated in accordance
with FHLMC and FNMA standards. In general, the maximum amount for
mortgage loans originated under the Progressive Series Program is
$750,000; however, ICI Funding may approve mortgage loans in excess of
such amount on a case-by-case basis.
All of the mortgage loans originated under the Progressive
Series I Program are underwritten either by employees of ICI Funding or by
contracted mortgage insurance companies or delegated conduit sellers. All
mortgage loans originated under the Series II and III Programs are
underwritten by employees of ICI Funding and/or Commonwealth Mortgage
Assurance Company. Substantially all of the Series I Program mortgage
loans and all of the Series II and III Program mortgage loans with Loan-
to-Value Ratios at origination in excess of 80% are insured by a Primary
Insurance Policy. ICI Funding receives verbal verification of employment
prior to funding or acquiring each Progressive Series Program mortgage
loan.
S-28
<PAGE>
Full/Alternative Documentation and Reduced Documentation
Progressive Series Programs. Each prospective borrower completes a
mortgage loan application which includes information with respect to the
applicant's liabilities, income, credit history, employment history and
personal information. ICI Funding requires a credit report on each
applicant from a credit reporting company. The report typically contains
information relating to credit history with local and national merchants
and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions or judgments.
The Progressive Series Program allows for approval of an
application pursuant to the (a) Full/Alternative Documentation Program, or
(b) the Limited Documentation Program, the "No Ratio" Program or the "No
Income, No Assets" Program (any of the foregoing, a "Reduced Documentation
Program"). The Full/Alternative Documentation Program requires the
following documents: (i) Uniform Residential Loan Application (FNMA Form
1003 or FHLMC Form 65), (ii) Statement of Assets and Liabilities (FNMA
Form 1003A or FHLMC 65A), (iii) Residential Mortgage Credit Report with
records obtained from at least two separate repositories, (iv)
Verification of Employment Form providing a complete two year employment
history, (v) Verification of Deposit Form for all liquid assets, verifying
minimum cash reserves based upon the Loan-to-Value Ratio and borrower's
income, and (vi) a Uniform Residential Appraisal Report (FNMA Form 1004 or
FHLMC Form 70). The Full/Alternative Documentation Program allows for the
use of certain alternative documents in lieu of the Verification of
Deposit Form and Verification of Employment Form. These include W-2
Statements, tax returns and one pay check from the most recent full month
for verification of income and the most recent three months personal bank
statements for verification of liquid assets. In addition, self-employed
borrowers must provide federal tax returns for the previous two to three
years, including K-1's, federal business tax returns for two years, a
signed IRS Form 4506 (Request for Copy of Tax Returns) and, if requested,
year-to-date financial statements.
Under the Limited Documentation Program, which is available to
borrowers in every Progressive Series Program, ICI Funding obtains from
prospective borrowers either a verification of deposits or bank statements
for the most recent two-month period preceding the mortgage loan
application. Under this program the borrower provides income information
on the mortgage loan application, and the debt service-to-income ratio is
calculated. However, income is not verified. Permitted maximum Loan-to-
Value Ratios (including secondary financing) under the Limited
Documentation Program generally are limited.
The Progressive Series Program also allows for approval of
applications pursuant to the "No Ratio" Program and "No Income, No Assets"
Program. The "No Ratio" Program, available to borrowers in the Series I
and Series II Programs, is designed for a mortgage loan which requires a
minimum 20% down payment from the borrower with employment information,
but no income information, stated on the application (and, therefore, the
debt service-to-income ratio is not calculated). The certification of
assets is confirmed by written verification of deposits and supported by
bank statements. With respect to the "No Ratio" Program, a mortgage loan
with a Loan-to-Value Ratio at origination in excess of 80% is not
eligible.
The "No Income, No Assets" Program, available to borrowers in
the Series I Program, requires a much larger down payment than under the
"No Ratio" Program. Under this program, the borrower provides no income
information, but provides employment and unverified asset information on
the mortgage loan application. With respect to the "No Income, No Assets"
Program, a mortgage loan with a Loan-to-Value Ratio at origination in
excess of 70% is generally not eligible.
Under all Progressive Series Programs, ICI Funding verbally
verifies the borrower's employment prior to closing. Credit history,
collateral quality and the amount of the down payment are important
factors in evaluating a mortgage loan submitted under one of the Reduced
Documentation Programs. In addition, in order to qualify for a Reduced
Documentation Program, a mortgage loan must conform to certain criteria
regarding maximum loan amount, property type and occupancy status.
Mortgage loans having a Loan-to-Value Ratio at origination in excess of
80% for Series I, II and III and mortgage loans on mortgaged property used
as a second or vacation home by the prospective borrowers are not eligible
for a Reduced Documentation Program. In general, the maximum loan amount
for mortgage loans underwritten in accordance with Series I, II and III
Reduced Documentation Program is $750,000 for purchase transactions and
rate-term transactions
S-29
<PAGE>
and a maximum loan amount of $650,000 for cash out refinance transactions.
Secondary financing is allowed in the origination of the Limited
Documentation Program but must meet the CLTV requirements described above
and certain other requirements for subordinate financing. Secondary
financing is generally not allowed in the case of the "No Ratio" or the
"No Income, No Assets" Programs. In all cases, liquid assets must support
the level of income of the borrower as stated in proportion to the type of
employment of the borrower. Full Documentation is requested by the
underwriter if it is the judgment of the underwriter that the compensating
factors are insufficient for loan approval.
Credit History. The Progressive Series Program defines an
acceptable credit history in each of the Series I, II and III Programs.
The Series I Program defines an acceptable credit history as a borrower
who has "A" credit, meaning a minimum of five trade accounts, with 24
months credit history, no 30-day delinquent mortgage payments in the last
24 months, and a maximum of two 30-day delinquent payments on any
installment credit account within the past 24 months. No bankruptcies or
foreclosures are allowed in the past 24 months. No judgments, suits,
liens, collections or charge-offs are allowed within the past 24 months.
With respect to the Series II Program, a borrower must have a
minimum of five trade accounts with no late mortgage payments for the past
12 months and may have one 30-day delinquent mortgage payment within the
past 13th through 24th months. A borrower may not have more than three
30-day delinquent payments on any revolving credit account and a maximum
of three 30-day delinquent payments within the past 24 months on any
installment credit account. All bankruptcies must be at least 24 months
old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 24
months.
With respect to the Series III Program, a borrower may not have
more than two 30-day delinquent mortgage payments within the past 24
months. The borrower may not have more than three 30-day delinquent
payments and one 60-day delinquent payment on revolving debt in the last
24 months and may not have more than three 30-day delinquent and one 60-
day delinquent payment on any installment credit account in the past 24
months. Any open judgment, suit, lien, collection or charge-off must be
paid prior to closing. Bankruptcies must be at least 24 months old, fully
discharged and the borrower must have re-established a satisfactory credit
history. No late mortgage payments are permitted on equity take-out
refinances under the Limited Documentation Program offered under the
Progressive Series Program.
Quality Control. ICI Funding generally performs a pre-funding
audit on each Progressive Series Program mortgage loan. This audit
includes a review for compliance with Progressive Series Program
parameters and accuracy of the legal documents. ICI Funding performs a
quality control review on a minimum of 25% of the mortgage loans
originated or acquired under the Progressive Series Program for complete
re-verification of employment, income and liquid assets used to qualify
for such mortgage loan. Such review also includes procedures intended to
detect evidence of fraudulent documentation and/or imprudent activity
during the processing, funding, servicing or selling of the mortgage loan.
Verification of occupancy and applicable information is made by regular
mail.
Appraisals. One- to four-family residential properties that are
to secure Progressive Series Program mortgage loans are appraised by
qualified independent appraisers who are approved by ICI Funding's
correspondents. Such appraisers inspect and appraise the subject property
and verify that such property is in acceptable condition. Following each
appraisal, the appraiser prepares a report which includes a market value
analysis based on recent sales of comparable homes in the area and, when
deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. All appraisals are required to conform to
the Uniform Standards of Professional Appraisal Practice adopted by the
Appraisal Standards Board of the Appraisal Foundation and must be on forms
acceptable to FNMA and FHLMC. As part of ICI Funding's quality control
procedures, either field or desk appraisal reviews are obtained on 10% of
all mortgage loans originated under the Progressive Series Program.
Selected mortgage loans will also be reviewed for compliance and document
accuracy. Desk and/or field appraisal reviews are required on all
mortgage loans originated under the Progressive Series Program with Loan-
to-Value Ratios in excess of 65% on mortgaged properties located in the
State of California, Loan-to-Value Ratios in excess of 70% on any
properties in all
S-30
<PAGE>
other states, loan amounts in excess of $350,000, non-owner occupied
properties, second home properties, cash-out refinance mortgage loans and
whenever in the underwriter's judgment it is necessary to reverify the
appraised value of the property.
ICI Funding commenced acquiring mortgage loans underwritten
pursuant to the Progressive Series Program in November 1995. Accordingly,
ICI Funding does not have any historical delinquency or default experience
that may be referred to for purposes of estimating the future delinquency
and loss experience of the Mortgage Loans underwritten pursuant to the
Progressive Series Program. There can be no assurance that the
delinquency experience of the servicing portfolio of ICII or of Wendover
as described herein will correspond to the delinquency experience of the
Mortgage Loans underwritten pursuant to the Progressive Series Program.
It is contemplated that all of the Progressive Series Program mortgage
loans originated or acquired by ICI Funding will also be underwritten with
a view toward the resale thereof in the secondary mortgage market.
Variations. ICI Funding uses the foregoing parameters as
guidelines only. On a case-by-case basis, ICI Funding may determine that
the prospective mortgagor warrants an exception outside the standard
Progressive Series Program guidelines. An exception may be allowed if the
loan application reflects certain compensating factors, including (i) the
prospective mortgagor has demonstrated an ability to save and devote a
greater portion of income to basic housing needs; (ii) the prospective
mortgagor may have a potential for increased earnings and advancement
because of education or special job training, even if the prospective
mortgagor has just entered the job market; (iii) the prospective mortgagor
has demonstrated an ability to maintain a debt free position; (iv) the
prospective mortgagor may have short term income that is verifiable but
could not be counted as stable income because it does not meet the
remaining term requirements; and (v) the prospective mortgagor's net worth
is substantial enough to suggest that repayment of the loan is within the
prospective mortgagor's ability.
The Master Servicer; the Sub-Servicer
ICI Funding (in its capacity as master servicer, the "Master
Servicer") will act as master servicer for the Mortgage Loans pursuant to
the Agreement. As set forth above, Wendover will sub-service the Mortgage
Loans in exchange for a sub-servicing fee. See "ICI Funding--General."
Certain information is set forth below with respect to ICII and
its portfolio even though it no longer services the Mortgage Loans. Its
portfolio as shown may be more relevant to the Mortgage Loans than that of
Wendover.
ICII. The following table sets forth certain delinquency
experience including pending foreclosures on residential mortgage loans
originated or acquired as part of ICII's former mortgage banking
operations (exclusive of mortgage loans held for sale or investment) and
included in ICII's servicing portfolio at the dates indicated. As of
December 31, 1993, 1994 and 1995 and March 31, 1996, the total principal
balance of loans being serviced by ICII was (in millions) $3,887.0,
$4,894.8, $4,532.3 and $1,814.6, respectively. Information is not
provided for periods after March 31, 1996 as a result of the subsequent
sale by ICII of its loan servicing operations.
S-31
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1993 1994/1/ 1995/1/ At March 31, 1996
--------------------- --------------------- --------------------- ----------------------
Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- ----------- -------- ----------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 28,641 100% 33,504 100% 34,188 100% 9,586 100%
====== === ====== === ====== === ====== =======
Period of Delinquency:
30-59 days............... 246 1.4% 580 2.5% 979 3.1% 363 4.3%
60-89 days............... 55 0.3% 115 0.6% 193 0.7% 99 1.3%
90 days or more.......... 82 0.6% 167 0.9% 223 0.8% 270/2/ 4.3%/2/
------ --- ------ --- ------ --- ------ -------
Total Delinquencies
(excluding Foreclosures).. 383 2.3% 862 4.0% 1,395 4.6% 732/2/ 9.8%/2/
====== === ====== === ====== === ====== =======
Foreclosures Pending 22 0.1% 199 1.2% 381 1.5% N/A N/A
</TABLE>
- ----------------
1 The increase in delinquency rate during 1994 and 1995 was primarily the
result of the purchase of $1.0 billion of servicing rights from the
Resolution Trust Corporation ("RTC") in January 1994 with a higher
delinquency rate than the remainder of ICII's residential servicing
portfolio of loans originated or acquired as part of ICII's former
mortgage banking operations. Excluding the acquisition of these
servicing rights, the delinquency rate at December 31, 1994 and 1995 and
March 31, 1996 would have been 3.2%, 5.4% and 8.1%, respectively. The
delinquency rate on the acquired portfolio was 12.5%, 74.8% and 72.1% at
December 31, 1994 and 1995 and March 31, 1996, respectively. (A majority
of the RTC servicing rights were sold in 1995. The Company retained the
RTC servicing related to loans that were delinquent 60 days and over.)
2 Includes pending foreclosures
Wendover. Wendover is a subservicer of residential, consumer and
commercial mortgage loans in 50 states. Additionally, Wendover provides
contract master servicing for residential mortgage loans, origination and
servicing for Federal Housing Authority home equity conversion mortgages,
specialized asset management and default servicing for non-performing
product, and special servicing activities for government entities. As of
December 31, 1995, Wendover employed 403 employees. Wendover is located in
Greensboro, North Carolina. Wendover is an approved servicer in good
standing with FNMA and FHLMC.
Established in 1986, Wendover was originally owned by Sunbelt Savings
FSB, which was formed to receive the assets and certain liabilities of
Independent American Mortgage Services Inc. ("IAMSI") and other insolvent
Texas savings and loan associations. Wendover was a subsidiary of IAMSI
until it was purchased by Wendover Financial Services Corp. in June 1990.
In October 1992, Wendover was acquired by State Street Bank and Trust
Company.
The following table sets forth certain information concerning delinquency
experience including bankruptcies and foreclosures in progress on one- to
four-family residential mortgage, consumer, and commercial loans included in
Wendover's servicing portfolio at the dates indicated. Consumer and
commercial loans represented less than 10% of the overall portfolio volume
at June 30, 1996. As at December 31, 1993, 1994 and 1995, and June 30,
1996, the total principal balance of loans being serviced by Wendover was
(in millions) $4,785.6, $7,160.8, $7,637.4 and $8,681.0, respectively. The
indicated periods of delinquency are based on the number of days past due on
a contractual basis. No mortgage, consumer, or commercial loan is
considered delinquent for these purposes until it is one month past due on a
contractual basis.
S-32
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1993 1994 1995 At June 30, 1996
--------------------- --------------------- --------------------- ----------------------
Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- ----------- -------- ----------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio/1/ 78,372 100% 96,270 100% 94,662 100% 109,848 100%
====== ==== ====== ===== ====== ===== ======= =====
Period of Delinquency:
30-59 days............... 2,778 2.85% 4,093 4.73% 5,364 6.10% 5,496 5.00%
60-89 days............... 679 0.66% 1,162 1.39% 1,291 1.46% 1,448 1.32%
90 days or more.......... 8,694 5.67% 10,082 5.98% 8,409 7.31% 6,698 6.10%
------ ---- ------ ----- ------ ----- ------- -----
Total Delinquencies
(excluding Foreclosures).. 12,151 9.18% 15,337 12.10% 15,064 14.87% 13,642 12.42%
====== ==== ====== ===== ====== ===== ======= =====
Foreclosures Pending 1,962 3.70% 1,632 2.28% 4,041 4.86% 3,686 3.36%
</TABLE>
- ------------------
1 Includes purchased mortgage servicing rights owned by Wendover totalling
6,332 loans for $614.9 million unpaid principal balance and 5,908 loans
for $567.1 million unpaid principal balance as of December 31, 1995 and
June 30, 1996, respectively.
Wendover subservices for a variety of clients with portfolios that
include sub-performing and non-performing loans. In 1995 Wendover added
several new clients with an inordinate amount of loans that were severely
delinquent, in foreclosure, bankruptcy or the post-foreclosure claim
process. Clients with special needs or those with "B" or "C" quality
portfolios are assigned to Wendover's Asset Management Division. Such
division handles approximately 400 delinquent loans per employee and is
responsible for the collection, workout, foreclosure, bankruptcy or REO
management of each account in their respective portfolios. Standards for
these portfolios typically require intensive collection activity which
include collection contacts early and often, innovative workout programs and
fast track foreclosure processing where appropriate.
General. There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans will correspond to the delinquency and
foreclosure experience of the servicing portfolio of either ICII or Wendover
set forth in the foregoing tables. The statistics shown above represent the
respective delinquency and foreclosure experiences only at the dates
presented, whereas the aggregate delinquency and foreclosure experience on
the Mortgage Loans will depend on the results obtained over the life of the
Trust. Each servicing portfolio includes mortgage loans with a variety of
payment and other characteristics (including geographic location) which are
not necessarily representative of the payment and other characteristics of
the Mortgage Loans. In addition, Wendover's servicing portfolio includes
consumer and commercial loans. Each servicing portfolio includes mortgage
loans underwritten pursuant to guidelines not necessarily representative of
those applicable to the Mortgage Loans. It should be noted that if the
residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by ICII or Wendover. In addition,
adverse economic conditions 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 and foreclosures with respect
to the Mortgage Loans.
S-33
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the Certificates
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the Prospectus and the provisions of the Agreement
relating to the Certificates offered hereby.
General
The Mortgage Pass-Through Certificates, Series 1996-4 (the
"Certificates") will consist of the classes of Certificates offered hereby
(the "Offered Certificates") in addition to the Class B-4, Class B-5 and
Class B-6 Certificates (the "Other Certificates"), which are not being
offered hereby.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in the Trust. The Trust will consist of (i) the Mortgage
Loans, (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the account (the "Protected Account")
established by the Master Servicer for the collection of payments on the
Mortgage Loans and in the Certificate Account and belonging to the Trust,
(iii) property acquired by foreclosure of such Mortgage Loans or by deed in
lieu of foreclosure; (iv) any applicable Primary Insurance Policies and
standard hazard insurance policies; and (v) all proceeds of the foregoing.
Each Class of Book-Entry Certificates will be represented initially by a
single certificate registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC"), and beneficial interests
will be held by investors in minimum denominations of $25,000 (except
$1,000,000 for the Class X Certificates) and in each case increments of $1
in excess thereof. One Certificate of each such Class may be issued in a
different principal amount to accommodate the remainder of the initial
principal amount of the Certificates of such Class. No person acquiring an
interest in the Book-Entry Certificates (a "Certificate Owner") will be
entitled to receive a certificate representing such person's interest in the
Trust, except in the event Definitive Certificates are issued under the
limited circumstances set forth below under "--Definitive Certificates."
Unless and until Definitive Certificates are issued, all references to
actions by holders of Book-Entry Certificates shall refer to actions taken
by DTC upon instructions from its Participants (as defined below), and all
references herein to distributions, notices, reports and statements to
holders of Book-Entry Certificates shall refer to distributions, notices,
reports and statements to DTC or Cede, as the registered holder of the Book-
Entry Certificates, as the case may be, for distribution to Certificate
Owners in accordance with DTC procedures.
The Class R-1 and Class R-2 Certificates will be issued in certificated
fully-registered form in a single certificate in a denomination of $100
each.
Distributions of principal and interest as set forth below initially will
be made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to the holders of the Physical Certificates. Upon the
issuance of Definitive Certificates to persons other than Cede,
distributions will be made by the Trustee to the persons in whose names such
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 or Notional Amount of not less than $1,000,000, 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 City or California are authorized or obligated by
law or executive order to be closed.
S-34
<PAGE>
Book-Entry Registration
DTC is a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and
a "clearing agency" registered pursuant to Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities for its
participating organizations ("Participants") and to facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entries, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers
(including Bear, Stearns & Co. Inc.), banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants
and Indirect Participants. In addition, Certificate Owners will receive all
distributions of principal and interest on the Book-Entry Certificates
through Participants. Under a book-entry format, Certificate Owners may
experience some delay in their receipt of payments, since such payments will
be forwarded to Cede, as nominee for DTC. DTC will forward such payments to
its Participants, which thereafter will forward them to Indirect
Participants or Certificate Owners. It is anticipated that, except as
provided below under "--Definitive Certificates," the only
"Certificateholder" with respect to the Book-Entry Certificates will be
Cede, as nominee for DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders, as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC will be required to make book-entry
transfers of Book-Entry Certificates among Participants and to receive and
transmit distributions of principal of, and interest on, Book-Entry
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Book-Entry Certificates similarly
are required to make book-entry transfers and receive and transmit such
payments on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess physical certificates, the
Rules provide a mechanism by which Participants and Certificate Owners will
receive payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the ability
of a Certificate Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or to otherwise act with
respect to such Book-Entry Certificates, may be limited due to the absence
of physical certificates for such Book-Entry Certificates.
DTC has advised BSMSI that it will take any action permitted to be taken
by a holder of Book-Entry Certificates under the Agreement only at the
direction of one or more Participants to whose accounts with DTC the Book-
Entry Certificates are credited. Additionally, DTC has advised BSMSI that
it will take such action where the consent of specified percentages of the
Book-Entry Certificates is required under the Agreement only at the
direction of and on behalf of Participants whose interests represent such
specified percentages. DTC may take conflicting actions on behalf of other
Participants.
Neither BSMSI, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on
account of beneficial ownership interests of the Book-Entry Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Definitive Certificates
Except for the Physical Certificates, the Offered Certificates will be
issued in fully registered, certificated form ("Definitive Certificates") to
Certificate Owners or their nominees, rather than to DTC or its nominee,
only if (i) BSMSI advises the Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
S-35
<PAGE>
depository with respect to the Certificates and BSMSI is unable to locate a
qualified successor within 30 days or (ii) BSMSI, at its option, elects to
terminate the book-entry system through DTC.
Upon the occurrence of either event described in clause (i) or (ii) of
the immediately preceding paragraph, the Trustee is required to notify DTC,
which in turn will notify all Certificate Owners through Participants, of
the availability of Definitive Certificates. Upon surrender by Cede, as
nominee of DTC, of the Definitive Certificates representing the Book-Entry
Certificates and receipt of instructions for reregistration, the Trustee
will reissue the Book-Entry Certificates as Definitive Certificates to
Certificate Owners. Under no circumstances will Definitive Certificates of
any Class be issued in an amount representing an interest in, as of the Cut-
off Date, less than $25,000 principal amount of the respective Class of
Book-Entry Certificate.
Physical Certificates and Definitive 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
Irvine, California. Physical Certificates and Definitive 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 Physical Certificates and Definitive 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 3
Park Plaza, Irvine, CA 92714.
Available Funds
Available funds for any Distribution Date will be determined separately
with respect to each Mortgage Loan Group ("Group I Available Funds" and
"Group II Available Funds," respectively,) and in each case will be an
amount equal to the aggregate of the following with respect to the related
Mortgage Loans: (a) all previously undistributed payments on account of
principal (including the principal portion of Monthly Payments, Principal
Prepayments and the principal amount of Liquidation Proceeds) and all
previously undistributed payments on account of interest received after the
Cut-off Date and on or prior to the related Determination Date, (b) any
Monthly Advances (including Certificate Account Advances, as defined under
"The Pooling and Servicing Agreement--Monthly Advances" herein) and
Compensating Interest Payments (as defined under "The Pooling and Servicing
Agreement--Servicing Compensation and Payment of Expenses" herein) by the
Master Servicer and (c) any amount reimbursed by the Master Servicer 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
after the applicable Prepayment Period 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;
(vi) amounts of Trustee's Fees for such Distribution Date; and
(vii) amounts permitted to be withdrawn from the Certificate Account
pursuant to clauses (i) through (xi) described under the caption "The
Pooling and Servicing Agreement--Certificate Account" herein.
"Available Funds" for any Distribution Date will equal the sum of the Group
I Available Funds and the Group II Available Funds.
S-36
<PAGE>
Distributions on the Certificates
Allocation of Available Funds. Interest and principal on the
Certificates will be distributed monthly on each Distribution Date,
commencing in October 1996, in an aggregate amount equal to the Available
Funds for such Distribution Date.
(A) On each Distribution Date on or prior to the Distribution Date on
which the Current Principal Amounts of the Subordinate Certificates are
reduced to zero (the "Cross-Over Date"), an amount equal to the Group I
Available Funds will be distributed in the following order of priority among
the Certificates:
first, to the interest-bearing Class A-I Certificates, the Residual
Certificates and Component I of the Class X Certificates, the Accrued
Certificate Interest on each such Class and the Class X Component I
Accrued Certificate Interest on such Component for such Distribution
Date;
second, to the interest-bearing Class A-I Certificates, the Residual
Certificates and Component I of the Class X Certificates, any Accrued
Certificate Interest and Class X Component I Accrued Certificate Interest
thereon remaining undistributed from previous Distribution Dates, to the
extent of remaining Group I Available Funds, any shortfall in available
amounts being allocated among such Classes and Component in proportion to
the amount of such Accrued Certificate Interest and Class X Component I
Accrued Certificate Interest remaining undistributed for each such Class
or Component for such Distribution Date;
third, to the Class A-I Certificates, the Residual Certificates and the
Class PO Certificates in reduction of the Current Principal Amounts
thereof:
(a) the Group I Senior Optimal Principal Amount (as defined herein), in
the following order of priority:
(i) concurrently to the Class A-I-10 and Class A-I-11 Certificates,
pro rata based upon their Current Principal Amounts up to the Class A-I-
10/Class A-I-11 Optimal Principal Amount (as defined herein) for such
Distribution Date, until their Current Principal Amounts have been
reduced to zero;
(ii) concurrently, to the Class R-1 and Class R-2 Certificates, pro
rata, based upon their current Principal Amounts, until the respective
Current Principal Amounts thereof have been reduced to zero;
(iii) 63.3345135529% and 36.6654864471% concurrently to the Class A-
I-1 Certificates and Class A-I-2 Certificates, until the Current
Principal Amount of the Class A-I-1 Certificates has been reduced to
zero;
(iv) 71.9706283018% and 28.0293716982% concurrently to the Class
A-I-3 Certificates and Class A-I-2 Certificates, until the Current
Principal Amount of the Class A-I-3 Certificates has been reduced to
zero;
(v) 75.3993824674% and 24.6006175326% concurrently to the Class
A-I-4 Certificates and the Class A-I-2 Certificates until the Current
Principal Amount of the Class A-I-4 Certificates has been reduced to
zero;
(vi) 83.3356910454% and 16.6643089546% concurrently to the Class
A-I-5 Certificates and the Class A-I-2 Certificates until the Current
Principal Amount of the Class A-I-5 Certificates has been reduced to
zero;
(vii) 89.4259237897% and 10.5740762103% concurrently to the Class
A-I-6 Certificates and Class A-I-2 Certificates, until the Current
Principal Amounts thereof have been reduced to zero;
(viii) sequentially to the Class A-I-7, Class A-I-8, Class A-I-9
Certificates, in that order, in each case until the Current Principal
Amount of each such Class of Certificates has been reduced to zero; and
(b) the Class PO Principal Distribution Amount (as defined herein) for
such Distribution Date, to the Class PO Certificates, until the Current
Principal Amount thereof has been reduced to zero; and
S-37
<PAGE>
fourth, the Class PO Deferred Amount for such Distribution Date to the
Class PO Certificates; provided, that (i) on any Distribution Date,
distributions pursuant to this priority (A) fourth, shall not exceed the
excess, if any, of (x) the Available Funds remaining after giving effect
to distributions pursuant to priorities (A) first through third above and
(B) first through third below over (y) the amount of Accrued Certificate
Interest for such Distribution Date and Accrued Certificate Interest
remaining undistributed from previous Distribution Dates on all Classes
of Subordinate Certificates then outstanding, (ii) such distributions
shall not reduce the Current Principal Amount of the Class PO
Certificates and (iii) no distribution will be made in respect of the
Class PO Deferred Amount after the Cross-Over Date.
The "Class A-I-10/Class A-I-11 Optimal Principal Amount" for any
Distribution Date occurring prior to the Distribution Date in October 2001
will equal zero. The Class A-I-10/Class A-I-11 Optimal Principal Amount for
any Distribution Date occurring after the first five years following the
Closing Date will be as follows: for any Distribution Date during the sixth
and seventh years after the Closing Date, 50% of the Class A-I-10/Class A-I-
11 Pro Rata Optimal Principal Amount (as defined below) for such
Distribution Date; and, for any Distribution Date thereafter, 100% of the
Class A-I-10/Class A-I-11 Pro Rata Optimal Principal Amount for such
Distribution Date. Notwithstanding the foregoing, if on any Distribution
Date the Current Principal Amount of each Class of Class A-I Certificates
(other than the Class A-I-10 and Class A-I-11 Certificates) has been reduced
to zero, the Class A-I-10/Class A-I-11 Optimal Principal Amount shall equal
the Group I Senior Optimal Principal Amount to the extent not distributed on
such Distribution Date to other Classes of Class A-I Certificates or
Residual Certificates.
For any Distribution Date, the "Class A-I-10/Class A-I-11 Pro Rata
Optimal Principal Amount" shall be an amount equal to the product of (x) the
Group I Senior Optimal Principal Amount for such Distribution Date
multiplied by (y) a fraction, the numerator of which is the sum of the
Current Principal Amounts of the Class A-I-10 and Class A-I-11 Certificates
immediately prior to such Distribution Date and the denominator of which is
the aggregate Current Principal Amounts of all Classes of Class A-I
Certificates and Residual Certificates immediately prior to such
Distribution Date.
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then Current Principal Amounts of such Classes.
If, after distributions have been made pursuant to priorities (A) first
and second above on any Distribution Date, remaining Group I Available Funds
are less than the sum of the Group I Senior Optimal Principal Amount and the
Class PO Principal Distribution Amount for such Distribution Date, such
amounts shall be proportionately reduced, and such remaining Group I
Available Funds will be distributed on the Class A-I and Residual
Certificates and Class PO Certificates in accordance with clauses (a) and
(b) of priority (A) third above on the basis of such reduced amounts.
Notwithstanding any reduction in principal distributable to the Class PO
Certificates pursuant to this paragraph, the principal balance of the Class
PO Certificates shall be reduced not only by principal so distributed but
also by the difference between (i) principal distributable to the Class PO
Certificates in accordance with clause (b) of priority (A) third above and
(ii) principal actually distributed to the Class PO Certificates after
giving effect to this paragraph (the "Class PO Cash Shortfall"). The Class
PO Cash Shortfall with respect to any Distribution Date will be added to the
Class PO Deferred Amount.
(B) On each Distribution Date on or prior to the Cross-Over Date, an
amount equal to the Group II Available Funds will be distributed in the
following order of priority among the Certificates:
first, to the Class A-II Certificates and Component II of the Class X
Certificates, the Accrued Certificate Interest on such Class and Class X
Component II Accrued Certificate Interest on such Component for such
Distribution Date;
second, to the Class A-II Certificates and Component II of the Class X
Certificates, any Accrued Certificate Interest and Class X Component II
Accrued Certificate Interest thereon remaining undistributed from
previous Distribution Dates, to the extent of the remaining Group II
Available Funds, any shortfall in available amounts being allocated
between such Class and Component in proportion to the amount of such
Accrued Certificate
S-38
<PAGE>
Interest and Class X Component II Accrued Certificate Interest remaining
undistributed for such Class or Component for such Distribution Date; and
third, the Group II Senior Optimal Principal Amount to the Class A-II
Certificates until their Current Principal Amount has been reduced to
zero.
(C) On each Distribution Date on or prior to the Cross-Over Date, an
amount equal to any remaining Group I Available Funds and Group II Available
Funds following the distributions in (A) and (B) above will be distributed
sequentially, in the following order, to the Class B-1, Class B-2, Class B-
3, Class B-4, Class B-5 and Class B-6 Certificates, in each case up to an
amount equal to and in the following order: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Class's Allocable Share (as defined herein) for such
Distribution Date.
(D) On each Distribution Date prior to the occurrence of the Cross-Over
Date but after the reduction of the Current Principal Amounts of the Class
A-I Certificates or Class A-II Certificates to zero, the remaining Class or
Classes of Class A Certificates will be entitled to receive, in addition to
any Principal Prepayments related to such Class A Certificates' respective
Mortgage Loan Group, 100% of the Principal Prepayments on the Loans in the
other Mortgage Loan Group (in the case of Mortgage Loan Group I in
accordance with the priorities set forth in priority (A) third above, and in
reduction of the Certificate Principal Balances thereof). In addition, if
on any Distribution Date on which the aggregate Current Principal Amount of
the Class A-I Certificates or Class A-II Certificates would be greater than
the aggregate Scheduled Principal Balance of the Mortgage Loans in the
related Mortgage Loan Group (other than the related PO Percentage (as
defined herein) of the Group I Discount Mortgage Loans in Mortgage Loan
Group I) and Class B Certificates are still outstanding, in each case after
giving effect to distributions to be made on such Distribution Date, 100% of
the Principal Prepayments otherwise allocable to the Class B Certificates on
the Mortgage Loans in the other Mortgage Loan Group will be distributed to
such Class or Classes of Class A Certificates (in the case of the Class A-I
Certificates, in accordance with the priorities set forth in priority (A)
third above) in reduction of the Current Principal Amounts thereof, until
the aggregate Current Principal Amount of the Class A-I Certificates or
Class A-II Certificates, as applicable, is an amount equal to the aggregate
Scheduled Principal Amount of the Mortgage Loans in the related Mortgage
Loan Group (other than the related PO Percentage of the Group I Discount
Mortgage Loans in Mortgage Loan Group I).
(E) On each Distribution Date after the Cross-Over Date, distributions
of principal on the outstanding Class A-I Certificates and Residual
Certificates will be made pro rata among all such Certificates, regardless
of the allocation, or sequential nature, of principal payments described in
priority (A) third above, based upon the then Current Principal Amounts of
such Certificates, and interest will be distributed as described above with
respect to Distribution Dates on or prior to the Cross-Over Date.
(F) On each Distribution Date, any Group I Available Funds and Group II
Available Funds remaining after payment of interest and principal as
described above will be distributed to the Class R-1 and Class R-2
Certificates; provided that if on any Distribution Date on or after the
Cross-Over Date there are any Group I Available Funds remaining after
payment of interest and principal as described in the preceding paragraphs,
such Group I Available Funds will be distributed to the Class A-II
Certificates in accordance with the priorities in paragraph (B) above until
all amounts due to such Certificates have been paid in full before any
amounts are distributed to the Residual Certificates. Similarly, if on any
Distribution Date on or after the Cross-Over Date there are any Group II
Available Funds remaining after payment of interest and principal as
described in the preceding paragraphs, such Group II Available Funds will be
distributed to the Senior Certificates (other than the Class A-II
Certificates and Component II of the Class X Certificates) in accordance
with the priorities in paragraph (E) above until all amounts due to such
Senior Certificates have been paid in full before any amounts are
distributed to the Residual Certificates. It is not anticipated that there
will be any significant amounts remaining for such distribution.
Interest. Interest will accrue during the preceding Interest Accrual
Period for each interest-bearing Class of Certificates at its Pass-Through
Rate on the Current Principal Amount or Notional Amount of such Class
immediately preceding such Distribution Date. The effective yield to the
holders of Certificates will be lower than the yield otherwise produced by
the applicable Pass-Through Rate and purchase price, because interest will
not be distributed to
S-39
<PAGE>
such Certificateholders until the 25th 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. See "Yield and
Prepayment Considerations" herein.
All interest-bearing Offered Certificates (other than the Class A-II,
Class X and Class R-2 Certificates) will bear interest at the fixed Pass-
Through Rates set forth on the cover page hereof.
The Class A-II Certificates will bear interest on their Current Principal
Amount at a variable Pass-Through Rate equal to the weighted average of the
Net Rates of the Group II Mortgage Loans. The Pass-Through Rate for the
Class A-II Certificates for the first Interest Accrual Period is expected to
be approximately 9.85% per annum.
As a result of the allocation after the Cross-Over Date of the principal
portion of Realized Losses, if any, applicable to Group II Mortgage Loans to
all Senior Certificates (other than the Class PO Certificates), pro rata,
the Current Principal Amount of the Class A-II Certificates may exceed the
outstanding balance of the Group II Mortgage Loans. Consequently, the Class
A-II Certificates may not be assured of receipt of interest on their Current
Principal Amount equal to the weighted average of the Net Rates of the Group
II Mortgage Loans. As described in paragraph (F) above under "-- Allocation
of Available Funds," certain excess payments of interest on the Group I
Mortgage Loans over the amounts needed to pay interest on the Senior
Certificates (other than the Class A-II and Class PO Certificates) and the
interest on Component I of the Class X Certificates will be available to pay
some or all of such shortfall in interest on the Class A-II Certificates.
The Class X Certificates will bear interest on their Notional Amount at a
variable Pass-Through Rate equal to the excess of (a) the weighted average
of the Net Rates of all of the Mortgage Loans over (b) the weighted average
of the Pass-Through Rates of all the Certificates (other than the Class X
Certificates). The Pass-Through Rate for the Class X Certificates for the
first Interest Accrual Period is expected to be approximately 0.68% per
annum.
In order to calculate the source of interest due on the Class X
Certificates and for REMIC purposes, the Class X Certificates are deemed to
consist of separate components (each, a "Separate Component"), certain of
which correspond to the Class A-I Certificates, the Class R-1 Certificates
and a principal amount of the Class B Certificates which derives its
distributions from the Group I Mortgage Loans (collectively, "Component I")
and one which corresponds to the principal amount of the Class B
Certificates which derives its distributions from the Group II Mortgage
Loans ("Component II").
Since interest on the Class X Certificates is based on amounts paid on
both the Group I Mortgage Loans and the Group II Mortgage Loans, the Accrued
Certificate Interest for the Class X Certificates may also be expressed as
the sum of the Class X Component I Accrued Certificate Interest and the
Class X Component II Accrued Certificate Interest (each as defined below.)
"Class X Component I Accrued Certificate Interest" for any Distribution
Date is equal to the excess of all interest accrued on the Group I Mortgage
Loans during the related Interest Accrual Period over the sum of (x) all
Accrued Certificate Interest on the Class A-I Certificates and the Residual
Certificates for such Distribution Date, (y) the portion of the Accrued
Certificate Interest on the Class B Certificates for such Distribution Date
that the Class B Group I Current Principal Amount as of such Distribution
Date bears to the aggregate Current Principal Amounts of the Class B
Certificates as of such Distribution Date, and (z) the portion of (i) any
Net Interest Shortfall and (ii) the interest portion of any Excess Losses,
and after the Cross-Over Date, (iii) the interest portion of any Realized
Losses, allocated to the Class X Certificates that the Class X Component I
Accrued Certificate Interest (determined without regard to this clause (z))
bears to the total Accrued Certificate Interest on the Class X Certificates
(determined without regard to such Net Interest Shortfall, or the interest
portion of Excess Losses or Realized Losses, as applicable). For this
purpose, the "Class B Group I Current Principal Amount" as of any
Distribution Date equals the aggregate Current Principal Amounts of the
Class B Certificates as of such Distribution Date less the Class B Group II
Current Principal Amount (as defined below) as of such Distribution Date.
The Class X Component I Accrued Certificate Interest for any Distribution
Date on or after the Cross-Over Date shall equal the Accrued Certificate
Interest on the Class X Certificates for such Distribution Date.
S-40
<PAGE>
"Class X Component II Accrued Certificate Interest" for any Distribution
Date is equal to the excess of all interest accrued on the Group II Mortgage
Loans during the related Interest Accrual Period over the sum of (x) all
Accrued Certificate Interest on the Class A-II Certificates for such
Distribution Date, (y) the portion of the Accrued Certificate Interest on
the Class B Certificates for such Distribution Date that the Class B Group
II Current Principal Amount as of such Distribution Date bears to the
aggregate Current Principal Amounts of the Class B Certificates as of such
Distribution Date, and (z) the portion of (i) any Net Interest Shortfall and
(ii) the interest portion of any Excess Losses, and after the Cross-Over
Date, (iii) the interest portion of any Realized Losses, allocated to the
Class X Certificates that the Class X Component II Accrued Certificate
Interest (determined without regard to this clause (z)) bears to the total
Accrued Certificate Interest on the Class X Certificates (determined without
regard to such Net Interest Shortfall, or the interest portion of Excess
Losses or Realized Losses, as applicable). For this purpose, the "Class B
Group II Current Principal Amount" as of any Distribution Date equals the
sum of the Scheduled Principal Balances of the Group II Mortgage Loans as of
such Distribution Date less the Current Principal Amount of the Class A-II
Certificates as of such Distribution Date. The Class X Component II Accrued
Certificate Interest for any Distribution Date on or after the Cross-Over
Date shall be zero.
The Class R-2 Certificates will bear interest on their Current Principal
Amount at a variable Pass-through Rate equal to the weighted average of the
Net Rates of the Group I Mortgage Loans. The Pass-Through Rate for the
Class R-2 Certificates for the first Interest Accrual Period is expected to
be approximately 8.84% per annum.
The "Accrued Certificate Interest" for any interest-bearing Certificate
for any Distribution Date will equal the interest accrued during the related
Interest Accrual Period at the applicable Pass-Through Rate on the Current
Principal Amount (or, in the case of a Class X Certificate, the Notional
Amount) of such Certificate immediately prior to such Distribution Date less
(i) in the case of an interest-bearing Senior Certificate, such
Certificate's share of any Net Interest Shortfall (as defined herein) and
the interest portion of any Excess Losses and, after the Cross-Over Date,
the interest portion of any Realized Losses and (ii) in the case of a
Subordinate Certificate, such Certificate's share of any Net Interest
Shortfall and the interest portion of any Realized Losses. Such shortfalls
and losses will be allocated among the Senior Certificates in proportion to
the amount of Accrued Certificate Interest that would have been allocated
thereto in the absence of such shortfalls and losses, except that after the
Cross-Over Date, the Class A-I-11 Certificates will be allocated the
interest portion of any Realized Losses (other than Excess Losses) otherwise
allocable to the Super Senior Certificates. Accrued Certificate Interest is
calculated on the basis of a 360-day year consisting of twelve 30-day
months. No Accrued Certificate Interest will be payable with respect to any
Class of Certificates after the Distribution Date on which the outstanding
principal balance (or Notional Amount) of such Certificate has been reduced
to zero.
The "Current Principal Amount" of any Certificate (other than a Class X
Certificate) as of any Distribution Date will equal such Certificate's
initial principal amount on the Closing Date as reduced by (i) all amounts
distributed on previous Distribution Dates on such Certificate on account of
principal (and the Class PO Cash Shortfall with respect to a Class PO
Certificate), (ii) the principal portion of all Realized Losses previously
allocated to such Certificate and (iii) in the case of a Subordinate
Certificate, such Certificate's share, if any, of the Subordinate
Certificate Writedown Amount and the Class PO Deferred Payment Writedown
Amount for previous Distribution Dates. With respect to any Class of
Certificates (other than the Class X Certificates), the Current Principal
Amount thereof will equal the sum of the Current Principal Amounts of all
Certificates in such Class.
As of any Distribution Date, the "Subordinate Certificate Writedown
Amount" will equal the amount by which (a) the sum of the Current Principal
Amounts of all of the Certificates (after giving effect to the distribution
of principal and the allocation of Realized Losses and the Class PO Deferred
Payment Writedown Amount in reduction of the Current Principal Amounts of
the Certificates on such Distribution Date) exceeds (b) the sum of the
Scheduled Principal Balances of the Mortgage Loans on the first day of the
month of such Distribution Date less any Deficient Valuation occurring on or
prior to the Bankruptcy Coverage Termination Date (as defined herein). For
any Distribution Date, the "Class PO Deferred Payment Writedown Amount" will
equal the amount, if any, distributed on such date in respect of the Class
PO Deferred Amount pursuant to priority (A) fourth under "--Allocation of
Available Funds" above. The Subordinate Certificate Writedown Amount and
the Class PO Deferred Payment Writedown Amount will be allocated to the
Classes of Subordinate Certificates in inverse order of their numerical
Class designations, until the Current Principal Amount of each such Class
has been reduced to zero and, from and after the Cross-Over Date, the
Subordinate
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<PAGE>
Certificate Writedown Amount will be allocated pro rata among the Classes of
Senior Certificates (other than the Class X and Class PO Certificates) based
on their then-outstanding Current Principal Amounts.
The Class X Certificates will have a Notional Amount equal to the
aggregate Scheduled Principal Balances of all of the Mortgage Loans.
With respect to any Distribution Date, the "Interest Shortfall" is equal
to the aggregate shortfall, if any, in collections of interest (adjusted to
the related Net Rates) resulting from (a) prepayments in full received from
the 15th day (or, in the case of the first Distribution Date, from the Cut-
off Date) through the last day of the month preceding such Distribution
Date, (b) partial prepayments received during the related Prepayment Period
to the extent applied prior to the Due Date in the month of the Distribution
Date 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 (the "Relief Act"). Interest 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) (a) partial
prepayments are generally not required to be accompanied by interest on the
amount of such partial prepayment and (b) partial prepayments applied prior
to the Due Date in the month of the Distribution Date will result in a
reduction of the Scheduled Principal Balance of the related Mortgage Loan
without a corresponding reduction of the Current Principal Amount of any
Certificate 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. Interest Shortfalls resulting from prepayments in full or in
part in any calendar month will be offset by the Master Servicer on the
Distribution Date in the following calendar month to the extent that such
Interest Shortfalls do not exceed the lesser of (i) the Master Servicing Fee
in connection with such Distribution Date or (ii) 1/12 of 0.125% of the
Scheduled Principal Balances of the Mortgage Loans with respect to such
Distribution Date. The amount of the Master Servicing Fee used to offset
such Interest Shortfalls is referred to herein as "Compensating Interest
Payments." Interest Shortfalls net of Compensating Interest Payments are
referred to herein as "Net Interest Shortfalls."
If on any Distribution Date the Group I Available Funds are less than the
Accrued Certificate Interest on the Class A-I and Residual Certificates and
the Class X Component I Accrued Certificate Interest on Component I of the
Class X Certificates or if the Group II Available Funds are less than the
Accrued Certificate Interest on the Class A-II Certificates and the Class X
Component II Accrued Certificate Interest on Component II of the Class X
Certificates, in each case for such Distribution Date and prior to reduction
for Net Interest Shortfall and the interest portion of Realized Losses, the
shortfall will be allocated among the holders of each such respective Class
or Component in proportion to the respective amounts of Accrued Certificate
Interest and Class X Component I Accrued Certificate Interest or Class X
Component II Accrued Certificate Interest, as applicable, that would have
been allocated thereto in the absence of such Net Interest Shortfall and/or
Realized Losses for such Distribution Date on each such Class or Component.
In addition, the amount of any interest shortfalls with respect to the
related Mortgage Loan Group that are covered by subordination will
constitute unpaid Accrued Certificate Interest or unpaid Class X Component I
Accrued Certificate Interest or unpaid Class X Component II Accrued
Certificate Interest and will be distributable to holders of the
Certificates of the related Classes or Component entitled to such amounts on
subsequent Distribution Dates, to the extent of Group I Available Funds or
Group II Available Funds, as applicable, after interest distributions as
required herein. Any such amounts so carried forward will not bear
interest. Shortfalls in interest payments will not be offset by a reduction
in the servicing compensation of the Master Servicer or otherwise, except to
the limited extent described above.
Principal. An amount equal to all amounts payable in respect of
principal of the Group I Mortgage Loans will be allocated between (i) the
Senior Certificates (other than the Class A-II, Class PO and Class X
Certificates) and the Subordinate Certificates, on the one hand, and (ii)
the Class PO Certificates, on the other, in each case based on the
applicable Non-PO Percentage and the applicable PO Percentage, respectively,
of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net Rate
less than 8.125% per annum (each such Mortgage Loan, a "Group I Discount
Mortgage Loan") will be equal to the Net Rate thereof divided by 8.125%.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net Rate
equal to or greater than 8.125% (each such Mortgage Loan, a "Non-Discount
Mortgage Loan") will be 100%. The "PO Percentage" with respect to any
Discount Mortgage Loan will be the fraction, expressed as a percentage,
equal to 8.125% minus the Net Rate thereof divided by 8.125%. The "PO
Percentage" with respect to any Non-Discount Mortgage Loan will be 0%.
S-42
<PAGE>
Distributions in reduction of the Current Principal Amount of each Class
of Senior Certificates (other than the Class A-II and Class X Certificates)
will be made on each Distribution Date pursuant to priority (A) third above,
the fourth paragraph following priority (A) fourth and paragraphs (D), (E)
and (F) above under "--Allocation of Available Funds." In accordance with
priority (A) third, the Group I Available Funds remaining after distribution
of interest on the Class A-I Certificates, the Residual Certificates and
Component I of the Class X Certificates on such Distribution Date will be
allocated to the Class A-I and the Residual Certificates, and the Class PO
Certificates in an aggregate amount not to exceed the sum of the Group I
Senior Optimal Principal Amount and the Class PO Principal Distribution
Amount for such Distribution Date.
Distributions in reduction of the Current Principal Amount of the Class
A-II Certificates will be made on each Distribution Date pursuant to
priority (B) third and paragraphs (D) and (F) under "-- Allocation of
Available Funds" above.
Distributions in reduction of the Current Principal Amounts of the
Subordinate Certificates will be made pursuant to paragraph (C) under "--
Allocation of Available Funds" above. The sum of the Group I Available
Funds and the Group II Available Funds, if any, remaining after
distributions of principal and interest on the Senior Certificates and
payments in respect of the Class PO Deferred Amount on such Distribution
Date will be allocated to the Subordinate Certificates in an amount equal to
each such Class's Allocable Share for such Distribution Date, provided that
no distribution of principal will be made on any such Class until any Class
ranking prior thereto has received distributions of interest and principal,
and such Class has received distributions of interest, on such Distribution
Date.
The amount to which the Senior Certificates (other than the Class PO and
Class X Certificates) are entitled as principal on any Distribution Date
will be determined separately for the Class A-I Certificates and the
Residual Certificates (the "Group I Senior Optimal Principal Amount") and
for the Class A-II Certificates (the "Group II Senior Optimal Principal
Amount") and in each case will be an amount equal to the sum of:
(i) the applicable Senior Percentage (as defined below) of the
applicable Non-PO Percentage of all scheduled payments of principal due
on each Mortgage Loan in the related Mortgage Loan Group on the first day
of the month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment
for previous principal prepayments and the principal portion of Debt
Service Reductions after the Bankruptcy Coverage Termination Date, but
before any adjustment to such amortization schedule by reason of any
other bankruptcy or similar proceeding or any moratorium or similar
waiver or grace period);
(ii) the applicable Senior Prepayment Percentage (as defined below) of
the applicable Non-PO Percentage of the Scheduled Principal Balance of
each Mortgage Loan in the related Mortgage Loan Group which was the
subject of a prepayment in full received by the Master Servicer during
the applicable Prepayment Period (as defined below);
(iii) the applicable Senior Prepayment Percentage of the applicable
Non-PO Percentage of all partial prepayments of principal received on
each Mortgage Loan in the related Mortgage Loan Group during the
applicable Prepayment Period;
(iv) the lesser of (a) the applicable Senior Prepayment Percentage of
the applicable Non-PO Percentage of the sum of (w) the net liquidation
proceeds allocable to principal on each Mortgage Loan in the related
Mortgage Loan Group which became a Liquidated Mortgage Loan during the
related Prepayment Period (other than Mortgage Loans described in clause
(x)) and (x) the Scheduled Principal Balance of each Mortgage Loan in the
related Mortgage Loan Group that was purchased by a private mortgage
insurer during the related Prepayment Period as an alternative to paying
a claim under the related insurance policy, and (b) the applicable Senior
Percentage of the applicable Non-PO Percentage of the sum of (w) the
Scheduled Principal Balance of each Mortgage Loan in the related Mortgage
Loan Group which became a Liquidated Mortgage Loan during the related
Prepayment Period (other than Mortgage Loans described in clause (x)) and
(x) the Scheduled Principal Balance of each Mortgage Loan in the related
Mortgage Loan Group that was purchased by a private mortgage insurer
during the related Prepayment Period as an alternative to paying a claim
under the related insurance policy less (y) in the case of clause (b),
the applicable Senior Percentage of the applicable Non-PO Percentage of
the principal
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<PAGE>
portion of Excess Losses (other than Debt Service Reductions) on each
Mortgage Loan in the related Mortgage Loan Group incurred during the
related Prepayment Period; and
(v) the applicable Senior Prepayment Percentage of the applicable Non-
PO Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was repurchased by
the Master Servicer in connection with such Distribution Date and (b) the
difference, if any, between the Scheduled Principal Balance of a Mortgage
Loan in the related Mortgage Loan Group that has been replaced by the
Master Servicer with a substitute Mortgage Loan pursuant to the Agreement
in connection with such Distribution Date and the Scheduled Principal
Balance of such substitute Mortgage Loan.
With respect to any Mortgage Loan and any Distribution Date, the
"Prepayment Period" is the period (i) from the 15th day of the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, the Cut-off Date) through the 14th day of the month of
such Distribution Date with respect to any Mortgage Loan that was the
subject of a voluntary prepayment in full or (ii) from the first day through
the last day of the month preceding the month of such Distribution Date with
respect to any other unscheduled prepayment of principal.
The "Class A-I Senior Percentage" and the "Class A-II Senior Percentage"
(each, a "Senior Percentage") will each initially equal approximately
91.75%. Each Senior Percentage will be recalculated with respect to each
Distribution Date to equal the lesser of (i) 100% and (ii) the percentage
(carried to six places rounded up) obtained by dividing the aggregate
Current Principal Amounts of all of the Class A-I Certificates and the
Residual Certificates in the case of the Class A-I Senior Percentage and the
Class A-II Certificates in the case of the Class A-II Senior Percentage
immediately preceding such Distribution Date by the aggregate Scheduled
Principal Balance of all the Mortgage Loans in the related Mortgage Loan
Group (other than the PO Percentage of the Group I Discount Mortgage Loans
in the case of Mortgage Loan Group I) immediately preceding such
Distribution Date. The initial Class A-I Senior Percentage is greater than
the initial percentage interest in Mortgage Loan Group I evidenced by the
related Classes of Class A-I Certificates and Residual Certificates in the
aggregate, because each such percentage is calculated without regard to the
PO Percentage of the Scheduled Principal Balance of each Group I Discount
Mortgage Loan.
The "Senior Prepayment Percentage" with respect to each Mortgage Loan
Group on any Distribution Date occurring during the periods set forth below
will be as follows:
<TABLE>
<CAPTION>
Period (dates inclusive) Senior Prepayment Percentage
------------------------ ----------------------------
<S> <C>
October 25, 1996 - September 25, 2001.......... 100%
October 25, 2001 - September 25, 2002.......... applicable Senior Percentage plus 70% of the Subordinate Percentage
October 25, 2002 - September 25, 2003.......... applicable Senior Percentage plus 60% of the Subordinate Percentage
October 25, 2003 - September 25, 2004.......... applicable Senior Percentage plus 40% of the Subordinate Percentage
October 25, 2004 - September 25, 2005.......... applicable Senior Percentage plus 20% of the Subordinate Percentage
October 25, 2005 and thereafter................ applicable Senior Percentage
</TABLE>
Notwithstanding the foregoing, if on any Distribution Date the
applicable Senior Percentage exceeds the applicable Senior Percentage as of
the Cut-off Date, the related Senior Prepayment Percentage for such
Distribution Date will equal 100%. Upon reduction of the Current Principal
Amounts of the Class A-I Certificates and the Residual Certificates or the
Class A-II Certificates, as applicable, to zero, the related Senior
Prepayment Percentage will equal
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<PAGE>
0%; provided that in the circumstances described in paragraph (D) above
under "--Allocation of Available Funds," prepayments resulting from Mortgage
Loans in one Mortgage Loan Group and otherwise distributable to the
Subordinate Certificates will be distributed to the Senior Certificates
related to the other Mortgage Loan Group (other than the Class PO and Class
X Certificates in the case of the Group I Mortgage Loans).
In addition, no reduction of a Senior Prepayment Percentage shall
occur on any Distribution Date (such limitation being the "Senior Prepayment
Percentage Stepdown Limitation") unless, as of the last day of the month
preceding such Distribution Date, either (a)(i)(X) the aggregate outstanding
principal balance of Mortgage Loans in both Mortgage Loan Groups delinquent
60 days or more (including for this purpose any Mortgage Loans in
foreclosure and Mortgage Loans with respect to which the related Mortgaged
Property has been acquired by the Trust), averaged over the last six months,
as a percentage of the aggregate Current Principal Amount of the Subordinate
Certificates averaged over the last six months, does not exceed 50% or (Y)
the aggregate outstanding principal balance of the Mortgage Loans in both
Mortgage Loan Groups delinquent 60 days or more averaged over the last six
months, as a percentage of the aggregate outstanding principal balance of
all Mortgage Loans averaged over the last six months, does not exceed 2% and
(ii) cumulative Realized Losses on the Mortgage Loans in both Mortgage Loan
Groups do not exceed (a) 30% of the aggregate Current Principal Amounts of
the Subordinate Certificates as of the Cut-off Date (the "Original
Subordinate Principal Balance") if such Distribution Date occurs between and
including October 2001 and September 2002, (b) 35% of the related Original
Subordinate Principal Balance if such Distribution Date occurs between and
including October 2002 and September 2003, (c) 40% of the related Original
Subordinate Principal Balance if such Distribution Date occurs between and
including October 2003 and September 2004, (d) 45% of the related Original
Subordinate Principal Balance if such Distribution Date occurs between and
including October 2004 and September 2005, and (e) 50% of the related
Original Subordinate Principal Balance if such Distribution Date occurs
during or after October 2005 or (b)(i) the outstanding principal balance of
the Mortgage Loans in both Mortgage Loan Groups delinquent 60 days or more
averaged over the last six months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last
six months, does not exceed 4% and (ii) Realized Losses on the Mortgage
Loans in both Mortgage Loan Groups to date for such Distribution Date are
less than 10% of the Original Subordinate Principal Balance.
The "Class PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of
principal due on each Group I Discount Mortgage Loan on the first day
of the month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment
for previous principal prepayments and the principal portion of Debt
Service Reductions after the Bankruptcy Coverage Termination Date, but
before any adjustment to such amortization schedule by reason of any
other bankruptcy or similar proceeding or any moratorium or similar
waiver or grace period);
(ii) the applicable PO Percentage of the Scheduled Principal Balance
of each Group I Discount Mortgage Loan which was the subject of a
prepayment in full received by the Master Servicer during the
applicable Prepayment Period;
(iii) the applicable PO Percentage of all partial prepayments of
principal on Group I Mortgage Loans received during the applicable
Prepayment Period;
(iv) the lesser of (a) the applicable PO Percentage of the sum of
(w) the net liquidation proceeds allocable to principal on each Group I
Discount Mortgage Loan which became a Liquidated Mortgage Loan during
the related Prepayment Period (other than Group I Discount Mortgage
Loans described in clause (x)) and (x) the Scheduled Principal Balance
of each Group I Discount Mortgage Loan that was purchased by a private
mortgage insurer during the related Prepayment Period as an alternative
to paying a claim under the related insurance policy, and (b) the
applicable PO Percentage of the sum of (w) the Scheduled Principal
Balance of each Group I Discount Mortgage Loan which became a
Liquidated Mortgage Loan during the related Prepayment Period (other
than Group I Discount Mortgage Loans described in clause (x)) and (x)
the Scheduled Principal Balance of each Group I Discount Mortgage Loan
that was purchased by a private
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mortgage insurer during the related Prepayment Period as an alternative
to paying a claim under the related insurance policy less (y) in the
case of clause (b), the applicable PO Percentage of the principal
portion of Excess Losses (other than Debt Service Reductions) with
respect to Group I Mortgage Loans incurred during the related
Prepayment Period; and
(v) the applicable PO Percentage of the sum of (a) the
Scheduled Principal Balance of each Group I Discount Mortgage Loan
which was repurchased by the Master Servicer in connection with such
Distribution Date and (b) the difference, if any, between the Scheduled
Principal Balance of a Group I Discount Mortgage Loan that has been
replaced by the Master Servicer with a substitute Group I Discount
Mortgage Loan pursuant to the Agreement in connection with such
Distribution Date and the Scheduled Principal Balance of such
substitute Group I Discount Mortgage Loan.
The "Subordinate Percentage" with respect to each Mortgage Loan
Group, which will initially equal approximately 8.25% with respect to each
of Mortgage Loan Group I and Mortgage Loan Group II, will be recalculated
for each Distribution Date to equal 100% minus the related Senior Percentage
for such Distribution Date. The "Subordinate Prepayment Percentage" with
respect to each Mortgage Loan Group on any Distribution Date will equal
100% minus the related Senior Prepayment Percentage, except that on any
Distribution Date after the Current Principal Amounts of the related Senior
Certificates (other than the Class PO Certificates in the case of Mortgage
Loan Group I) have each been reduced to zero, the applicable Subordinate
Prepayment Percentage will equal 100%.
The "Subordinate Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum of the following (but
in no event greater than the aggregate Current Principal Amounts of the
Subordinate Certificates immediately prior to such Distribution Date):
(i) the applicable Subordinate Percentage of the applicable Non-PO
Percentage of all scheduled payments of principal due on each Mortgage
Loan in the related Mortgage Loan Group on the first day of the month
in which the Distribution Date occurs, as specified in the amortization
schedule at the time applicable thereto (after adjustment for previous
principal prepayments and the principal portion of Debt Service
Reductions after the Bankruptcy Coverage Termination Date, but before
any adjustment to such amortization schedule by reason of any other
bankruptcy or similar proceeding or any moratorium or similar waiver or
grace period);
(ii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was the subject
of a prepayment in full received by the Master Servicer during the
applicable Prepayment Period;
(iii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received on Mortgage Loans in the Related Mortgage Loan Group during
the applicable Prepayment Period (plus, on the Distribution Date on
which the Current Principal Amounts of the related Senior Certificates
(other than the Class PO Certificates in the case of Mortgage Loan
Group I) have all been reduced to zero, 100% of any applicable Senior
Optimal Principal Amount remaining undistributed on such date);
(iv) the excess, if any, of the applicable Non-PO Percentage of the
sum of (a) the net liquidation proceeds allocable to principal received
during the related Prepayment Period in respect of each Liquidated
Mortgage Loan in the related Mortgage Loan Group (other than Mortgage
Loans described in clause (b)) and (b) the principal balance of each
Mortgage Loan in the related Mortgage Loan Group that was purchased by
a private mortgage insurer during the related Prepayment Period as an
alternative to paying a claim under the related insurance policy over
(c) the sum of the amounts distributable to the related Senior
Certificateholders pursuant to clause (iv) of each of the definitions
of Group I Senior Optimal Principal Amount, Group II Senior Optimal
Principal Amount and Class PO Principal Distribution Amount on such
Distribution Date; and
(v) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Scheduled Principal
Balance of each Mortgage Loan in the related Mortgage Loan Group which
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was repurchased by the Master Servicer in connection with such
Distribution Date and (b) the difference, if any, between the Scheduled
Principal Balance of a Mortgage Loan in the related Mortgage Loan Group
that has been replaced by the Master Servicer with a substitute
Mortgage Loan pursuant to the Agreement in connection with such
Distribution Date and the Scheduled Principal Balance of such
substitute Mortgage Loan.
The "Allocable Share" with respect to any Class of Subordinate
Certificates on any Distribution Date will generally equal such Class's pro
rata share (based on the Current Principal Amount of each Class entitled
thereto) of each of the components of the definition of the Subordinate
Optimal Principal Amount; provided, that, except as described in the second
succeeding sentence, no Class of Subordinate Certificates shall be entitled
on any Distribution Date to receive distributions pursuant to clauses (ii),
(iii) and (v) of the definition of the Subordinate Optimal Principal Amount
unless the Class Prepayment Distribution Trigger for the related Class is
satisfied for such Distribution Date. The "Class Prepayment Distribution
Trigger" for a Class of Subordinate Certificates for any Distribution Date
is satisfied if the fraction (expressed as a percentage), the numerator of
which is the aggregate Current Principal Amount of such Class and each Class
subordinate thereto, if any, and the denominator of which is the Scheduled
Principal Balances of all of the Mortgage Loans as of the Due Date in the
month next preceding such Distribution Date, equals or exceeds such
percentage calculated as of the Closing Date. If on any Distribution Date
the Current Principal Amount of any Class of Subordinate Certificates for
which the related Class Prepayment Distribution Trigger was satisfied on
such Distribution Date is reduced to zero, any amounts distributable to such
Class pursuant to clauses (ii), (iii) and (v) of the definition of
"Subordinate Optimal Principal Amount," to the extent of such Class's
remaining Allocable Share, shall be distributed to the remaining Classes of
Subordinate Certificates in reduction of their respective Current Principal
Amounts in the order of their numerical Class designations. If the Class
Prepayment Distribution Trigger is not satisfied for any Class of
Subordinate Certificates on any Distribution Date, this may have the effect
of accelerating the amortization of more senior Classes of Subordinate
Certificates. On any Distribution Date, any reduction in funds available
for distribution to the Classes of Subordinate Certificates resulting from a
distribution of the Class PO Deferred Amount will be allocated to the
Classes of Subordinate Certificates, in reduction of the Allocable Shares
thereof, in inverse order of their numerical Class designations.
"Determination Date" means the 21st day of the month of the
Distribution Date, or if such day is not a Business Day, the following
Business Day (but in no event less than two Business Days prior to the
related Distribution Date).
"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 ICI Funding and any cash deposit in connection with the substitution of a
Mortgage Loan pursuant to the provisions described under "The Pooling and
Servicing Agreement--Assignment of Mortgage Loans" and "--Representations
and Warranties" herein.
"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 Insurance Proceeds
and Repurchase Proceeds, but excluding Liquidation Proceeds received at the
time a Mortgage Loan becomes a Liquidated Mortgage Loan.
"Monthly Payment" with respect to any Mortgage Loan and any month is
the scheduled payment or payments of principal and interest due during such
month on such Mortgage Loan which either is payable by a Mortgagor in such
month under the related Mortgage Note, or in the case of any Mortgaged
Property acquired through foreclosure or deed-in-lieu of foreclosure (each
such Mortgaged Property, an "REO Property"), would otherwise have been
payable under the related Mortgage Note.
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Allocation of Losses; Subordination
A "Realized Loss" with respect to a Mortgage Loan is (i) a Bankruptcy
Loss (as defined below) or (ii) as to any Liquidated Mortgage Loan, the
unpaid principal balance thereof plus accrued and unpaid interest thereon at
the Mortgage Rate through the last day of the month of liquidation less the
Net Liquidation Proceeds with respect to such Mortgage Loan and the related
Mortgaged Property. A "Liquidated Mortgage Loan" is any defaulted Mortgage
Loan as to which the Master Servicer has determined that all amounts which
it expects to recover from or on account of such Mortgage Loan have been
recovered.
"Liquidation Proceeds" are amounts received by the 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 expenses incurred by the Master Servicer in
connection with the liquidation of such Mortgage Loan and the related
Mortgaged Property.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property at an amount less
than the then Outstanding Principal Balance of the Mortgage Loan secured by
such Mortgaged Property and could reduce the secured debt to such value. In
such case, the holder of such Mortgage Loan would become an unsecured
creditor to the extent of the difference between the Outstanding Principal
Balance of such Mortgage Loan and such reduced secured debt (such
difference, a "Deficient Valuation"). In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction of the amount of the monthly payment on
the related Mortgage Loan (a "Debt Service Reduction").
A "Bankruptcy Loss" with respect to any Mortgage Loan is a Deficient
Valuation or Debt Service Reduction.
A "Fraud Loss" is any Realized Loss attributable to fraud in the
origination of the related Mortgage Loan.
A "Special Hazard Loss" is a Realized Loss attributable to damage or
a direct physical loss suffered by a Mortgaged Property (including any
Realized Loss due to the presence or suspected presence of hazardous wastes
or substances on a Mortgaged Property) other than any such damage or loss
covered by a hazard policy or a flood insurance policy required to be
maintained in respect of such Mortgaged Property under the Agreement or any
loss due to normal wear and tear or certain other causes.
The applicable Non-PO Percentage of the principal portion of any
Realized Loss (other than Excess Losses) on a Mortgage Loan in either
Mortgage Loan Group for any Distribution Date will not be allocated to any
Senior Certificates until the Cross-Over Date. Prior to the Cross-Over Date
(and on such date under certain circumstances), the applicable Non-PO
Percentage of any such Realized Loss will be allocated among the outstanding
Classes of Subordinate Certificates, in inverse order of priority, until the
Current Principal Amount of each such Class has been reduced to zero (i.e.,
such Realized Losses will be allocated first to the Class B-6 Certificates
while such Certificates are outstanding, second to the Class B-5
Certificates, and so on). The applicable Non-PO Percentage of the principal
portion of any Excess Bankruptcy Loss (other than a Debt Service Reduction),
Excess Fraud Loss or Excess Special Hazard Loss for any Distribution Date
will be allocated pro rata among all outstanding Classes of Certificates
(other than the Class PO and Class X Certificates) based on their Current
Principal Amounts. An "Excess Bankruptcy Loss," "Excess Fraud Loss" or
"Excess Special Hazard Loss" is any Bankruptcy Loss, Fraud Loss or Special
Hazard Loss, respectively, occurring after the Bankruptcy Coverage
Termination Date, Fraud Coverage Termination Date and Special Hazard
Termination Date, respectively, as described more fully below. Commencing on
the Cross-Over Date, the applicable Non-PO Percentage of the principal
portion of any Realized Loss (other than a Debt Service Reduction) on a
Mortgage Loan will be allocated among the outstanding Classes of Senior
Certificates (other than the Class PO and Class X Certificates) pro rata
based upon their Current Principal Amounts, except that the pro rata portion
of any such Realized Loss (other than Excess Losses) otherwise borne by the
Super Senior Certificates will be borne by the Senior Support Certificates,
until the Current Principal Amount of the Senior Support Certificates has
been reduced to zero.
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Since the Subordinate Certificates will absorb Realized Losses on
Mortgage Loans in both Mortgage Loan Groups, a disproportionate amount of
Realized Losses with respect to Mortgage Loans in either Mortgage Loan Group
will adversely impact the availability of subordination to the Certificates
related to the other Mortgage Loan Group.
On each Distribution Date, the applicable PO Percentage of the
principal portion of any Realized Loss on a Group I Discount Mortgage Loan
and Class PO Cash Shortfall will be allocated to the Class PO Certificates
until the Current Principal Amount thereof is reduced to zero. With respect
to any Distribution Date through the Cross-Over Date, the aggregate of all
amounts so allocable to the Class PO Certificates on such date in respect of
Realized Losses (other than Excess Losses) and Class PO Cash Shortfall and
all amounts previously allocated in respect of such losses or Class PO Cash
Shortfall to the Class PO Certificates and not distributed on prior
Distribution Dates will be the "Class PO Deferred Amount." To the extent
Group I Available Funds are available therefor on any Distribution Date
through the Cross-Over Date, distributions in respect of the Class PO
Deferred Amount will be made on the Class PO Certificates in accordance with
priority (A) fourth under "--Allocation of Available Funds" above. Any
distribution of Group I Available Funds in respect of the Class PO Deferred
Amount will not reduce the Class PO Current Principal Amount. No interest
will accrue on the Class PO Deferred Amount. On each Distribution Date
through the Cross-Over Date, the Current Principal Amount of the lowest
ranking Class of Subordinate Certificates then outstanding having the
highest numerical Class designation will be reduced by the amount of any
distributions in respect of the Class PO Deferred Amount on such
Distribution Date, through the operation of the Class PO Deferred Payment
Writedown Amount. After the Cross-Over Date, no more distributions will be
made in respect of, and Realized Losses and Class PO Cash Shortfalls
allocated to the Class PO Certificates will not be added to, the Class PO
Deferred Amount.
No reduction of the Current Principal Amount of any Class shall be
made on any Distribution Date on account of Realized Losses to the extent
that such reduction would have the effect of reducing the aggregate Current
Principal Amount of all of the Certificates as of such Distribution Date to
an amount less than the Scheduled Principal Balances of all of the Mortgage
Loans as of the first day of the month of such Distribution Date, less any
Deficient Valuations occurring on or prior to the Bankruptcy Coverage
Termination Date (such limitation being the "Loss Allocation Limitation").
The principal portion of Debt Service Reductions will not be
allocated in reduction of the Current Principal Amount of any Certificate.
However, after the Bankruptcy Coverage Termination Date, the amounts
distributable under clause (i) of each of the definitions of Group I Senior
Optimal Principal Amount or Group II Senior Optimal Principal Amount, Class
PO Principal Distribution Amount and Subordinate Optimal Principal Amount
will be reduced by the amount of any Debt Service Reductions. Regardless of
when they occur, Debt Service Reductions may reduce the amount of Available
Funds otherwise available for distribution on a Distribution Date. As a
result of the subordination of the Subordinate Certificates in right of
distribution, any Debt Service Reductions prior to the Bankruptcy Coverage
Termination Date will be borne by the Subordinate Certificates (to the
extent then outstanding) in inverse order of priority.
All allocations of Realized Losses will be accomplished on a
Distribution Date by reducing the Current Principal Amount of the applicable
Classes by their appropriate shares of any such losses occurring during the
month preceding the month of such Distribution Date and, accordingly, will
be taken into account in determining the distributions of principal and
interest on the Certificates commencing on the following Distribution Date,
except that the aggregate amount of the principal portion of any Realized
Losses to be allocated to the Class PO Certificates on any Distribution Date
through the Cross-Over Date will also be taken into account in determining
distributions in respect of the Class PO Deferred Amount for such
Distribution Date.
The interest portion of all Realized Losses will be allocated among
the outstanding Classes of Certificates offered hereby to the extent
described under "Distributions on the Certificates--Interest" above.
Any Deficient Valuation will on each Distribution Date be allocated
solely to the outstanding Subordinate Certificates until the Bankruptcy
Coverage Termination Date. The "Bankruptcy Coverage Termination Date" is
the Distribution Date upon which the Bankruptcy Loss Amount has been reduced
to zero or a negative number (or the Cross-Over Date, if earlier). On each
Distribution Date, the "Bankruptcy Loss Amount" will equal approximately
$100,000 (approximately 0.04% of the aggregate Scheduled Principal Balances
of the Mortgage Loans as of the Cut-off
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Date), subject to reduction as described in the Agreement, minus the
aggregate amount of previous Bankruptcy Losses. The Bankruptcy Loss Amount
and the related coverage levels described above may be reduced or modified
upon written confirmation from S&P and Fitch (each as defined herein) that
such reduction or modification will not adversely affect the then current
ratings of the Senior Certificates by S&P and Fitch. Such reduction may
adversely affect the coverage provided by subordination with respect to
Bankruptcy Losses.
Any Fraud Loss will on each Distribution Date be allocated solely to
the outstanding Subordinate Certificates until the Fraud Coverage
Termination Date. The "Fraud Coverage Termination Date" is the Distribution
Date upon which the Fraud Loss Amount has been reduced to zero or a negative
number (or the Cross-Over Date, if earlier). Upon the initial issuance of
the Certificates, the "Fraud Loss Amount" will equal approximately 2.0%
(approximately $5,300,069) of the aggregate Scheduled Principal Balances of
the Mortgage Loans as of the Cut-off Date. As of any Distribution Date
prior to the first anniversary of the Cut-off Date, the Fraud Loss Amount
will equal approximately $5,300,069, minus the aggregate amount of Fraud
Losses that would have been allocated to the Subordinate Certificates in the
absence of the Loss Allocation Limitation since the Cut-off Date. As of any
Distribution Date from the first through the fifth anniversaries of the Cut-
off Date, the Fraud Loss Amount will equal (1) the lesser of (a) the Fraud
Loss Amount as of the most recent anniversary of the Cut-off Date and (b)
1.0% of the aggregate outstanding principal balance of all of the Mortgage
Loans as of the most recent anniversary of the Cut-off Date minus (2) the
Fraud Losses that would have been allocated to the Subordinate Certificates
in the absence of the Loss Allocation Limitation since the most recent
anniversary of the Cut-off Date. After the fifth anniversary of the Cut-off
Date, the Fraud Loss Amount shall be zero.
Any Special Hazard Loss will on each Distribution Date be allocated
solely to the outstanding Subordinate Certificates until the Special Hazard
Termination Date. The "Special Hazard Termination Date" is the Distribution
Date upon which the Special Hazard Loss Amount has been reduced to zero or a
negative number (or the Cross-Over Date, if earlier). Upon the initial
issuance of the Certificates, the "Special Hazard Loss Amount" will equal
approximately 1.0% (approximately $2,650,034) of the aggregate Scheduled
Principal Balances of the Mortgage Loans as of the Cut-off Date. As of any
Distribution Date, the Special Hazard Loss Amount will equal approximately
$2,650,034, minus the sum of (i) the aggregate amount of Special Hazard
Losses that would have been previously allocated to the Subordinate
Certificates in the absence of the Loss Allocation Limitation and (ii) the
Adjustment Amount. For each anniversary of the Cut-off Date, the
"Adjustment Amount" shall be equal to the amount, if any, by which the
Special Hazard Loss Amount (without giving effect to the deduction of the
Adjustment Amount for such anniversary) exceeds the lesser of (A) an amount
calculated by the Company and approved by each of S&P and Fitch, which
amount shall not be less than $500,000, and (B) the greater of (x) 1.0% (or
if greater than 1.0%, the highest percentage of Mortgage Loans by principal
balance secured by Mortgaged Properties in any California zip code) of the
outstanding principal balance of all the Mortgage Loans on the Distribution
Date immediately preceding such anniversary and (y) twice the outstanding
principal balance of the Mortgage Loan which has the largest outstanding
principal balance on the Distribution Date immediately preceding such
anniversary.
Subordination
Priority of Senior Certificates. As of the Closing Date, the
aggregate Current Principal Amounts of all classes of Subordinate
Certificates and the Other Certificates will equal approximately 8.25% and
1.50%, respectively, of the aggregate Current Principal Amounts of all
Classes of Certificates. The rights of the holders of each Class of
Subordinate Certificates to receive distributions with respect to the Group
I Mortgage Loans and Group II Mortgage Loans will be subordinated to such
rights of the holders of the related Senior Certificates and of each Class
of Subordinate Certificates having a lower numerical Class designation than
such Class, to the extent described above. The subordination of the
Subordinate Certificates to the Senior Certificates, and the further
subordination among the Subordinate Certificates, are each intended to
increase the likelihood of timely receipt by the holders of the Certificates
with higher relative payment priorities of the maximum amount to which they
are entitled on any Distribution Date and to provide such holders protection
against losses resulting from defaults on the applicable Mortgage Loans to
the extent described above.
However, in certain circumstances, the amount of available
subordination (including the limited subordination provided for Excess
Losses) may be exhausted and shortfalls in distributions on the Offered
Certificates could result.
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Holders of Senior Certificates will bear their proportionate share of
Realized Losses in excess of the total subordination amount; provided that,
on and after the Cross-Over Date, the Senior Support Certificateholders will
bear Realized Losses, other than any Excess Losses, disproportionately with
the Super Senior Certificateholders due to the credit enhancement provided
by the Senior Support Certificates. The allocation of the principal portion
of the Non-PO Percentage of any Realized Loss, and of the Class PO Deferred
Payment Writedown Amount, to the Subordinate Certificates on any
Distribution Date will decrease the protection provided to the Senior
Certificates then outstanding on future Distribution Dates by reducing the
aggregate Current Principal Amount of the Subordinate Certificates then
outstanding.
In addition, in order to extend the period during which the
Subordinate Certificates remain available as credit enhancement for the
Senior Certificates, the entire amount of any prepayment or other
unscheduled recovery of principal with respect to a Mortgage Loan will be
allocated to the applicable Senior Certificates to the extent described
herein during the first five years after the Closing Date (with such
allocation being subject to reduction thereafter as described herein). This
allocation has the effect of accelerating the amortization of the applicable
Senior Certificates while, in the absence of losses in respect of the
related Mortgage Loans, increasing the percentage interest in the principal
balance of the related Mortgage Loans evidenced by the Subordinate
Certificates.
In certain other circumstances as described in paragraph (D) under
"--Distributions on the Certificates --Allocation of Available Funds,"
Principal Prepayments otherwise distributable to the Subordinate
Certificates will in lieu thereof be distributed to Senior Certificates.
As among the Class A-I Certificates, prepayments on the Group I
Mortgage Loans generally will be allocated solely to such Classes other than
the Class A-I-10 and A-I-11 Certificates during the first five years after
the Closing Date, and then such allocation will be reduced over the next two
years after which time such Senior Certificates will share pro rata in such
allocations. Consequently, during the first seven years after the Closing
Date, prepayments will have the effect of accelerating the amortization of
such Certificates other than the Class A-I-10 and Class A-I-11 Certificates,
while increasing the percentage interest in the Mortgage Loans evidenced by
the Class A-I-10 and Class A-I-11 Certificates.
After the payment of amounts distributable in respect of the Senior
Certificates on each Distribution Date, the Subordinate Certificates will be
entitled on such date to the remaining portion, if any, of the Group I
Available Funds and Group II Available Funds in an aggregate amount equal to
the Accrued Certificate Interest on the Subordinate Certificates for such
date, any remaining undistributed Accrued Certificate Interest thereon from
previous Distribution Dates and the sum of the Allocable Shares of the
Subordinate Certificates. Amounts so distributed to Subordinate
Certificateholders will not be available to cover any delinquencies or any
Realized Losses on Mortgage Loans in respect of subsequent Distribution
Dates.
Priority Among Subordinate Certificates. On each Distribution Date,
the holders of any particular Class of Subordinate Certificates will have a
preferential right to receive the amounts due them on such Distribution Date
out of Available Funds, prior to any distribution being made on such date on
each Class of Certificates subordinated to such Class. In addition, except
as described herein, the Non-PO Percentage of the principal portion of any
Realized Loss with respect to a Mortgage Loan and any Class PO Deferred
Payment Writedown Amount will be allocated, to the extent set forth herein,
in reduction of the Current Principal Amounts of the related Classes of
Subordinate Certificates in the inverse order of their numerical Class
designation. The effect of the allocation of such Realized Losses and of
any Class PO Deferred Payment Writedown Amount to a Class of Subordinate
Certificates will be to reduce future distributions allocable to such Class
and increase the relative portion of distributions allocable to more senior
Classes of Subordinate Certificates.
In order to maintain the relative levels of subordination among the
related Classes of Subordinate Certificates, the applicable Non-PO
Percentage of prepayments and certain other unscheduled recoveries of
principal in respect of the Mortgage Loans (which generally will not be
distributable to such Certificates for at least the first five years) will
not be distributable to the holders of any Class of Subordinate Certificates
on any Distribution Date for which the related Class Prepayment Distribution
Trigger is not satisfied, except as described above. See "Description of the
Certificates--Distributions on the Certificates--Principal." If the Class
Prepayment Distribution Trigger is not satisfied
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with respect to any Class of Subordinate Certificates, the amortization of
more senior Classes of Subordinate Certificates may occur more rapidly than
would otherwise have been the case and, in the absence of losses in respect
of the Mortgage Loans, the percentage interest in the principal balance of
the Mortgage Loans evidenced by such Subordinate Certificates may increase.
As a result of the subordination of any Class of Subordinate
Certificates, such Class of Certificates will be more sensitive than more
senior Classes of Certificates to the rate of delinquencies and defaults on
the Mortgage Loans, and under certain circumstances investors in such
Certificates may not recover their initial investment.
YIELD AND PREPAYMENT CONSIDERATIONS
General
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 the
Certificates is September 25, 2027. The Assumed Final Distribution Date is
the first anniversary of the Distribution Date immediately following the
latest scheduled maturity date of any Mortgage Loan. 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 may be earlier, and could be substantially earlier,
than the Assumed Final Distribution Date. In addition, the Master Servicer
or its designee may, at its option, repurchase all the Mortgage Loans from
the Trust on or after any Distribution Date on which the aggregate unpaid
principal balance of the Mortgage Loans is less than 10% of the aggregate
Scheduled Principal Balance of the Mortgage Loans 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 lives of the Certificates
will be influenced by, among other factors, the rate at which principal is
paid on Mortgage Loans in the applicable Mortgage Loan Group. Principal
payments of such Mortgage Loans may be in the form of scheduled amortization
or prepayments including as a result of 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. In general, 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 applicable Mortgage Loan Group
increases.
The prepayment model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage
loans. A 100% Prepayment Assumption assumes a Constant Prepayment Rate
("CPR") of 4.0% per annum of the then
S-52
<PAGE>
outstanding principal balance of such mortgage loans in the first month of
the life of the mortgage loans and an additional amount of approximately
1.090909% (precisely 12/11%) per annum in each month thereafter until the
twelfth month. Beginning in the twelfth month and in each month thereafter
during the life of the mortgage loans, a 100% Prepayment Assumption assumes
a CPR of 16% per annum each month. As used in the table below, a 50%
Prepayment Assumption assumes prepayment rates equal to 50% of the
Prepayment Assumption. Correspondingly, a 150% Prepayment Assumption
assumes prepayment rates equal to 150% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate
of prepayment of any pool of mortgage loans, including the Mortgage Loans.
Pricing Assumption
The Certificates were structured assuming, among other things, a 100%
Prepayment Assumption with respect to the Certificates. The prepayment
assumptions 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 Tables
The following tables entitled "Percent of Initial Principal Amount
Outstanding" indicate the percentages of the initial principal amount (or
Notional Amount) of each Class of Offered Certificates that would be
outstanding after each of the dates shown at various constant percentages of
the Prepayment Assumption and the corresponding weighted average lives of
such Classes of Offered Certificates.
The following tables have been prepared based on the assumptions
that: (i) the Group I Mortgage Loans consist of five Mortgage Loans with
the following characteristics:
<TABLE>
<CAPTION>
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
--------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$221,413,438.56 9.15364833% 8.88864833% 360 358
$ 10,456,234.84 8.25589153% 7.99089153% 359 356
$ 12,993,923.70 9.06391198% 8.79891198% 180 178
$ 469,305.23 8.28492669% 8.01992669% 180 177
$ 423,778.20 7.87500000% 7.61000000% 347 297
</TABLE>
(ii) the Group II Mortgage Loans consist of two Mortgage Loans with the
following characteristics:
<TABLE>
<CAPTION>
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
--------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$ 18,945,519.91 10.11742116% 9.85242116% 360 358
$ 301,224.11 10.00371066% 9.73871066% 179 177
</TABLE>
(iii) the Mortgage Loans prepay at the specified constant percentages of the
Prepayment Assumption, (iv) no defaults in the payment by Mortgagors of
principal of and interest on the Mortgage Loans are experienced, (v)
scheduled payments on the Mortgage Loans are received on the first day of
each month commencing in October 1996 and are computed prior to giving
effect to prepayments received on the last day of the prior month, (vi)
prepayments are allocated as described herein without giving effect to loss
and delinquency tests, (vii) there are no Net Interest Shortfalls and
prepayments represent prepayments in full of individual Mortgage Loans and
are received on the last day of each month, commencing in September 1996,
(viii) the scheduled monthly payment for each Mortgage Loan has been
calculated based on its outstanding balance, interest rate and remaining
term to maturity such that each Mortgage Loan
S-53
<PAGE>
will amortize in amounts sufficient to repay the balance of such Mortgage
Loan by its remaining term to maturity, (ix) the initial principal or
notional amounts of the Certificates are as set forth on the cover page
hereof and under "Summary of Terms--Other Certificates," (x) interest
accrues on each Class of Certificates at the applicable interest rate or in
the amounts described herein, (xi) distributions in respect of the
Certificates are received in cash on the 25th day of each month, commencing
in October 1996, (xii) the Offered Certificates are purchased on September
30, 1996 and (xiii) the Master Servicer does not exercise the option to
repurchase the Mortgage Loans described under the caption "The Pooling and
Servicing Agreement--Termination." While it is assumed that each of the
Mortgage Loans prepays at the specified constant percentages of the
Prepayment Assumption, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual
Mortgage Loans that will be delivered to the Trustee and the characteristics
of the Mortgage Loans assumed in preparing the tables. To the extent that
the Mortgage Loans have characteristics which differ from those assumed in
preparing the tables, the Certificates may mature earlier or later than
indicated by the tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each Class of Offered Certificates (other than the
Class X Certificates) and set forth the percentages of the initial Current
Principal Amount of each such Class that would be outstanding after the
Distribution Date in September of each of the years indicated, assuming that
the Mortgage Loans prepay at the percentage of the Prepayment Assumption
indicated therein. Neither the Prepayment Assumption nor any other
prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans. Variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentage of initial Current Principal
Amount (and weighted average life) shown in the following tables. Such
variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the Prepayment
Assumption.
S-54
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-1 CERTIFICATES CLASS A-I-2 CERTIFICATES
------------------------------- -------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------- -------------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
September 1997.......... 68 53 39 24 10 85 79 72 65 59
September 1998.......... 28 0 0 0 0 67 53 43 33 25
September 1999.......... 0 0 0 0 0 51 36 24 14 7
September 2000.......... 0 0 0 0 0 40 23 11 4 0
September 2001.......... 0 0 0 0 0 30 13 4 0 0
September 2002.......... 0 0 0 0 0 22 7 1 0 0
September 2003.......... 0 0 0 0 0 16 4 0 0 0
September 2004.......... 0 0 0 0 0 12 2 0 0 0
September 2005.......... 0 0 0 0 0 9 1 0 0 0
September 2006.......... 0 0 0 0 0 6 0 0 0 0
September 2007.......... 0 0 0 0 0 5 0 0 0 0
September 2008.......... 0 0 0 0 0 3 0 0 0 0
September 2009.......... 0 0 0 0 0 2 0 0 0 0
September 2010.......... 0 0 0 0 0 1 0 0 0 0
September 2011 and
thereafter............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 1.5 1.1 0.9 0.7 0.6 4.0 2.7 2.1 1.7 1.4
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** 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.
S-55
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-3 CLASS A-I-4 CERTIFICATES
------------------------------- -------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------- -------------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
September 1997.......... 100 100 100 100 100 100 100 100 100 100
September 1998.......... 100 96 47 0 0 100 100 100 99 53
September 1999.......... 86 14 0 0 0 100 100 47 0 0
September 2000.......... 30 0 0 0 0 100 42 0 0 0
September 2001.......... 0 0 0 0 0 78 0 0 0 0
September 2002.......... 0 0 0 0 0 37 0 0 0 0
September 2003.......... 0 0 0 0 0 * 0 0 0 0
September 2004 and
thereafter............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 3.7 2.6 2.0 1.6 1.4 5.7 3.9 3.0 2.4 2.1
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** 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.
S-56
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-5 CERTIFICATES CLASS A-I-6 CERTIFICATES
------------------------------- --------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------- --------------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
------ ----- ----- ----- ----- ----- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
September 1997 ......... 100 100 100 100 100 100 100 100 100 100
September 1998.......... 100 100 100 100 100 100 100 100 100 100
September 1999 ......... 100 100 100 79 0 100 100 100 100 100
September 2000 ......... 100 100 49 0 0 100 100 100 61 0
September 2001 ......... 100 69 0 0 0 100 100 60 0 0
September 2002 ......... 100 6 0 0 0 100 100 10 0 0
September 2003 ......... 100 0 0 0 0 100 61 0 0 0
September 2004 ......... 61 0 0 0 0 100 32 0 0 0
September 2005 ......... 26 0 0 0 0 100 8 0 0 0
September 2006 ......... 0 0 0 0 0 95 0 0 0 0
September 2007 ......... 0 0 0 0 0 71 0 0 0 0
September 2008 ......... 0 0 0 0 0 50 0 0 0 0
September 2009 ......... 0 0 0 0 0 29 0 0 0 0
September 2010 ......... 0 0 0 0 0 11 0 0 0 0
September 2011 and
thereafter............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 8.4 5.3 4.0 3.2 2.7 12.1 7.5 5.3 4.2 3.5
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** 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.
S-57
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-7 CERTIFICATES CLASS A-I-8 CERTIFICATES
----------------------------- -----------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
----------------------------- -----------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
September 1997.......... 100 100 100 100 100 100 100 100 100 100
September 1998.......... 100 100 100 100 100 100 100 100 100 100
September 1999.......... 100 100 100 100 100 100 100 100 100 100
September 2000.......... 100 100 100 100 86 100 100 100 100 100
September 2001.......... 100 100 100 59 0 100 100 100 100 31
September 2002.......... 100 100 100 0 0 100 100 100 74 0
September 2003.......... 100 100 42 0 0 100 100 100 15 0
September 2004.......... 100 100 1 0 0 100 100 100 0 0
September 2005.......... 100 100 0 0 0 100 100 70 0 0
September 2006.......... 100 76 0 0 0 100 100 46 0 0
September 2007.......... 100 41 0 0 0 100 100 26 0 0
September 2008.......... 100 11 0 0 0 100 100 9 0 0
September 2009.......... 100 0 0 0 0 100 85 0 0 0
September 2010.......... 100 0 0 0 0 100 62 0 0 0
September 2011.......... 88 0 0 0 0 100 43 0 0 0
September 2012.......... 59 0 0 0 0 100 27 0 0 0
September 2013.......... 33 0 0 0 0 100 12 0 0 0
September 2014.......... 9 0 0 0 0 100 0 0 0 0
September 2015.......... 0 0 0 0 0 87 0 0 0 0
September 2016.......... 0 0 0 0 0 66 0 0 0 0
September 2017.......... 0 0 0 0 0 48 0 0 0 0
September 2018.......... 0 0 0 0 0 30 0 0 0 0
September 2019.......... 0 0 0 0 0 15 0 0 0 0
September 2020 and
thereafter............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 16.4 10.8 7.0 5.2 4.2 21.0 14.8 10.0 6.5 4.9
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** 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.
S-58
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-10 AND
CLASS A-I-9 CERTIFICATES CLASS A-I-11 CERTIFICATES
----------------------------- -----------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
----------------------------- -----------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
September 1997.......... 100 100 100 100 100 100 100 100 100 100
September 1998.......... 100 100 100 100 100 100 100 100 100 100
September 1999.......... 100 100 100 100 100 100 100 100 100 100
September 2000.......... 100 100 100 100 100 100 100 100 100 100
September 2001.......... 100 100 100 100 100 100 100 100 100 100
September 2002.......... 100 100 100 100 49 95 92 90 87 83
September 2003.......... 100 100 100 100 0 90 85 80 75 65
September 2004.......... 100 100 100 92 0 81 73 65 56 44
September 2005.......... 100 100 100 71 0 73 63 53 43 31
September 2006.......... 100 100 100 55 0 66 54 43 34 23
September 2007.......... 100 100 100 43 0 59 46 36 26 17
September 2008.......... 100 100 100 34 0 53 40 29 21 13
September 2009.......... 100 100 93 26 0 47 34 24 16 9
September 2010.......... 100 100 75 20 0 42 29 19 12 7
September 2011.......... 100 100 61 16 0 37 24 16 9 5
September 2012.......... 100 100 49 12 0 33 21 13 7 4
September 2013.......... 100 100 40 9 0 29 18 10 6 3
September 2014.......... 100 100 32 7 0 26 15 8 4 2
September 2015.......... 100 84 26 5 0 23 12 7 3 1
September 2016.......... 100 69 20 4 0 20 10 5 2 1
September 2017.......... 100 57 16 3 0 17 8 4 2 1
September 2018.......... 100 46 12 2 0 14 7 3 1 1
September 2019.......... 100 37 9 2 0 12 5 2 1 *
September 2020.......... 100 29 7 1 0 10 4 2 1 *
September 2021.......... 79 22 5 1 0 8 3 1 * *
September 2022.......... 60 16 4 1 0 6 2 1 * *
September 2023.......... 43 11 2 * 0 4 2 1 * *
September 2024.......... 27 6 1 * 0 3 1 * * *
September 2025.......... 12 3 1 * 0 1 * * * *
September 2026 and
thereafter............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 26.7 22.3 17.1 11.6 6.1 14.0 12.0 10.6 9.6 8.6
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** 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.
S-59
<PAGE>
<TABLE>
<CAPTION>
CLASS A-II CERTIFICATES CLASS PO CERTIFICATES
------------------------------- -------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------- -------------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage...... 100 100 100 100 100 100 100 100 100 100
September 1997.......... 93 90 86 83 80 93 89 86 83 79
September 1998.......... 84 77 71 64 58 84 78 71 65 60
September 1999.......... 76 67 58 49 42 77 68 59 52 45
September 2000.......... 69 57 47 37 29 70 59 49 41 34
September 2001.......... 62 49 37 28 20 63 51 41 32 25
September 2002.......... 56 42 30 21 14 57 44 34 25 19
September 2003.......... 51 36 24 16 9 52 38 28 20 14
September 2004.......... 46 31 20 12 6 47 33 23 16 11
September 2005.......... 41 26 16 9 4 42 28 19 12 8
September 2006.......... 37 23 13 7 3 38 24 15 10 6
September 2007.......... 34 20 11 6 2 34 21 13 7 4
September 2008.......... 30 17 9 4 2 30 18 10 6 3
September 2009.......... 27 15 7 3 1 27 15 8 4 2
September 2010.......... 25 13 6 3 1 24 13 7 3 2
September 2011.......... 22 11 5 2 1 21 11 5 3 1
September 2012.......... 20 9 4 2 1 19 9 4 2 1
September 2013.......... 17 8 3 1 * 16 8 4 2 1
September 2014.......... 15 7 3 1 * 14 6 3 1 *
September 2015.......... 13 6 2 1 * 12 5 2 1 *
September 2016.......... 12 5 2 1 * 11 4 2 1 *
September 2017.......... 10 4 1 * * 9 4 1 * *
September 2018.......... 9 3 1 * * 7 3 1 * *
September 2019.......... 7 2 1 * * 6 2 1 * *
September 2020.......... 6 2 1 * * 5 2 1 * *
September 2021.......... 5 1 * * * 4 1 * * *
September 2022.......... 4 1 * * * 3 1 * * *
September 2023.......... 3 1 * * * 2 1 * * *
September 2024.......... 2 * * * * 1 * * * *
September 2025.......... 1 * * * * * * * * *
September 2026 and
thereafter............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 9.3 6.7 5.1 4.0 3.3 9.2 6.9 5.4 4.4 3.7
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** 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.
S-60
<PAGE>
<TABLE>
<CAPTION>
CLASS B-1, B-2 AND B- CLASS R-1 AND R-
3 CERTIFICATES 2 CERTIFICATES
----------------------------- -------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
----------------------------- -------------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
September 1997.......... 99 99 99 99 99 0 0 0 0 0
September 1998.......... 98 98 98 98 98 0 0 0 0 0
September 1999.......... 97 97 97 97 97 0 0 0 0 0
September 2000.......... 96 96 96 96 96 0 0 0 0 0
September 2001.......... 95 95 95 95 95 0 0 0 0 0
September 2002.......... 92 90 89 88 86 0 0 0 0 0
September 2003.......... 87 85 82 79 76 0 0 0 0 0
September 2004.......... 82 77 73 68 64 0 0 0 0 0
September 2005.......... 75 68 62 56 50 0 0 0 0 0
September 2006.......... 67 59 51 44 37 0 0 0 0 0
September 2007.......... 61 51 42 34 28 0 0 0 0 0
September 2008.......... 54 43 34 27 21 0 0 0 0 0
September 2009.......... 49 37 28 21 15 0 0 0 0 0
September 2010.......... 43 32 23 16 11 0 0 0 0 0
September 2011.......... 38 27 18 12 8 0 0 0 0 0
September 2012.......... 34 23 15 10 6 0 0 0 0 0
September 2013.......... 30 19 12 7 4 0 0 0 0 0
September 2014.......... 27 16 10 6 3 0 0 0 0 0
September 2015.......... 23 14 8 4 2 0 0 0 0 0
September 2016.......... 20 11 6 3 2 0 0 0 0 0
September 2017.......... 17 9 5 2 1 0 0 0 0 0
September 2018.......... 15 8 4 2 1 0 0 0 0 0
September 2019.......... 12 6 3 1 1 0 0 0 0 0
September 2020.......... 10 5 2 1 * 0 0 0 0 0
September 2021.......... 8 4 2 1 * 0 0 0 0 0
September 2022.......... 6 3 1 * * 0 0 0 0 0
September 2023.......... 4 2 1 * * 0 0 0 0 0
September 2024.......... 3 1 * * * 0 0 0 0 0
September 2025.......... 1 * * * * 0 0 0 0 0
September 2026 and
thereafter............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 14.0 12.3 11.1 10.2 9.6 0.1 0.1 0.1 0.1 0.1
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** 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.
S-61
<PAGE>
Yield on Class PO Certificates
The Class PO Certificates will be "principal only" certificates, will
not bear interest and will be offered at a substantial discount to their
original principal amount. As indicated in the table below a low rate of
principal payments (including prepayments) will have a material negative
effect on the yield to investors in the Class PO Certificates.
The significance of the effects of prepayments on the Class PO
Certificates is illustrated in the following table entitled "Sensitivity
of the Class PO Certificates to Prepayments," which shows the pre-tax
yield (on a corporate bond equivalent basis) to the holders of such
Certificates under different constant percentages of the Prepayment
Assumption. The yields of such Certificates set forth in the following
table were calculated using the assumptions specified above under "--
Decrement Tables" and assuming that the purchase price of the Class PO
Certificates is approximately $115,090 for 100% of such Class of
Certificates and such Certificates are purchased on September 30, 1996.
It is not likely that the Group I Mortgage Loans will prepay at a
constant rate until maturity or that all of the Group I Mortgage Loans
will prepay at the same rate or that they will have the characteristics
assumed. There can be no assurance that the Group I Mortgage Loans will
prepay at any of the rates shown in the table or at any other particular
rate. The timing of changes in the rate of prepayments may affect
significantly the yield realized by a holder of a Class PO Certificate and
there can be no assurance that the pre-tax yield to an investor in the
Class PO Certificates will correspond to any of the pre-tax yields shown
herein. Each investor must make its own decision as to the appropriate
prepayment assumptions to be used in deciding whether or not to purchase a
Class PO Certificate.
Sensitivity of the Class PO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
% of Prepayment Assumption
------------------------------
<S> <C> <C> <C> <C> <C>
50% 75% 100% 125% 150%
--- ---- ---- ---- ----
Pre-Tax Yields to Maturity.... 7.9% 11.0% 14.3% 17.8% 21.5%
</TABLE>
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 PO Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price of the Class PO 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 on the Class PO Certificates and consequently
does not purport to reflect the return on any investment in the Class PO
Certificates when such reinvestment rates are considered.
Yield on Class X Certificates
The significance of the effects of prepayments on the Class X
Certificates is illustrated in the following table entitled "Sensitivity
of the Class X Certificates to Prepayments," which shows the pre-tax yield
(on a corporate bond equivalent basis) to holders of such Certificates
under different constant percentages of the Prepayment Assumption. The
yields of such Certificates set forth in the following table were
calculated using the assumptions specified above under "--Decrement
Tables" and assuming that the purchase price including accrued interest of
the Class X Certificates is approximately $6,770,249 for 100% of such
Class of Certificates and such Certificates are purchased on September 30,
1996.
As indicated in the following table, the yield to investors in the
Class X Certificates will be highly sensitive to the rate of principal
payments (including prepayments) of the Mortgage Loans
S-62
<PAGE>
(especially those with high Net Rates), which generally can be prepaid at
any time. On the basis of the assumptions described above, the yield to
maturity on the Class X Certificates would be 0% if prepayments were to
occur at a constant rate of approximately 155% of the Prepayment
Assumption. Using such assumptions, if the actual prepayment rate of the
Mortgage Loans were to exceed the foregoing rate for as little as one
month (while equaling such rate for all other months), investors in the
Class X Certificates would not recover fully their initial investments.
It is not likely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will prepay at the
same rate or that they will have the characteristics assumed. There can
be no assurance that the Mortgage Loans will prepay at any of the rates
shown in the table or at any other particular rate. The timing of changes
in the rate of prepayments may affect significantly the yield realized by
a holder of a Class X Certificate and there can be no assurance that the
pre-tax yield to an investor in the Class X Certificates will correspond
to any of the pre-tax yields shown herein. Each investor must make its
own decision as to the appropriate prepayment assumptions to be used in
deciding whether or not to purchase a Class X Certificate.
Sensitivity of the Class X
Certificates to Prepayments
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
% of Prepayment Assumption
-------------------------------
<S> <C> <C> <C> <C> <C>
50% 75% 100% 125% 200%
----- ---- ---- ---- ----
Pre-Tax Yields to Maturity.... 18.5% 14.3% 9.9% 5.5% (8.2%)
</TABLE>
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 X Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price of the Class 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 interest on the Class X Certificates and
consequently does not purport to reflect the return on any investment in
the Class 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.
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Voting Rights
Voting rights of the Trust in general will be allocated 1% to the
Class X Certificates with the balance allocated among the Classes of
Certificates based upon their respective Current Principal Amounts.
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, to be sold to the
Trustee. The Mortgage Loans will be identified in a schedule appearing as
an exhibit to the Agreement with the Group I Mortgage Loans and the Group
II Mortgage Loans separately identified. Such schedule will include
information as to the principal balance of each Mortgage Loan as of the
Cut-off Date, as well as information including, among other things, the
Mortgage Rate, the Net Rate, the Monthly Payment, the maturity date of
each Mortgage Note, 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 or
commitment or binder for title insurance; originals of all assumption and
modification agreements; 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." The Master Servicer 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 ICI Funding of
such Material Defect. ICI Funding 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 ICI Funding does not correct or cure such Material
Defect within such period and such defect materially and adversely affects
the interests of the Certificateholders in the related Mortgage Loan, ICI
Funding 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 discovers a Material Defect, the Trustee
shall notify ICI Funding of such Material Defect. ICI Funding 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 ICI Funding does not
correct or cure such Material Defect within such period and such defect
materially and adversely affects the interests of the Certificateholders
in the related Mortgage Loan, ICI Funding 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 plus accrued but unpaid interest
on the Outstanding Principal Balance at the related Mortgage Rate through
and including the last day
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of the month of repurchase reduced by (ii) any portion of the Master
Servicing Fee (as defined under "--Servicing Compensation and Payment of
Expenses" herein) or advances payable to the purchaser of the Mortgage
Loan.
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.
Representations and Warranties
In the purchase agreement pursuant to which BSMSI purchased the
Mortgage Loans, ICI Funding made certain representations and warranties to
BSMSI concerning the Mortgage Loans. BSMSI will assign to the Trustee all
of its right, title and interest in such purchase agreement insofar as it
relates to such representations and warranties, as well as the repurchase
and substitution remedies provided for breach of such representations and
warranties. The representations and warranties of ICI Funding 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 relating to a Mortgage Loan 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 (except with respect to common areas in the case of
condominiums, PUDs and de minimis PUDs) or by leasehold for a term
longer than the term of the related Mortgage, subject only to certain
permitted exceptions;
(c) as of the Cut-off Date, no payment of principal of or
interest on or in respect of any Mortgage Loan is 30 or more days
past due:
(d) 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;
(e) a lender's title insurance policy (on an ALTA or CLTA form)
or binder, or other assurance of title customary in the relevant
jurisdiction therefor, was issued on the date of the origination of
each Mortgage Loan, each such policy, binder or assurance is valid
and remains in full force and effect;
(f) the original principal amount of each Mortgage Loan is not
more than 95% of the Original Value; with the exception of one Group
I Mortgage Loan with a Cut-off Date Scheduled Principal Balance of
approximately $125,137 and one Group II Mortgage Loan with a Cut-off
Date Scheduled Principal Balance of approximately $431,059, each
Mortgage Loan with a Loan-to-Value Ratio in excess of 80% at
origination 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 outstanding
principal amount over 75% of such Original Value until the principal
balance of such Mortgage Loan is reduced below 80% of the Original
Value or, based upon a new appraisal, the principal balance of such
Mortgage Loan represents less than 80% of the new appraised value;
(g) all of the Mortgage Loans were acquired by ICI Funding.
Approximately 95.19% and 66.02% of the Group I Mortgage Loans and
Group II Mortgage Loans, respectively, (by Cut-off Date Scheduled
Principal Balance) were underwritten pursuant to, or in accordance
with the standards of, the Progressive Series I Program, 3.23% and
16.24% pursuant to, or in accordance with the standards
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of, the Progressive Series II Program and 1.58% and 17.74% pursuant
to, or in accordance with the standards of, the Progressive Series
III;
(h) at the time of origination of the Mortgage Loans, at least
93.62% of the Group I Mortgage Loans and 60.39% of the Group II
Mortgage Loans (by aggregate principal balance), respectively, will
be secured by Mortgages on properties which were owner-occupied
primary residences;
(i) the improvements on each Mortgaged Property securing such
Mortgage Loan is insured (by an insurer which is acceptable to ICI
Funding) against loss by fire and such hazards as are covered under a
standard extended coverage endorsement in the locale where the
Mortgaged Property is located, 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 but in no event in an amount less than an amount
that is required to prevent the Mortgagor from being deemed to be a
co-insurer thereunder; if the improvement on 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
under federal law; and each Mortgage obligates the Mortgagor
thereunder to maintain the insurance referred to above at the
Mortgagor's cost and expense;
(j) there is no material monetary default existing under any
Mortgage or the related Mortgage Note and 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 ICI Funding nor any of its 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
(k) no Mortgagor, at the time of origination of the applicable
Mortgage, was a debtor in any state or federal bankruptcy or
insolvency proceeding.
Upon discovery or receipt of notice by ICI Funding, BSMSI or the
Trustee of a breach of any representation or warranty relating to the
Mortgage Loans which materially and adversely affects the value of the
interests of 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 60 days from the date of discovery by ICI Funding, or the date ICI
Funding is notified by the party discovering or receiving notice of such
breach (whichever occurs earlier), ICI Funding will (i) cure such breach
in all material respects, (ii) purchase the affected Mortgage Loan at the
applicable Repurchase Price (or, if such Mortgage Loan or the related
Mortgaged Property acquired in respect thereof has been sold, pay the
excess of the Repurchase Price over the Net Liquidation Proceeds (as
defined herein)) to the Trust or (iii) if within two years of the Closing
Date, substitute a qualifying substitute Mortgage Loan in exchange for
such Mortgage Loan. The obligations of ICI Funding to cure, purchase or
substitute a qualifying substitute Mortgage Loan shall constitute the
Certificateholders' sole and exclusive remedy respecting a breach of such
representations or warranties.
Collection and Other Servicing Procedures
The Master Servicer will use its reasonable efforts to ensure that
all payments required under the terms and provisions of the Mortgage Loans
are collected, and shall follow collection procedures comparable to the
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, the Master Servicer
may in its discretion (i) waive or permit to be waived any late payment or
prepayment charge, assumption fee
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or any penalty interest in connection with the prepayment of a Mortgage
Loan and (ii) 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 the Master Servicer shall consent to the
deferment of due dates for payments due on a Mortgage Note, the Master
Servicer shall nonetheless 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 through liquidation of the Mortgaged Property,
but the obligation of the Master Servicer to advance shall apply only to
the extent that the Master Servicer believes, in good faith, that such
advances are recoverable from future payments on any Mortgage Loan.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor and the Master Servicer has knowledge thereof, the Master
Servicer will accelerate the maturity of the Mortgage Loan, to the extent
permitted by the terms of the related Mortgage Note and applicable law.
If it reasonably believes that the due-on-sale clause cannot be enforced
under applicable law, the Master Servicer may 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. The Master Servicer will retain any fee collected for
entering into an assumption agreement, as additional servicing
compensation. In regard to circumstances in which the Master Servicer may
be unable to enforce due-on-sale clauses, see "Certain Legal Aspects of
Mortgage Loans--Due-on-Sale Clauses" in the Prospectus. In connection
with any such assumption, the Mortgage Rate borne by the related Mortgage
Note may not be changed. No Mortgage Loan may be assumed unless coverage
under any existing Primary Insurance Policy continues as to that Mortgage
Loan after such assumption.
The Master Servicer, and any permitted sub-servicer, 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. The Master Servicer or such sub-
servicers 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 the Master Servicer or such sub-servicers, as described
above. In addition, the Master Servicer may permit a sub-servicer 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 the Master Servicer or any
sub-servicer 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 the
Master Servicer or the related sub-servicer or to clear and terminate the
Servicing Accounts at or at any time after the termination of the
Agreement.
For each Mortgage Loan which as of the Cut-off Date was covered by a
Primary Insurance Policy, the Master Servicer will maintain and keep, or
cause to be maintained and kept, with respect to each such 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
Loans--General" herein, at least until such excess has been eliminated.
Pursuant to applicable state law, the Master Servicer 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 80%.
Primary Insurance Policies may be replaced by substantially equivalent
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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.
The Master Servicer will require each sub-servicer to maintain errors
and omissions insurance and fidelity bonds in certain specified amounts.
Hazard Insurance
The Master Servicer will maintain and keep, or cause to be maintained
and kept, with respect to each Mortgage Loan, in full force and effect for
each Mortgaged Property a hazard insurance policy equal to at least the
lesser of the Outstanding Principal Balance of the Mortgage Loan or 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 the Master Servicer 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 normal
servicing procedures) shall be deposited in a Protected Account. Any cost
incurred 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 the Master Servicer out of related late payments by the
Mortgagor or out of Insurance Proceeds or Liquidation Proceeds or any
other amounts in the Certificate Account. The right of the Master
Servicer to reimbursement for such costs incurred will be prior to the
right of Certificateholders to receive any related Insurance Proceeds or
Liquidation Proceeds or any other amounts in the Certificate Account.
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.
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Where the property securing a Mortgage Loan is located at the time of
origination in a federally designated flood area, the Master Servicer will
cause with respect to such Mortgage Loan 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 lesser 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 1% of the applicable amount of coverage, whichever is
less.
The Master Servicer, on behalf of the Trustee and Certificateholders,
will present claims to the insurer under any applicable Primary Insurance
Policy or hazard insurance policy. As set forth above, all collections by
the Master Servicer 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 normal servicing procedures are to be
deposited in a Protected Account.
Realization Upon Defaulted Mortgage Loans; Purchases of Defaulted Mortgage
Loans
The Master Servicer will use its reasonable efforts to maximize the
receipt of principal and interest on Defaulted Mortgage Loans and
foreclose upon or otherwise comparably convert the ownership of properties
securing Defaulted Mortgage Loans as to which no satisfactory collection
arrangements can be made. The Master Servicer will service the property
acquired by the Trust through foreclosure or deed-in-lieu of foreclosure
and use its reasonable efforts to maximize the receipt of principal and
interest on Defaulted Mortgage Loans; provided, however, that the Master
Servicer will not be required to expend its 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 the Master Servicer, 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.
Notwithstanding the foregoing, under the Agreement, the Master
Servicer will have the option (but not the obligation) to purchase any
Mortgage Loan as to which the Mortgagor has failed to make unexcused
payment in full of three or more scheduled payments of principal and
interest (a "Defaulted Mortgage Loan"). Any such purchase will be for a
price equal to the Repurchase Price of such Mortgage Loan. The purchase
price for any Defaulted Mortgage Loan will be deposited in the Certificate
Account on the Business Day prior to the Distribution Date on which the
proceeds of such purchase are to be distributed to the Certificateholders.
Certain Rights Related to Foreclosure
The Agreement may permit the Master Servicer, at its option, to grant
certain rights in connection with the foreclosure of Defaulted Mortgage
Loans to holders of the Class B-6 Certificates which are unaffiliated with
ICI Funding Inc. Such rights, if granted, would be granted after the date
of initial issuance of the Certificates and may or may not inure to the
benefit of successive holders of the Class B-6 Certificates. These rights
would include, among other things, the right to receive notice from the
Master Servicer that foreclosure of a Defaulted Mortgage Loan is imminent
and the right to request that the Master Servicer, but only with the
consent of the Master Servicer, delay the commencement of foreclosure
proceedings for up to six months after the Mortgage Loan has become
delinquent. It would be a condition to the exercise of this latter right
that a reserve fund for the benefit of holders of the other applicable
Classes of Certificates and the Master
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Servicer be established. An amount equal to 125% of the greater of the
Scheduled Principal Balance of the Defaulted Mortgage Loan and the current
appraised value of the underlying Mortgaged Property, together with
interest at the applicable Mortgage Rate for the period that foreclosure
is delayed, would be deposited into such reserve fund. The principal
purpose of the reserve fund would be to protect holders of the other
applicable Classes of Certificates from any diminution in value of the
underlying Mortgaged Property attributable to the delay in foreclosure.
Amounts on deposit in the reserve fund may be invested in certain
specified investments acceptable to the Rating Agencies.
The exercise by holders of the Class B-6 Certificates of the right to
delay foreclosure would not alter the obligation of the Master Servicer to
make advances as described under "Monthly Advances" below. Monthly
Advances made by the Master Servicer after the date foreclosure is delayed
would be recoverable from amounts on deposit in the reserve fund.
Any exercise by the holders of the Class B-6 Certificates of any
right to delay commencement of foreclosure proceedings as described above,
if granted, could affect the amount recovered upon the liquidation of the
related Mortgaged Property and could also affect the extent of any losses
recognized thereon if the amounts available in the reserve fund are not
sufficient to make up the difference between the net liquidation proceeds
and the unpaid principal balance of the related Defaulted Mortgage Loan.
There can be no assurance that this situation would not arise under
circumstances in which it could be in the interest of more senior Classes
of Certificates to proceed promptly to pursue remedies against the
Mortgagor and Mortgaged Property in order to expedite recovery on a
Defaulted Mortgaged Loan. Any right to request the delay of commencement
of foreclosure proceedings granted to the holders of the Class B-6
Certificates would terminate in certain specified circumstances, including
when the Current Principal Amount of such Class had reduced to zero.
Servicing Compensation and Payment of Expenses
The Master Servicer shall be entitled to receive the Master Servicing
Fee (as defined below) from full payments of accrued interest on each
Mortgage Loan as compensation for its activities under the Agreement.
However, Interest Shortfalls resulting from prepayments in full or in part
in any calendar month will be offset by the Master Servicer on the
Distribution Date in the following calendar month to the extent such
Interest Shortfalls do not exceed the lesser of (i) the Master Servicing
Fee in connection with such Distribution Date or (ii) 1/12 of 0.125% of
the Scheduled Principal Balances of the Mortgage Loans for such
Distribution Date (the amount of the Master Servicing Fee used to offset
Interest Shortfalls is referred to herein as "Compensating Interest
Payments"). To the extent insufficient to cover all such Interest
Shortfall, Compensating Interest Payments will be allocated between
Mortgage Loan Group I and Mortgage Loan Group II pro rata based on the
amount of such Interest Shortfalls experienced by the Group I Mortgage
Loans and the Group II Mortgage Loans, respectively. The remaining amount
of Interest Shortfalls after applying Compensating Interest Payments is
referred to herein as "Net Interest Shortfalls."
In addition to the primary compensation described above, the Master
Servicer will retain all prepayment charges, if any, assumption fees, tax
service fees, fees for statement of account payoff and late payment
charges, all to the extent collected from Mortgagors. The Master Servicer
will also be entitled to retain, as additional servicing compensation, (a)
amounts in respect of interest paid by borrowers in connection with any
principal prepayment in full received by the Master Servicer from the
first day through the 14th day of each month other than the month of the
Cut-off Date, (b) any income earned on the Certificate Account and certain
other accounts and (c) any Excess Liquidation Proceeds (i.e., the amount,
if any, by which Liquidation Proceeds with respect to a Liquidated
Mortgage Loan exceeds 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, 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.
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The Master Servicer or any sub-servicer will pay all expenses
incurred in connection with its servicing responsibilities (subject to
limited reimbursement as described herein). On each Distribution Date,
the Trustee will pay itself the respective fees and reimbursable expenses
to which it is entitled 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 "Master Servicing Fee" in respect of each Mortgage Loan will be
0.25% per annum of the Outstanding Principal Balance of such Mortgage
Loan. The Master Servicing Fee consists of (a) servicing compensation
payable to the Master Servicer in respect of its master servicing
activities and (b) sub-servicing and other related compensation payable to
the Sub-Servicer.
Protected Account
The Master Servicer and each permitted sub-servicer will establish
and maintain an account (each, a "Protected Account") into which it will
deposit daily 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 Master Servicer'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. 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 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 Servicer 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 Master Servicer which were due on the related Due
Date, net of servicing fees due the Master Servicer;
(ii) Full principal prepayments and any Liquidation Proceeds
received by the Master Servicer 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 the Master
Servicer; and
(iii) Partial prepayments of principal received by the Master
Servicer 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 two separate subaccounts, one each for all funds with
respect to each Mortgage Loan Group. The Trustee will deposit in the
appropriate subaccount of the Certificate Account, as received, the
following amounts:
(i) Any amounts withdrawn from a Protected Account or other
permitted account;
(ii) Any Monthly Advance and Compensating Interest Payments;
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(iii) Any Insurance Proceeds or Liquidation Proceeds received by
the 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; and
(vi) Any other amounts received by the Master Servicer or the
Trustee and required to be deposited in the Certificate Account
pursuant to the Agreement.
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 the 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 in general (i) fully
insured by the FDIC to the maximum coverage provided thereby or (ii) at
the written direction of the Master Servicer invested, in the name of the
Trustee, in such Permitted Investments as the Master Servicer may direct
or deposited in demand deposits with such depository institutions as
designated by the 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 Master Servicer,
make or cause to be made such withdrawals or transfers from the
appropriate subaccount of the Certificate Account as the Master Servicer
has designated for such transfer or withdrawal for the following purposes:
(i) to reimburse the Master Servicer or a Sub-Servicer for any
Monthly Advance of its own funds or any advance of such Sub-
Servicer's own funds, the right of the Master Servicer or a Sub-
Servicer to reimbursement pursuant to this subclause (i) being
limited to amounts received on a particular Mortgage Loan (including,
for this purpose, the Repurchase Proceeds, 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;
(ii) to reimburse the Master Servicer or a Sub-Servicer from
Insurance Proceeds or Liquidation Proceeds relating to a particular
Mortgage Loan for amounts expended by the Master Servicer or a Sub-
Servicer 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 such Mortgage Loan;
(iii) to reimburse the Master Servicer or a Sub-Servicer 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 the Master Servicer or a Sub-Servicer
from Liquidation Proceeds from a particular Mortgage Loan for
liquidation expenses incurred with respect to such Mortgage Loan;
(iv) to pay the Master Servicer or a Sub-Servicer to the extent
permitted by the Agreement from Liquidation Proceeds or Insurance
Proceeds received in connection with the liquidation of a Mortgage
Loan, the amount which the Master Servicer or a Sub-Servicer would
have been entitled to receive under subclause (ix) 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;
(v) to pay the Master Servicer or a Sub-Servicer to the extent
permitted by the Agreement from the Repurchase Price for any Mortgage
Loan, the amount which the Master Servicer or a Sub-Servicer would
have been entitled to receive under subclause (ix) below as servicing
compensation;
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(vi) to reimburse the Master Servicer or a Sub-Servicer 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 Loan (including, for this
purpose, the Repurchase Proceeds, Insurance Proceeds and Liquidation
Proceeds) which represent late recoveries of the payments for which
such advances were made;
(vii) to pay the Master Servicer or a Sub-Servicer 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;
(viii) to reimburse the Master Servicer or a Sub-Servicer for
any Monthly Advance or advance, if a Realized Loss is to be allocated
with respect to the related Mortgage Loan on the related Distribution
Date, if the advance has not been reimbursed pursuant to clauses (i)
and (vi);
(ix) to pay the Master Servicer and a Sub-Servicer servicing
compensation as set forth above;
(x) to reimburse the Master Servicer for expenses, costs and
liabilities incurred by and reimbursable to it pursuant to the
Agreement, which, if not specifically allocable to a Mortgage Loan
Group, shall be allocated to each subaccount, pro rata, based on the
Schedule Principal Balances of the Group I Mortgage Loans and the
Group II Mortgage Loans;
(xi) to pay to the Master Servicer, as additional servicing
compensation, any Excess Liquidation Proceeds;
(xii) to clear and terminate the Certificate Account; and
(xiii) to remove amounts deposited in error.
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
(ii) Second, the amount distributable to the Certificateholders
shall be paid in accordance with the provisions set forth under
"Description of the Certificates--Distributions on the Certificates."
Certain Matters Regarding the Master Servicer
The Agreement will provide that the Master Servicer may not 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 the Master Servicer to
the extent required under the Agreement. The Master Servicer, however,
has the right, with the written consent of the Insurer (which consent will
not be unreasonably withheld), to assign, sell or transfer its rights and
delegate its duties and obligations under the Agreement; provided that the
rating of the Certificates in effect immediately prior to such assignment,
sale, transfer or delegation is not qualified, downgraded or withdrawn as
a result of such assignment, sale, transfer or delegation and the
purchaser or transferee accepting such assignment, sale, transfer or
delegation (i) is qualified to service mortgage loans for FNMA or FHLMC,
(ii) is reasonably satisfactory to the Trustee, (iii) has a net worth of
not less than $10,000,000 and (iv) executes and delivers to the Trustee an
agreement, in form and substance reasonably satisfactory to the Trustee,
which contains an assumption by such purchaser or transferee of the due
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and punctual performance and observance of each covenant and condition to
be performed or observed by the Master Servicer under the Agreement from
and after the date of such agreement.
The Agreement will further provide that neither the Master Servicer
nor any of its directors, officers, employees and agents shall be under
any liability to the Trustee, the Trust 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 Servicer 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 or
by reason of reckless disregard of obligations and duties thereunder. The
Agreement will further provide that the Master Servicer and its 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 gross 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 Servicer is 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 Servicer may, however, in its discretion undertake any such action
which it 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 Trust and the Master Servicer will
be entitled to be reimbursed therefor from the Certificate Account. Any
such indemnification or reimbursement to the Trustee which is not
specifically related to a Mortgage Loan Group shall be charged against the
subaccounts of the Certificate Account pro rata based upon the respective
outstanding principal amounts of the Group I Mortgage Loans and the Group
II Mortgage Loans.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer is a party, or any corporation
succeeding to the business of the Master Servicer will be the successor of
the Master Servicer under the Agreement, provided that any such successor
to the Master Servicer shall be qualified to service Mortgage Loans on
behalf of FNMA or FHLMC.
Events of Default
"Events of Default" under the Agreement consist of (i) failure by the
Master Servicer to cause to be deposited in the Certificate Account
amounts required to be deposited by the Master Servicer pursuant to the
Agreement, and such failure continues unremedied for two Business Days,
(ii) failure by the Master Servicer to observe or perform in any material
respect any other material covenants and agreements set forth in the
Certificates or the Agreement to be performed by it, and such failure
continues unremedied for 60 days after the date on which written notice of
such failure has been given to the Master Servicer by the Trustee or to
the Master Servicer and the Trustee by the holders of Certificates
aggregating ownership of not less than 25% of the Trust, (iii) the entry
against the 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 unstayed and in effect for a
period of 60 consecutive days, or the commencement of an involuntary case
against the Master Servicer under any applicable insolvency or
reorganization statute which case is not dismissed within 60 days, (iv)
consent by the 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 the Master Servicer or substantially all of its property,
admission by the 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
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obligations or (v) assignment or delegation by the Master Servicer of its
duties or rights under the Agreement in contravention of the provisions
permitting such assignment or delegation under the Agreement.
In each and every such case, so long as such Event of Default with
respect to the Master Servicer shall not have been remedied, the Trustee
or the holders of Certificates aggregating ownership of not less than 51%
of the Trust may in each case by notice in writing to the Master Servicer
(and to the Trustee if given by such Certificateholders), with a copy to
the Rating Agencies, terminate all of the rights and obligations (but not
the liabilities) of the Master Servicer under the Agreement and in and to
the Mortgage Loans serviced by the Master Servicer and the proceeds
thereof. Upon the receipt by the Master Servicer of such written notice,
all authority and power of the 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 the Master Servicer of a notice of termination or
an opinion of counsel to the effect that the 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 the 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 the 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 the
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 the Master Servicer would have been entitled to retain if the Master
Servicer had continued to act as such, except for those amounts due the
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 having
a net worth of not less than $10,000,000, as the successor to the Master
Servicer under the Agreement in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer under the
Agreement. Pending appointment of a successor to the Master Servicer
under the Agreement, the Trustee shall act in such capacity as provided
under the Agreement. 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 scheduled payment on a Mortgage Loan which was due on the Due
Date in the month of a Distribution Date and is delinquent other than as a
result of application of the Relief Act exceeds the amount deposited in
the appropriate subaccount of the Certificate Account which will be used
for a Certificate Account Advance (as defined below) with respect to such
Mortgage Loan, the Master Servicer will deposit in the appropriate
subaccount of the Certificate Account not later than the fourth Business
Day immediately preceding the Distribution Date an amount equal to such
deficiency net of the related Master Servicing Fee except to the extent
the Master Servicer determines any such advance to be nonrecoverable from
Liquidation Proceeds, Insurance Proceeds or from future payments on the
Mortgage Loan for which such advance was made. Subject to the foregoing,
such advances will be made through liquidation of the related Mortgaged
Property. Any amount used as a Certificate Account Advance shall be
replaced by the Master Servicer by deposit in the appropriate subaccount
of the Certificate Account on or before any future date to the extent that
funds in the appropriate subaccount of the Certificate Account on such
date are less than the amount required to be transferred to the
appropriate subaccount of the Certificate Account. If applicable, on the
fifth Business Day preceding each Distribution Date, the Master Servicer
shall present an Officer's Certificate to the Trustee (i)
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stating that the Master Servicer elects not to make a Monthly Advance in a
stated amount and (ii) detailing the reason it deems the advance to be
nonrecoverable.
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 or
Notional 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 Servicer 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 foreclosure
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 any Distribution Date on which the aggregate unpaid principal
balance of the Mortgage Loans is less than 10% of the aggregate Scheduled
Principal Balance as of the Cut-off Date, the Master Servicer or its
designee may repurchase from the Trust all Mortgage Loans remaining
outstanding at a purchase price equal to (a) 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 Master Servicer's determination, based upon
an opinion of counsel, that the REMIC status of REMIC I or REMIC II has
been lost or that a substantial risk exists that such status will be lost
for the then current taxable year. Upon termination, the holders of
Certificates (other than the Class X Certificates) will receive the
Current Principal Amount of their Certificates, if any, and accrued but
unpaid interest and the holders of the Class X Certificates will receive
accrued but unpaid interest on their Certificates.
The Trustee
The Trustee may resign at any time, in which event the Master
Servicer will be obligated to appoint a successor Trustee. The Trustee
also may be removed at any time by the Master Servicer, 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. The
Trustee may also be removed at any time by the holders of Certificates
evidencing ownership of not less than 51% 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 Servicer
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.
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FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Mortgage Loans, the Certificate
Account and certain assets owned by the Trust as a REMIC ("REMIC II") for
federal income tax purposes. REMIC II will issue "regular interests" and
one "residual interest." An election will be made to treat the "regular
interests" in REMIC II and certain other assets owned by the Trust as a
REMIC ("REMIC I"). The Certificates (other than the Class R-1, Class R-2
and Class X Certificates), as well as the Separate Components of the Class
X Certificates, will be designated as regular interests in REMIC I. The
Certificates (other than the Class R-1 and Class R-2 Certificates) and,
where the context so requires, the Separate Components of the Class X
Certificates (in lieu of the Class X Certificates) are herein referred to
as "Regular Certificates" or "REMIC Regular Certificates". The Class R-2
Certificates will be designated as the residual interest in REMIC II and
the Class R-1 Certificates will be designated as the residual interest in
REMIC I (collectively, the "Residual Certificates" or the "REMIC Residual
Certificates"). All Certificateholders are advised to see "Certain
Federal Income Tax Consequences" in the Prospectus for a discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of the REMIC Regular Certificates and the REMIC Residual
Certificates.
Because the REMIC Regular Certificates will be considered REMIC
regular interests, they generally will be taxable as debt obligations
under the Internal Revenue Code of 1986, as amended (the "Code"), and
interest paid or accrued on the Regular Certificates, including original
issue discount with respect to any Regular Certificates issued with
original issue discount, will be taxable to Certificateholders in
accordance with the accrual method of accounting. The Class PO
Certificates and each of the Separate Components comprising the Class X
Certificates will be treated as issued with original issue discount. Some
or all of the other Classes of Regular Certificates may also be subject to
the 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. All purchasers
of REMIC Regular Certificates are urged to consult their tax advisors for
advice regarding the effect, if any, of the OID Regulations on the
purchase of the Regular Certificates. The prepayment assumption that will
be used in determining the rate of accrual of original issue discount with
respect to the Certificates is 100% of the Prepayment Assumption. The
Prepayment Assumption represents a rate of payment of unscheduled
principal on a pool of mortgage loans, expressed as an annualized
percentage of the outstanding principal balance of such mortgage loans at
the beginning of each period. However, no representation is made as to
the rate at which prepayments actually will occur. In addition, other
Classes of Regular Certificates may be treated as having been issued at a
premium. See "Certain Federal Income Tax Consequences--REMIC Regular
Certificates--Premium" in the Prospectus.
For federal income tax purposes, the Class X Certificates will be
considered to consist of fourteen separate interest-bearing components
(the "Separate Components"). Eleven of the Separate Components will have
notional amounts equal to the principal balances of the respective Class
A-I Certificates and will each bear interest at a variable Pass-Through
Rate equal to the excess of (a) the rate computed by dividing (i) the sum
of the amounts computed for each Group I Mortgage Loan determined by
multiplying the principal balance of each Group I Mortgage Loan by the Net
Rate of the Group I Mortgage Loan, by (ii) the sum of the amounts computed
for each Group I Mortgage Loan by multiplying the Non-PO Percentage with
respect to each Group I Mortgage Loan by the principal balance of the
Group I Mortgage Loan over (b) 8.125% (the "Group I Rate"). The twelfth
Separate Component will have a notional amount equal to the sum of the
principal balances of the Group I Mortgage Loans less the sum of the
principal balances of the Class A-I, Class PO, Class R-1, and Class R-2
Certificates and will bear interest at a variable Pass-Through Rate equal
to the Group I Rate. The thirteenth Separate Component will have a
notional amount equal to the sum of the principal balances of the Group II
Mortgage Loans less the principal balance of the Class A-II Certificates
and will bear interest at a variable Pass-Through Rate equal to the
weighted average of the Net Rates of the Group II Mortgage Loans. The
fourteenth Separate Component will have a notional amount equal to the
principal balance of the Class R-1 Certificates and will bear interest at
a variable Pass-Through Rate equal to the Group I Rate.
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The Residual Certificates generally will not be treated as evidences
of indebtedness for federal income tax purposes. Instead, the Residual
Certificates will be considered as residual interests in a REMIC,
representing rights to the taxable income or net loss of REMIC I (in the
case of the Class R-1 Certificates) or REMIC II (in the case of the Class
R-2 Certificates). Holders of the Residual 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 holders of Residual
Certificates previously may have received full payment of any stated
interest and principal. The taxable income of holders of the Residual
Certificates attributable to the Residual Certificates may exceed any
principal and interest payments received by such Certificateholders during
the corresponding period, which would result in a negligible (or even
negative) after-tax return, in certain circumstances.
The Offered Certificates (excluding the Class X Certificates and
including the Residual Certificates) as well as each of the Separate
Components comprising the Class X 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 such
Certificates and the Separate Components of the Class X Certificates will
be considered "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.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA
should consider the ERISA fiduciary investment standards before
authorizing an investment by a plan in the Certificates. In addition,
fiduciaries of employee benefit plans subject to Title I of ERISA, as well
as certain plans or other retirement arrangements not subject to ERISA,
but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor, or
partners), or any entity whose underlying assets include plan assets by
reason of a plan or account investing in such entity, including an
insurance company general account (collectively, "Plan(s)"), should
consult with their legal counsel to determine whether an investment in the
Certificates will cause the assets of the Trust ("Trust Assets") to be
considered plan assets pursuant to the plan asset regulations set forth at
29 C.F.R. (S) 10.3-101 (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 Servicer to the fiduciary investments
standards of ERISA, or cause the excise tax provisions of Section 4975 of
the Code to apply to the Trust Assets, unless an exemption granted by the
Department of Labor applies to the purchase, sale, transfer or holding of
the Certificates. In particular, investors that are insurance companies
should consult with their legal counsel with respect to the United States
Supreme Court case, John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank, 114 S.Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general
account may be deemed to be plan assets under certain circumstances.
Investors should analyze whether that decision or recent federal
legislation enacted affecting insurance company general accounts (see
Section 1460 of the Small Job Protection Act of 1996) may have an impact
with respect to purchases of Certificates.
Prohibited Transaction Exemption 90-30 ("PTE 90-30") and Prohibited
Transaction Exemption 90-24 ("PTE 90-24" and collectively with PTE 90-30,
the "Exemptions") will generally be met with respect to the Senior
Certificates (other than the Class A-I-11, Class PO and Class X
Certificates), except for those conditions which are dependent on facts
unknown to BSMSI or which it cannot control, such as those relating to the
circumstances of the Plan purchaser or the Plan fiduciary making the
decision to purchase such Class of Senior Certificates. However, before
purchasing a Senior Certificate (other than a Class A-I-11, Class PO or
Class X Certificate), a fiduciary of a Plan should make its own
determination as to the availability of exemptive relief provided by the
Exemptions or the availability of any other prohibited transaction
exemptions, and whether the conditions of any such exemption will be
applicable to such Senior Certificates. See "ERISA Considerations" in the
Prospectus.
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The Exemptions do not apply to the Class A-I-11 or Class B
Certificates because the rights and interests evidenced by such Class A-I-
11 and Class B Certificates are subordinated to the rights and interests
evidenced by other Classes of Certificates issued by the Trust.
The Exemptions do not apply to the Class PO and Class X Certificates
because neither of the Underwriters nor any of their affiliates is either
underwriting or acting as a selling or placement agent with respect to the
Class PO or Class X Certificates. However, if the Class PO or Class X
Certificates were to be made available for purchase in the secondary
market through an underwriting or sale or placement by an entity
(including either of the Underwriters) which has been granted an
underwriters' prohibited transaction exemption similar to the Exemptions,
such Class PO or Class X Certificates, as applicable would be eligible for
purchase by Plans, subject to the same considerations set forth herein
with respect to the other Classes of Senior Certificates.
The Class A-I-11, Class PO, Class X and Class B Certificates may be
acquired for or on behalf of a purchaser which is acquiring such
Certificates directly or indirectly for or on behalf of a Plan, provided
that the proposed transferee provides a Benefit Plan Opinion to the
Trustee. A "Benefit Plan Opinion" is an opinion of counsel satisfactory
to the Trustee (and upon which the Trustee and the Master Servicer are
authorized to rely) to the effect that neither the proposed transfer
and/or holding of a Certificate nor the servicing, management and
operation of the Trust (i) will result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code which will not be covered
under an individual or class prohibited transaction exemption including
but not limited to Department of Labor Prohibited Transaction Exemption
("PTE") 84-14 (Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers); PTE 91-38 (Class
Exemption for Certain Transactions Involving Bank Collective Investment
Funds); PTE 90-1 (Class Exemption for Certain Transactions Involving
Insurance Company Pooled Separate Accounts), PTE 95-60 (Class Exemption
for Certain Transactions Involving Insurance Company General Accounts),
and PTCE 96-23 (Class Exemption for Plan Asset Transactions Determined by
In-House Asset Managers) or (ii) will give rise to any additional
fiduciary duties under ERISA on the part of the Master Servicer or the
Trustee. A Benefit Plan Opinion shall not be an expense of the Trustee or
the Master Servicer.
In the event that the Class PO or Class X Certificates are made
available for purchase in the secondary market through an underwriting or
sale or placement by an entity (including either of the Underwriters)
which has been granted an underwriter's prohibited transaction exemption
similar to Prohibited Transaction Exemption 90-30 and Prohibited
Transaction Exemption 90-24, no Benefit Plan Opinion shall be required for
the Class PO or Class X Certificates, as applicable, to be acquired by, or
transferred to, an entity which is acquiring such Certificates directly or
indirectly for or on behalf of, a Benefit Plan Investor.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of the Senior Certificates. Assets of a Plan should not be
invested in the Senior Certificates unless it is clear that the Exemptions
or any other prohibited transaction exemption will apply and exempt all
potential prohibited transactions.
A governmental plan as defined in Section 3(32) of ERISA is not
subject to ERISA, or Code Section 4975. However, such governmental plan
may be subject to Federal, state and local law, which is, to a material
extent, similar to the provisions of ERISA or a Code Section 4975
("Similar Law"). A fiduciary of a governmental plan should make its own
determination as to the propriety of such investment under applicable
fiduciary or other investment standards, and the need for and the
availability of any exemptive relief under any Similar Law.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will
constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as they are
rated in one of the two highest rating categories by at least one
nationally recognized statistical rating
S-79
<PAGE>
organization, 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 enacted legislation overriding the legal investment
provisions of SMMEA. The remaining Classes of Certificates will not
constitute "mortgage related securities" under SMMEA (the "Non-SMMEA
Certificates"). The appropriate characterization of the Non-SMMEA
Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase Non-SMMEA
Certificates, may be subject to significant interpretive uncertainties.
All investors 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.
RESTRICTIONS ON PURCHASE AND TRANSFER OF THE RESIDUAL CERTIFICATES
The Residual Certificates are not offered for sale to any investor
that is a "disqualified organization" as described in "Certain Federal
Income Tax Consequences--Transfers of REMIC Residual Certificates--Tax on
Disposition of REMIC Residual Certificates" and "--Restrictions on
Transfer; Holding by Pass-Through Entities" in the Prospectus.
Residual Certificates (or interests therein) may not be transferred
without the prior express written consent of Bankers Trust Company of
California, N.A., acting as "Tax Matters Person" as defined in the Code.
The Tax Matters Person will not give its consent to any proposed transfer
to a disqualified organization. As a prerequisite to such consent to any
other transfer, the proposed transferee must provide the Tax Matters
Person and the Trustee with an affidavit that the proposed transferee is
not a disqualified organization (and, unless the Tax Matters Person
consents to the transfer to a person who is not a U.S. Person (as defined
below), an affidavit that it is a U.S. Person). 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 Trust to tax (or
disqualify REMIC I or REMIC II as a REMIC) on the transfer of an interest
in a Residual 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 Residual
Certificateholder to taxation. See "Certain Federal Income Tax
Consequences--REMIC Residual Certificates--Transfers of REMIC Residual
Certificates--Tax on Disposition of REMIC Residual Certificates" and "--
Restrictions on Transfer; Holding by Pass-Through Entities" in the
Prospectus. Moreover, certain transfers of Residual Certificates that are
effective to transfer legal ownership may nevertheless be ineffective to
transfer ownership for federal income tax purposes, if at the time of the
transfer the Residual Certificate represents a "non-economic residual
interest" as defined in the REMIC Regulations and if avoiding or impeding
the assessment or collection of tax is a significant purpose of the
transfer. See "Certain Federal Income Tax Consequences--REMIC Residual
Certificates--Transfers of REMIC Residual Certificates" and "--
Restrictions on Transfer; Holding by Pass-Through Entities" in the
Prospectus. Further, unless the Tax Matters Person consents in writing
(which consent may be withheld in the Tax Matters Person's sole
discretion), the Residual 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 (a "U.S. Person").
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Offered Certificates (other than the Class PO and Class X
Certificates), are being purchased from BSMSI by the Underwriters upon
issuance. Each of the Underwriters has agreed to purchase 50% of each
Class of Senior Certificates (other than the Class PO, Class X, Class R-1
and Class R-2 Certificates), and Bear, Stearns & Co. Inc. ("Bear Stearns")
has agreed to purchase 100% of the Class R-1, Class R-2, Class B-1, Class
B-2 and B-3 Certificates. Bear Stearns is an affiliate of BSMSI.
Distribution of such Certificates will be made from time to time in
S-80
<PAGE>
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to BSMSI are expected to be approximately
100.58% of the aggregate principal balance of the Offered Certificates, as
of the Cut-off Date, plus accrued interest thereon, but before deducting
expenses payable by BSMSI in connection with the Offered Certificates. ln
connection with the purchase and sale of the Offered Certificates, the
Underwriters may be deemed to have received compensation from BSMSI in the
form of underwriting discounts.
BSMSI will indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, or will contribute to payments the Underwriters 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 Underwriters by Stroock & Stroock & Lavan, New
York, New York.
RATINGS
It is a condition to the issuance of each Class of Offered
Certificates that it receives the ratings set forth below from S&P and
Fitch.
<TABLE>
<CAPTION>
Rating
-------------
<S> <C> <C>
Class S&P Fitch
- -------------- ---- -----
Class A-I-1 AAA AAA
Class A-I-2 AAA AAA
Class A-I-3 AAA AAA
Class A-I-4 AAA AAA
Class A-I-5 AAA AAA
Class A-I-6 AAA AAA
Class A-I-7 AAA AAA
Class A-I-8 AAA AAA
Class A-I-9 AAA AAA
Class A-I-10 AAA AAA
Class A-I-11 AAA AAA
Class A-II AAA AAA
Class PO AAAr AAA
Class X AAAr AAA
Class B-1 -- AA
Class B-2 -- A
Class B-3 -- BBB
Class R-1 AAA AAA
Class R-2 AAA AAA
</TABLE>
S&P's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under
the Agreement. S&P's ratings take into consideration the credit quality of
the mortgage pool, structural and legal aspects associated with the
Certificates, and the extent to which the payment stream in the mortgage
pool is adequate to make payments required under the Certificates. S&P's
rating on the Offered Certificates does not, however, constitute a
statement regarding frequency of prepayments on the mortgages. The "r"
symbol is appended to the rating by S&P of those Certificates that S&P
believes may experience high volatility or high variability in expected
returns due to non-credit risks. The absence of an "r"
S-81
<PAGE>
symbol in the ratings of the other Offered Certificates should not be taken
as an indication that such Certificates will exhibit no volatility or
variability in total return.
The ratings assigned by Fitch to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage
loans by the related certificateholders under the agreements pursuant to
which such certificates are issued. Fitch's ratings take into
consideration the credit quality of the related mortgage pool, including
any credit support providers, structural and legal aspects associated with
such certificates, and the extent to which the payment stream on the
mortgage pool is adequate to make payments required by such certificates.
Fitch's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the mortgage loans.
The ratings of the Rating Agencies do not address the possibility
that, as a result of principal prepayments (i) Certificateholders might
suffer a lower than anticipated yield and (ii) if there is a rapid rate of
principal payments (including principal prepayments) on the Mortgage Loans,
investors in the Class X Certificates could fail to fully recover their
initial investments. The ratings on the Class R-1 and Class R-2
Certificates address only the return of their respective principal balances
and interest thereon.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating
is not a recommendation to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the Rating Agencies.
BSMSI has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates or, in such event, what rating would be assigned to the
Offered Certificates by such other rating agency. The ratings assigned by
such other rating agency to the Offered Certificates may be lower than the
ratings assigned by the Rating Agencies.
S-82
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accrued Certificate Interest................................. S-11
Adjustment Amount............................................ S-51
Aggregate Expense Rate....................................... S-8
Agreement.................................................... S-4
Allocable Share.............................................. S-48
Assumed Final Distribution Date.............................. S-52
Available Funds.............................................. S-10
Bankruptcy Coverage Termination Date......................... S-49
Bankruptcy Loss.............................................. S-48
Bankruptcy Loss Amount....................................... S-49
Book-Entry Certificates...................................... S-6
BSMSI........................................................ S-2
Business Day................................................. S-34
Cede......................................................... S-34
Certificate Account.......................................... S-71
Certificate Account Advance.................................. S-76
Certificate Owner............................................ S-34
Certificate Register......................................... S-38
Certificateholder............................................ S-36
Certificates................................................. S-1
Class A Certificates......................................... S-2
Class A-I Certificates....................................... S-5
Class A-II Certificates...................................... S-4
Class A-I Senior Percentage.................................. S-44
Class A-II Senior Percentage................................. S-44
Class A-I-10/Class A-I-11 Optimal Principal Amount........... S-38
Class A-I-10/Class A-I-11 Pro Rata Optimal Principal Amount.. S-38
Class B Certificates......................................... S-6
Class B Group I Principal Amount............................. S-41
Class B Group II Principal Amount............................ S-41
Class PO Cash Shortfall...................................... S-38
Class PO Deferred Amount..................................... S-14
Class PO Deferred Payment Writedown Amount................... S-41
Class PO Principal Distribution Amount....................... S-45
Class Prepayment Distribution Trigger........................ S-47
Class X Component I Accrued Certificate Interest............. S-40
Class X Component II Accrued Certificate Interest............ S-40
Closing Date................................................. S-7
CLTV......................................................... S-28
Code......................................................... S-21
Compensating Interest Payments............................... S-70
Component I.................................................. S-10
Component II................................................. S-10
CPR.......................................................... S-52
Cross-Over Date.............................................. S-10
Current Principal Amount..................................... S-12
Cut-off Date................................................. S-7
Cut-off Date Scheduled Principal Balance..................... S-7
Debt Service Reduction....................................... S-48
Defaulted Mortgage Loan...................................... S-69
</TABLE>
S-83
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Deficient Valuation.......................................... S-48
Definitive Certificates...................................... S-35
Depositor.................................................... S-6
Determination Date........................................... S-47
Distribution Date............................................ S-2
DTC.......................................................... S-34
Due Date..................................................... S-7
Due Period................................................... S-8
ERISA........................................................ S-23
Events of Default............................................ S-74
Excess Bankruptcy Losses..................................... S-16
Excess Fraud Losses.......................................... S-16
Excess Losses................................................ S-16
Excess Special Hazard Losses................................. S-16
Exemptions................................................... S-23
FHA.......................................................... S-26
Fitch........................................................ S-24
Fraud Coverage Termination Date.............................. S-48
Fraud Loss................................................... S-48
Fraud Loss Amount............................................ S-50
Group I Available Funds...................................... S-36
Group II Available Funds..................................... S-36
Group I Discount Mortgage Loan............................... S-42
Group I Mortgage Loans....................................... S-3
Group II Mortgage Loans...................................... S-3
Group I Rate................................................. S-77
Group I Senior Optimal Principal Amount...................... S-43
Group II Senior Optimal Principal Amount..................... S-43
ICII......................................................... S-27
ICI Funding.................................................. S-26
Indirect Participants........................................ S-35
Insurance Proceeds........................................... S-47
Interest Accrual Period...................................... S-9
Interest Shortfall........................................... S-42
Liquidated Mortgage Loan..................................... S-48
Liquidation Proceeds......................................... S-48
Loss Allocation Limitation................................... S-49
Master Servicer.............................................. S-5
Master Servicing Fee......................................... S-71
Material Defect.............................................. S-64
Monthly Advance.............................................. S-16
Monthly Payment.............................................. S-47
Mortgage File................................................ S-64
Mortgage Loan Group.......................................... S-3
Mortgage Loan Group I........................................ S-3
Mortgage Loan Group II....................................... S-3
Mortgage Loans............................................... S-6
Mortgage Rate................................................ S-6
Mortgaged Properties......................................... S-7
Net Interest Shortfalls...................................... S-43
Net Liquidation Proceeds..................................... S-46
</TABLE>
S-84
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Net Rate..................................................... S-8
Non-Discount Mortgage Loan................................... S-42
Non-SMMEA Certificates....................................... S-25
Non-PO Percentage............................................ S-42
Notional Amount.............................................. S-1
Offered Certificates......................................... S-1
Original Subordinate Principal Balance....................... S-45
Other Certificates........................................... S-4
Outstanding Principal Balance................................ S-65
Participants................................................. S-35
Pass-Through Rate............................................ S-1
Permitted Investments........................................ S-67
Physical Certificates........................................ S-5
Plan(s)...................................................... S-23
Plan Asset Regulations....................................... S-77
PO Percentage................................................ S-42
Prepayment Assumption........................................ S-52
Prepayment Period............................................ S-9
Primary Insurance Policy..................................... S-26
Principal Prepayment......................................... S-47
Protected Account............................................ S-34
PTE 90-24.................................................... S-78
PTE 90-30.................................................... S-78
Rating Agencies.............................................. S-23
Realized Loss................................................ S-46
Record Date.................................................. S-9
Regular Certificates......................................... S-6
REITs........................................................ S-78
Relief Act................................................... S-42
REMIC........................................................ S-2
REMIC I...................................................... S-22
REMIC II..................................................... S-22
REMIC Regular Certificates................................... S-22
REMIC Residual Certificates.................................. S-22
REO Property................................................. S-47
Repurchase Price............................................. S-64
Repurchase Proceeds.......................................... S-47
Residual Certificates........................................ S-7
Rules........................................................ S-35
Scheduled Principal Balance.................................. S-9
Senior Certificates.......................................... S-6
Senior Percentage............................................ S-42
Senior Prepayment Percentage................................. S-42
Senior Prepayment Percentage Stepdown Limitation............. S-45
Senior Support Certificates.................................. S-6
Separate Components.......................................... S-40
Servicing Account............................................ S-67
SMMEA........................................................ S-25
S&P.......................................................... S-24
Special Hazard Loss.......................................... S-48
Special Hazard Loss Amount................................... S-50
</TABLE>
S-85
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Special Hazard Termination Date.............................. S-50
Subordinate Certificates..................................... S-7
Subordinate Certificate Writedown Amount..................... S-41
Subordinate Optimal Principal Amount......................... S-46
Subordinate Percentage....................................... S-46
Subordinate Prepayment Percentage............................ S-46
Sub-Servicer................................................. S-27
Super Senior Certificates.................................... S-6
Tax Matters Person........................................... S-24
Trust........................................................ S-2
Trust Assets................................................. S-23
Trustee...................................................... S-7
Underwriters................................................. S-1
U.S. Person.................................................. S-80
VA........................................................... S-26
Wendover..................................................... S-7
</TABLE>
S-86
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The tables below set forth estimates of certain expected characteristics (as
of the Cut-off Date) of the Group I Mortgage Loans and Group II Mortgage Loans.
In each of the following tables, the percentages are based on the Cut-off Date
Scheduled Principal Balances and have been rounded and, as a result, may not
total 100.00%.
The description herein of the Mortgage Loans is based upon estimates of the
composition of the Mortgage Loans 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 as a result of (i)
Principal Prepayments thereof in full prior to September 16, 1996, (ii)
requirements of S&P or Fitch or (iii) delinquencies or otherwise. In any such
event, other mortgage loans may be included in the Trust. BSMSI believes that
the estimated information set forth herein with respect to the Mortgage Loans
and the Mortgage Loan Groups as presently constituted is representative of the
characteristics of the Mortgage Loans and the Mortgage Loan Groups as they will
be constituted at the time the Certificates are issued, although certain
characteristics of the Mortgage Loans and the Mortgage Loan Groups may vary.
YEAR OF FIRST PAYMENT OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
YEAR OF FIRST PAYMENT LOANS AS OF CUT-OFF DATE LOAN GROUP
- --------------------- --------- ------------------- ----------
<S> <C> <C> <C>
1992................................... 1 $ 423,778 0.17%
1995................................... 3 600,012 0.24
1996................................... 1,506 244,732,891 99.58
----- ------------ ------
Total.............................. 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average seasoning of the Group I
Mortgage Loans is expected to be approximately 2 months.
TYPES OF MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PROPERTY TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
Single-Family.......................... 1,126 $188,201,788 76.58%
Two- to Four-Family.................... 92 13,398,965 5.45
Planned Unit Development............... 169 30,133,905 12.26
Condominium............................ 123 14,022,023 5.71
----- ------------ ------
Total.............................. 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE LOAN GROUP
- ---------------- --------- ------------------- ----------
<S> <C> <C> <C>
Primary Residence...................... 1,352 $230,065,422 93.62%
Second Home............................ 65 7,263,113 2.96
Investor Property...................... 93 8,428,145 3.43
----- ------------ ------
Total.............................. 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
- --------
(1) Based on representations of the Mortgagor at the time of Group I Mortgage
Loan origination.
A-1
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTY
SECURING GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
STATES LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------ --------- ------------------- ----------
<S> <C> <C> <C>
Alabama................................ 2 $ 322,319 0.13%
Arizona................................ 10 1,670,508 0.68
California............................. 650 130,643,318 53.16
Colorado............................... 21 2,274,160 0.93
Connecticut............................ 13 2,029,521 0.83
Delaware............................... 2 283,711 0.12
Florida................................ 283 33,511,103 13.64
Georgia................................ 16 1,797,456 0.73
Hawaii................................. 6 1,404,293 0.57
Idaho.................................. 4 447,810 0.18
Illinois............................... 11 1,437,153 0.58
Indiana................................ 4 643,523 0.26
Maine.................................. 4 412,532 0.17
Maryland............................... 15 2,088,769 0.85
Massachusetts.......................... 20 3,204,897 1.30
Michigan............................... 1 344,802 0.14
Minnesota.............................. 2 539,425 0.22
Missouri............................... 2 169,663 0.07
Montana................................ 5 530,755 0.22
Nevada................................. 17 2,842,729 1.16
New Hampshire.......................... 3 259,304 0.11
New Jersey............................. 168 25,129,867 10.23
New Mexico............................. 1 105,874 0.04
New York............................... 105 14,707,052 5.98
North Carolina......................... 29 3,310,207 1.35
Ohio................................... 2 317,157 0.13
Oklahoma............................... 1 65,963 0.03
Oregon................................. 6 997,767 0.41
Pennsylvania........................... 11 1,795,182 0.73
Rhode Island........................... 5 485,766 0.20
South Carolina......................... 2 84,533 0.03
Texas.................................. 31 3,945,835 1.61
Utah................................... 17 2,262,111 0.92
Vermont................................ 3 316,954 0.13
Virginia............................... 13 2,173,526 0.88
Washington............................. 25 3,201,138 1.30
----- ------------ ------
Total.............................. 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, no more than approximately .62% of the aggregate
Outstanding Principal Balance of the Group I Mortgage Loans is expected to
be secured by properties located in any one zip code.
A-2
<PAGE>
LOAN PURPOSE OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOAN GROUP
- ------------ --------- ------------------- ----------
<S> <C> <C> <C>
Purchase............................... 831 $136,506,145 55.55%
Rate and Term Refinance................ 257 45,201,989 18.39
Cash-Out Refinance..................... 422 64,048,547 26.06
----- ------------ ------
Total.............................. 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
DISTRIBUTION OF GROUP I ORIGINAL MORTGAGE LOAN AMOUNTS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL MORTGAGE LOAN AMOUNT LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
$ 50,000 or less....................... 83 $ 3,465,265 1.41%
$ 50,001 - $100,000.................... 429 33,179,575 13.50
$100,001 - $150,000.................... 366 45,594,323 18.55
$150,001 - $200,000.................... 208 35,918,487 14.62
$200,001 - $250,000.................... 155 34,835,140 14.17
$250,001 - $300,000.................... 114 31,061,211 12.64
$300,001 - $350,000.................... 61 19,559,717 7.96
$350,001 - $400,000.................... 41 15,354,850 6.25
$400,001 - $450,000.................... 14 5,986,280 2.44
$450,001 - $500,000.................... 21 10,134,737 4.12
$500,001 - $550,000.................... 4 2,147,626 0.87
$550,001 - $600,000.................... 6 3,352,075 1.36
$600,001 - $650,000.................... 6 3,793,806 1.54
$650,001 - $700,000.................... 2 1,373,589 0.56
----- ------------ ------
Total.............................. 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the average Outstanding Principal Balance of the
Group I Mortgage Loans is expected to be approximately $162,753.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
50.00% or less......................... 136 $ 13,714,890 5.58%
50.01% - 55.00%........................ 46 6,370,104 2.59
55.01% - 60.00%........................ 93 11,441,191 4.66
60.01% - 65.00%........................ 102 13,952,096 5.68
65.01% - 70.00%........................ 195 27,530,295 11.20
70.01% - 75.00%........................ 337 59,377,522 24.16
75.01% - 80.00%........................ 523 95,809,696 38.99
80.01% - 85.00%........................ 4 906,472 0.37
85.01% - 90.00%........................ 35 7,461,943 3.04
90.01% - 95.00%........................ 39 9,192,473 3.74
----- ------------ ------
Total.............................. 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Group I Mortgage Loans is expected to be approximately
73.31%.
A-3
<PAGE>
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MORTGAGE RATE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
7.750%................................ 1 $ 100,888 0.04%
7.875%................................ 3 659,007 0.27
8.000%................................ 8 1,030,358 0.42
8.125%................................ 5 741,851 0.30
8.250%................................ 22 4,281,456 1.74
8.375%................................ 23 4,535,760 1.85
8.500%................................ 58 10,771,778 4.38
8.625%................................ 61 12,843,933 5.23
8.750%................................ 113 21,368,574 8.70
8.875%................................ 179 29,968,570 12.19
9.000%................................ 154 22,808,144 9.28
9.125%................................ 127 22,810,842 9.28
9.250%................................ 200 31,726,547 12.91
9.375%................................ 156 25,420,812 10.34
9.500%................................ 179 25,989,456 10.58
9.625%................................ 125 17,549,621 7.14
9.750%................................ 96 13,149,084 5.35
----- ------------ ------
Total................................ 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Mortgage Loans is expected to be approximately 9.107% per annum.
ORIGINAL TERM OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL TERM LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
180 Months......................... 118 $ 13,463,229 5.48%
240 Months......................... 1 84,269 0.03
360 Months......................... 1,391 232,209,183 94.49
----- ------------ ------
Total.......................... 1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average calculated remaining term of
the Group I Mortgage Loans is expected to be approximately 347 months.
DOCUMENTATION TYPE OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------------ --------- ------------------- ----------
<S> <C> <C> <C>
Full/Alternative....................... 355 $ 73,857,032 30.05%
Reduced/Stated Income.................. 1,048 158,755,129 64.60
No Income/No Asset..................... 107 13,144,519 5.35
----- ------------ ------
1,510 $245,756,681 100.00%
===== ============ ======
</TABLE>
A-4
<PAGE>
YEAR OF FIRST PAYMENT OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
YEAR OF FIRST PAYMENT LOANS AS OF CUT-OFF DATE LOAN GROUP
- --------------------- --------- ------------------- ----------
<S> <C> <C> <C>
1996................................... 172 19,246,744 100.00
--- ---------- ------
Total.............................. 172 19,246,744 100.00%
=== ========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average seasoning of the Group II
Mortgage Loans is expected to be approximately 2 months.
TYPES OF MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PROPERTY TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
Single-Family.......................... 93 $10,509,362 54.60%
Two- to Four-Family.................... 51 5,521,220 28.69
Planned Unit Development............... 12 1,700,357 8.83
Condominium............................ 16 1,515,805 7.88
--- ----------- ------
Total.............................. 172 $19,246,744 100.00%
=== =========== ======
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE LOAN GROUP
- ---------------- --------- ------------------- ----------
<S> <C> <C> <C>
Primary Residence...................... 81 $11,623,582 60.39%
Second Home............................ 6 492,851 2.56
Investor Property...................... 85 7,130,312 37.05
--- ----------- ------
Total.............................. 172 $19,246,744 100.00%
=== =========== ======
</TABLE>
- --------
(1) Based on representations of the Mortgagor at the time of Group II Mortgage
Loan Origination.
A-5
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTY
SECURING GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
STATES LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------ --------- ------------------- ----------
<S> <C> <C> <C>
Alabama................................ 1 $ 106,610 0.55%
Arizona................................ 3 278,516 1.45
California............................. 37 6,283,504 32.65
Connecticut............................ 3 348,046 1.81
Delaware............................... 2 102,662 0.53
Florida................................ 48 3,899,147 20.26
Georgia................................ 1 123,651 0.64
Illinois............................... 3 177,066 0.92
Indiana................................ 1 206,796 1.07
Maryland............................... 2 108,660 0.56
Massachusetts.......................... 2 172,002 0.89
Nevada................................. 4 355,579 1.85
New Hampshire.......................... 1 69,904 0.36
New Jersey............................. 21 2,774,523 14.42
New Mexico............................. 1 64,000 0.33
New York............................... 22 2,618,466 13.60
North Carolina......................... 3 427,960 2.22
Pennsylvania........................... 2 101,082 0.53
Texas.................................. 10 720,575 3.74
Vermont................................ 1 79,964 0.42
Virginia............................... 2 116,166 0.60
Washington............................. 2 111,864 0.58
--- ----------- ------
Total.............................. 172 $19,246,744 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, no more than approximately 2.59% of the aggregate
Outstanding Principal Balance of the Group II Mortgage Loans is expected to
be secured by properties located in any one zip code.
LOAN PURPOSE OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOAN GROUP
- ------------ --------- ------------------- ----------
<S> <C> <C> <C>
Purchase............................... 109 $11,773,176 61.17%
Rate and Term Refinance................ 24 2,963,738 15.40
Cash-Out Refinance..................... 39 4,509,831 23.43
--- ----------- ------
Total.............................. 172 $19,246,744 100.00%
=== =========== ======
</TABLE>
A-6
<PAGE>
DISTRIBUTION OF ORIGINAL GROUP II MORTGAGE LOAN AMOUNTS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL MORTGAGE LOAN AMOUNT LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
$ 50,000 or less....................... 26 $ 1,112,964 5.78%
$ 50,001 - $100,000.................... 72 5,213,673 27.09
$100,001 - $150,000.................... 37 4,552,943 23.66
$150,001 - $200,000.................... 18 2,976,053 15.46
$200,001 - $250,000.................... 10 2,235,494 11.61
$250,001 - $300,000.................... 3 789,367 4.10
$300,001 - $350,000.................... 2 654,706 3.40
$400,001 - $450,000.................... 4 1,711,543 8.89
--- ----------- ------
Total.............................. 172 $19,246,744 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the average Outstanding Principal Balance of the
Group II Mortgage Loan is expected to be approximately $111,900.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
50.00% or less......................... 6 $ 344,628 1.79%
50.01% - 55.00%........................ 3 193,819 1.01
55.01% - 60.00%........................ 6 699,886 3.64
60.01% - 65.00%........................ 11 930,644 4.84
65.01% - 70.00%........................ 24 2,638,971 13.71
70.01% - 75.00%........................ 28 3,171,238 16.48
75.01% - 80.00%........................ 54 6,981,451 36.27
80.01% - 85.00%........................ 4 250,390 1.30
85.01% - 90.00%........................ 34 3,469,119 18.02
90.01% - 95.00%........................ 2 566,599 2.94
--- ----------- ------
Total.............................. 172 $19,246,744 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Group II Mortgage Loans is expected to be approximately
77.21%.
A-7
<PAGE>
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
NUMBER OF AGGREGATE PRINCIPAL MORTGAGE
MORTGAGE BALANCE OUTSTANDING LOAN
MORTGAGE RATE LOANS AS OF CUT-OFF DATE GROUP
- ------------- --------- ------------------- --------
<S> <C> <C> <C>
9.875%.................................. 59 $ 6,843,258 35.56%
10.000%................................. 44 5,464,032 28.39
10.125%................................. 16 2,049,360 10.65
10.250%................................. 13 1,273,101 6.61
10.375%................................. 8 701,411 3.64
10.500%................................. 9 1,160,800 6.03
10.625%................................. 6 375,504 1.95
10.750%................................. 5 343,435 1.78
10.875%................................. 3 261,721 1.36
11.000%................................. 4 356,830 1.85
11.250%................................. 2 115,921 0.60
11.375%................................. 1 94,438 0.49
11.500%................................. 2 206,934 1.08
--- ----------- ------
Total.................................. 172 $19,246,744 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Mortgage Loans is expected to be approximately 10.116% per annum.
ORIGINAL TERM OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL TERM LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
180 Months............................. 6 $ 301,224 1.57%
360 Months............................. 166 18,945,520 98.43
--- ------------ ------
Total.............................. 172 $ 19,246,744 100.00%
=== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average calculated remaining term of
the Group II Mortgage Loans is expected to be approximately 354 months.
DOCUMENTATION TYPE OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------------ --------- ------------------- ----------
<S> <C> <C> <C>
Full/Alternative....................... 92 $9,140,439 47.49%
Reduced/Stated Income.................. 73 9,317,172 48.41
No Income/No Asset..................... 7 789,133 4.10
--- ---------- ------
Total.............................. 172 19,246,744 100.00%
=== ========== ======
</TABLE>
A-8
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS MORTGAGE SECURITIES INC.
DEPOSITOR
----------------
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates" ), which may be sold from time to time in one or more Series on
terms determined at the time of sale and described in the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of
one or more trust funds (each a "Trust Fund"). As specified in the related
Prospectus Supplement, a Trust Fund for a Series of Certificates will include
certain mortgage-related assets (the "Mortgage Assets") consisting of (i)
first lien mortgage loans or participations 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) conditional sales contracts and
installment sales or loan agreements or participations therein secured by
manufactured housing ("Contracts"), (v) mortgage pass-through 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 "Depositor") from one or more institutions which may be
affiliates of the Depositor (each, a "Seller") and conveyed by the Depositor
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
Depositor 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 Depositor with respect to a Series of Certificates will be to obtain
certain representations and warranties from the Sellers or other third parties
and to assign to the trustee (the "Trustee" ) for the related Series of
Certificates the Depositor'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."
----------------
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 September 24, 1996.
<PAGE>
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 a REMIC election 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 Depositor 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, 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.
2
<PAGE>
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 document, 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."
3
<PAGE>
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 Se-
ries).
Depositor............... Bear Stearns Mortgage Securities Inc., a Delaware
corporation and a wholly-owned subsidiary of Bear
Stearns Mortgage Capital Corporation. See "The De-
positor."
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 Depositor. See "The Pooling and
Servicing Agreement--Certain Matters Regarding the
Master Servicer and the Depositor."
Trust Fund Assets....... A Trust Fund for a Series of Certificates will in-
clude the Mortgage Assets consisting of (i) a pool
(a "Mortgage Pool") of Single Family Loans, Multi-
family Loans, Cooperative Loans or Contracts (col-
lectively, the "Mortgage Loans"), (ii) Agency Secu-
rities 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 Unless otherwise specified in the related Prospectus
Multi-family Loans... Supplement, Single Family Loans will be secured by
first mortgage liens on one- to four- family resi-
dential properties. Unless otherwise specified in
the related Prospectus Supplement, Cooperative Loans
will be secured by security interests in shares is-
sued by private, nonprofit, cooperative housing cor-
porations ("Cooperatives") and in the related pro-
prietary leases or occupancy agreements granting ex-
clusive 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, Sin-
gle 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 con-
taining five or more residential units, including
apartment buildings owned by Cooperatives. Such
loans may be conventional loans or insured by the
FHA, as specified
4
<PAGE>
in the related Prospectus Supplement. Unless other-
wise 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 in-
cluded in a Trust Fund will be described in the re-
lated 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 at 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 sup-
plied by the seller of the Mortgaged Property or
another source or may be treated as accrued in-
terest 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 signifi-
cantly 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 bal-
ance of 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 change
from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the
amount of monthly payments and may include maxi-
mum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a pre-
payment 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 af-
ter expiration of the applicable lockout
5
<PAGE>
period and may require the payment of a prepayment
fee in connection with any such subsequent prepay-
ment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment oc-
curs 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 cer-
tain transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards
of the Seller.
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 Sup-
plement, 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 mort-
gage insurance policies to the extent provided in
the related Prospectus Supplement. All Mortgage
Loans will have been purchased by the Depositor, ei-
ther directly or through an affiliate, from Sellers.
B. Contracts........... Contracts will consist of conditional sales and in-
stallment sales or loan agreements secured by new or
used Manufactured Homes (as defined herein). Con-
tracts 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 in-
terest at a fixed accrual percentage rate ("APR").
Unless otherwise specified in the related Prospectus
Supplement, Contracts will all have individual prin-
cipal 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.
C. Agency Securities... The Agency Securities will consist of (i) fully modi-
fied pass-through mortgage-backed certificates guar-
anteed as to timely payment of principal and inter-
est 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 Certif-
icates"), (iii) Mortgage Participation Certificates
issued and guaranteed as to timely payment of inter-
est 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 distribu-
tions (but not the interest distributions) or the
interest distributions (but not the principal dis-
tributions) 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
6
<PAGE>
otherwise specified in the Prospectus Supplement,
guaranteed to the same extent as the underlying se-
curities, (v) another type of guaranteed pass-
through certificate issued or guaranteed by GNMA,
FNMA, FHLMC or another government agency or govern-
ment-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 Securi-
ties 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 Mort-
gage Loans or (ii) Collateralized Mortgage Obliga-
tions ("CMOs") secured by such Mortgage Loans. Al-
though individual Mortgage Loans underlying a Pri-
vate Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency or in-
strumentality 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 re-
lating to a Series of Certificates, payments on the
Private Mortgage-Backed Securities will be distrib-
uted directly to the Trustee as registered owner of
such Private Mortgage-Backed Securities. See "The
Trust Fund--Private Mortgage-Backed Securities."
Description of the Each Certificate will represent a beneficial owner-
Certificates........... ship interest in a Trust Fund created by the Deposi-
tor pursuant to a Pooling and Servicing Agreement
(each, an "Agreement") among the Depositor, the Mas-
ter Servicer(s) and the Trustee for the related Se-
ries. 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 re-
ceive 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, let-
ters of credit, financial guaranty insurance poli-
cies, 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 alloca-
ble only to principal, only to interest or to any
combination thereof; (ii) may be entitled to receive
distributions
7
<PAGE>
only of prepayments of principal throughout the
lives of the Certificates or during specified peri-
ods; (iii) may be subordinated in the right to re-
ceive distributions of scheduled payments of princi-
pal, prepayments of principal, interest or any com-
bination 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 re-
lated Trust Fund; (vi) as to Certificates entitled
to distributions allocable to interest, may be enti-
tled 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 distribu-
tions allocable to interest only after the occur-
rence of events specified in the Prospectus Supple-
ment and may accrue interest until such events oc-
cur, in each case as specified in the Prospectus
Supplement. The timing and amounts of such distribu-
tions may vary among classes, over time, or other-
wise as specified in the related Prospectus Supple-
ment.
Distributions on the Distributions on the Certificates entitled thereto
Certificates........... 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 as-
sets of the related Trust Fund. The amount allocable
to payments of principal and interest on any Distri-
bution 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 en-
titled thereto. The aggregate original principal
balance of the Certificates will equal the aggregate
distributions allocable to principal that such Cer-
tificates 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 re-
lated 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 in-
terest rate borne by the underlying Mortgage Loans,
Agency Securities or Private Mortgage-Backed Securi-
ties, net of the aggregate servicing fees and any
other amounts specified in the Prospectus Supple-
ment. If specified in the Prospectus Supplement, the
aggregate original principal balance of the Certifi-
cates and interest rates on the classes of Certifi-
cates 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 Cer-
tificates 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.
8
<PAGE>
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 enhance-
ment may include one or more of the following types:
A. Subordination........ The rights of the holders of the Subordinated Certif-
icates of a Series to receive distributions with re-
spect 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 accom-
plished by the preferential right of such holders to
receive, prior to any distribution being made in re-
spect 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 to the extent described in the related Pro-
spectus Supplement. The protection afforded to the
holders of Senior Certificates of a Series by means
of the subordination feature also may be accom-
plished by allocating certain types of losses or de-
linquencies to the Subordinated Certificates to the
extent described in the related Prospectus Supple-
ment.
If so specified in the related Prospectus Supplement,
the same class of Certificates may be Senior Certif-
icates with respect to certain types of payments or
certain types of losses or delinquencies and Subor-
dinated Certificates with respect to other types of
payments or types of losses or delinquencies. If so
specified in the related Prospectus Supplement, sub-
ordination 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 stan-
dard hazard insurance policies or losses due to the
bankruptcy of the borrower. If specified in the Pro-
spectus Supplement, a reserve fund may be estab-
lished and maintained by the deposit therein of dis-
tributions allocable to the holders of Subordinated
Certificates until a specified level is reached. The
related Prospectus Supplement will set forth infor-
mation concerning the amount of subordination of a
class or classes of Subordinated Certificates in a
Series, the circumstances in which such subordina-
tion 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 dis-
tributions to holders of Senior Certificates or re-
leased from the related Trust Fund.
B. Pool Insurance A mortgage pool insurance policy or policies (the
Policy................. "Pool Insurance Policy") may be obtained and main-
tained for each Series pertaining to
9
<PAGE>
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 in-
cluded in the Mortgage Pool as of the Cut-off Date
or such other date as is specified in the related
Prospectus Supplement.
C. 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 insur-
ance policies may be covered by a special hazard in-
surance policy or policies (the "Special Hazard In-
surance 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 aggre-
gate principal balance of the Single Family Loans,
Cooperative Loans or Contracts as of the related
Cut-off Date, (ii) twice the unpaid principal bal-
ance 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, Coopera-
tive Loans or Contracts as of the Cut-off Date se-
cured by property in any single zip code concentra-
tion.
D. 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.
E. 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.
F. Other Arrangements... Other arrangements as described in the related Pro-
spectus Supplement including, but not limited to,
one or more Reserve Accounts, letters of credit, fi-
nancial guaranty insurance policies or third party
guarantees, may be used to provide coverage for cer-
tain 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 na-
tionally recognized rating agency that rates the re-
lated Series of Certificates (the "Rating Agency").
G. Cross Support........ If specified in the Prospectus Supplement, the bene-
ficial 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
10
<PAGE>
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 Sup-
plement, 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 ex-
hausted. 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 Mas-
ter Servicer (a "Sub-Servicer") will be obligated to
advance amounts corresponding to delinquent princi-
pal and interest payments on such Mortgage Loan un-
til the date on which the related Mortgaged Property
is sold at a foreclosure sale or the related Mort-
gage Loan is otherwise liquidated. Any such obliga-
tion to make advances may be limited to amounts due
holders of Senior Certificates of the related Se-
ries, to amounts deemed to be recoverable from late
payments or liquidation proceeds, for specified pe-
riods or any combination thereof, in each case as
specified in the related Prospectus Supplement. See
"Description of the Certificates--Advances."
Optional Termination.... The Master Servicer, the holders of the residual in-
terests in a REMIC, or any other entity specified in
the related Prospectus Supplement may have the op-
tion to effect early retirement of a Series of Cer-
tificates through the purchase of the Mortgage As-
sets and other assets in the related Trust Fund un-
der 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 pur-
poses of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") and, as such, will be legal
investments for certain types of institutional in-
vestors 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 re-
view by certain regulatory authorities may be sub-
ject to restrictions on investment in the Certifi-
cates. 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.
11
<PAGE>
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 cer-
tain assets of the Trust Fund) as a "real estate
mortgage investment conduit" ("REMIC") under the In-
ternal Revenue Code of 1986, as amended (the
"Code").
REMIC. If an election is to be made to treat the
Trust Fund or a segregated portion of the Trust Fund
for a series of Certificates as a REMIC for federal
income tax purposes, the related Prospectus Supple-
ment will specify which class or classes thereof, or
interests composing such class or classes, will be
designated as regular interests in the REMIC ("REMIC
Regular Certificates") and which class of Certifi-
cates will be designated as the residual interest in
the REMIC ("REMIC Residual Certificates").
For federal income tax purposes, REMIC Regular Cer-
tificates generally will be treated as debt obliga-
tions of the Trust Fund with payment terms equiva-
lent to the terms of such interests. Holders of
REMIC Regular Certificates will be required to re-
port income with respect to such interests under an
accrual method, regardless of their normal tax ac-
counting method. Original issue discount, if any, on
REMIC Regular Certificates will be includible in the
income of the holders thereof as it accrues, in ad-
vance of receipt of the cash attributable thereto,
which rate of accrual will be determined based on a
reasonable assumed prepayment rate. The REMIC Resid-
ual 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 portion of the REMIC's taxable income or loss.
Certain income of a REMIC (referred to as "excess
inclusions") generally may not be offset by such a
holder's net operating loss carryovers or other de-
ductions, and in the case of a tax-exempt holder of
a REMIC Residual Certificate will be treated as "un-
related business taxable income". In certain situa-
tions, 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 distrib-
uted to them. "DISQUALIFIED ORGANIZATIONS", AS DE-
FINED IN "CERTAIN FEDERAL INCOME TAX CONSEQUENCES--
REMIC RESIDUAL CERTIFICATES--TAX ON DISPOSITION OF
REMIC RESIDUAL CERTIFICATES; RESTRICTION ON TRANS-
FER; HOLDING BY PASS-THROUGH ENTITIES," ARE PROHIB-
ITED FROM ACQUIRING OR HOLDING ANY BENEFICIAL INTER-
EST IN THE REMIC RESIDUAL CERTIFICATES. In certain
cases, a transfer of a REMIC Residual Certificate
will not be effective for Federal income tax purpos-
es. See "Certain Federal Income Tax Consequences--
Transfers of REMIC Residual Certificates" and "--
Foreign Investors" herein.
12
<PAGE>
Grantor Trust. If no election is to be made to treat
the Trust Fund or a segregated portion of the Trust
Fund for a series of Certificates ("Non-REMIC Cer-
tificates") as a REMIC, the Trust Fund will be clas-
sified as a grantor trust for federal income tax
purposes and not as an association taxable as a cor-
poration. 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 (in-
cluding amounts paid as reasonable servicing compen-
sation) from the Mortgage Loans and will be enti-
tled, 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 Conse-
quences" herein and, if applicable, in the related
Prospectus Supplement.
ERISA Considerations.... A fiduciary of any employee benefit plan or other re-
tirement plan or arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with
its legal advisors whether the purchase or holding
of Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA
or the Code. See "ERISA Considerations."
13
<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.
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 Depositor. 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 Depositor, either directly or
through affiliates, from the Sellers and conveyed by the Depositor to the
related Trust Fund. The Sellers 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. 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
- --------
* 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 interests, 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.
14
<PAGE>
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 Seller
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, 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
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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 Depositor 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 Depositor 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.
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Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Certificates will be
to obtain certain representations and warranties from the Sellers or other
third parties and to assign to the Trustee for such Series of Certificates the
Depositor'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, Sellers or other third parties as more fully described herein under
"Mortgage Loan Program--Representations by Sellers; Repurchases" and "The
Pooling and Servicing Agreement--Sub-Servicing by Sellers," "--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. 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 tenant-stockholder of a Cooperative must make a monthly
payment
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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."
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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 anytime 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 40 years (but may have original maturities
of substantially less than 40 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
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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.
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
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps
to redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the
FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will consist
of conventional mortgage loans, FHA Loans or VA Loans. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying
a FNMA Certificate are expected to be between either 8 to 15 years or 20 to 30
years. The original maturities of substantially all of the fixed rate level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage
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representing servicing compensation and FNMAs 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.
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
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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 prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on
the underlying mortgage loans, interest at the FHLMC pass-through rate and any
other sums such as prepayment fees, within 60 days of the date on which such
payments are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield (expressed as a percentage)
required by FHLMC. The required yield, which includes a minimum servicing fee
retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage
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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 government-sponsored agency,
each as trustee, or by another trustee named in the related Prospectus
Supplement. FHLMC, FNMA, GNMA or another government agency or government-
sponsored agency 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
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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 Depositor.
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 be made on the Private Mortgage-
Backed Securities on the dates specified in the related Prospectus Supplement.
The Private Mortgage-Backed Securities may be entitled to receive nominal or no
principal distributions or nominal or no interest distributions. Principal and
interest distributions will be made on the Private Mortgage-Backed Securities
by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS Servicer
may have the right to repurchase assets underlying the Private Mortgage-Backed
Securities after a certain date or under other circumstances specified in the
related Prospectus Supplement.
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 Loan-to-Value Ratio
at origination in excess of 95%, (ii) each Single Family Loan secured by a
Mortgaged Property having a Loan-to-Value 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 (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
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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.
USE OF PROCEEDS
The Depositor 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
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 Depositor expects to sell Certificates in Series from
time to time.
THE DEPOSITOR
Bear Stearns Mortgage Securities Inc., the Depositor, 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 Depositor
maintains its principal office at 245 Park Avenue, New York. New York 10167.
Its telephone number is (212) 272-2000.
The Depositor 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 Depositor, either directly
or through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans so acquired by the Depositor 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 Seller
will represent and warrant that all Mortgage Loans originated and/or sold by it
to the Depositor 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 Seller
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
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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 Sellers may be
varied in appropriate cases where factors such as low Loan-to-Value Ratios or
other favorable credit 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 Seller 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.
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QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each Seller
will be required to satisfy the qualifications set forth herein. Each Seller
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 Seller must be a seller/servicer approved by either
FNMA or FHLMC, and each Seller 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 SELLERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or Agreement,
each Seller will have made representations and warranties in respect of the
Mortgage Loans sold by such Seller 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 Seller by or on behalf of the Depositor, (ii) that the
Seller had title to each such Mortgage Loan and such Mortgage Loan was subject
to no offsets, defences 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 Seller in respect of a Mortgage Loan will
have been made as of the date on which such Seller sold the Mortgage Loan to
the Depositor 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 Seller do not address events that may occur
following the sale of a Mortgage Loan by such Seller, 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 Seller to the Depositor or its
affiliates. If the Master Servicer is also a Seller of Mortgage Loans 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 Seller, will promptly
notify the relevant Seller 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 Seller cannot cure such
breach within 60 days after notice from the Master Servicer or the Trustee, as
the case may be, then such Seller 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 Seller is the Master Servicer). Except in those cases in
which the Master Servicer is the Seller, 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
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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 Seller.
Neither the Depositor nor the Master Servicer (unless the Master Servicer is
the Seller) will be obligated to purchase a Mortgage Loan if a Seller defaults
on its obligation to do so, and no assurance can be given that Sellers 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 Seller 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 Seller may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Seller as of the time of the sale to the
Seller. In lieu of representations and warranties made by the Seller as of the
time of the sale to the Depositor, the Seller may assign the representations
and warranties from the third party to the Depositor, 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 Seller will not be obligated to
purchase a Mortgage Loan if the third party defaults on its obligation to do
so.
The Seller and any third party which conveyed the Mortgage Loans to the
Seller may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Seller 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.
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 Depositor, 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 Depositor 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 Depositor. The
Certificates will not represent obligations of the Depositor or any affiliate
of the Depositor. 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
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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 be 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.
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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 the Seller 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 Depositor 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 Pass-
Through 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
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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
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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 Seller 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 to such Series of Certificates, among other things:
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(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
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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 Depositor 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 Depositor
is unable to locate a qualified successor, (ii) the Depositor, 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.
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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, 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 cancelled or reduced by the Master Servicer or the Depositor 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.
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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. A Pool
Insurance Policy, however, 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. 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.
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 Pool Insurance 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 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
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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 Seller's
representations described above and, in such event, might give rise to an
obligation on the part of such Seller to purchase the defaulted Mortgage Loan
if the breach cannot be cured by such Seller. 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.
The original amount of coverage under each Pool Insurance Policy will be
reduced over the life of the related Certificates by the aggregate net 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
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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.
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."
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 FHA-insured Single Family Loan, the Master
Servicer or any Sub-Servicer 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
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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 debenture 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 1803(a), as amended. As
of January 1, 1990, 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.
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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 coinsurance 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, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. 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 Depositor 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 may 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 Depositor 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
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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
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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 Soldiers' 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
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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 Depositor 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 Depositor on or with respect to such Mortgage Loans after
the Cutoff 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 Depositor 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
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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
Depositor 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
Depositor 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 Depositor 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
Depositor 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 Depositor or the originator of such loans, and (ii) in the
case of Contracts, the Depositor or Master Servicer will promptly make or cause
to be made an appropriate filing of a UCC-I 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 Depositor
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 Depositor 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 Depositor, and the Master
Servicer will notify the related Seller. Unless otherwise specified in the
related Prospectus Supplement, if the Seller or an entity which sold the
Mortgage Loan to the Seller cannot cure the omission or defect within 60 days
after receipt of such notice, the Seller 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 Seller 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 Sellers; Repurchases," neither the Master Servicer nor the
Depositor will be obligated to purchase such Mortgage Loan if the Seller 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 Depositor, 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.
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 Depositor 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
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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 Depositor 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 Sub-Servicer 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
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("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
Sellers; 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 Sub-Servicer 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 Certificateholders 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 SELLERS
Each Seller of 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
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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
Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. 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
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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
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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
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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 SubServicer 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
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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
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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.
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 Sub-
Servicers, 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 two officers 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 DEPOSITOR
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 Depositor or the Depositor'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 Depositor nor any director, officer, employee, or agent
of the Master Servicer or the Depositor will be under any liability to the
Trustee, the related Trust Fund or Certificateholders for any action taken or
for refraining from the
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taking of any action in good faith pursuant to the Agreement, or for errors in
judgment; provided, however, that neither the Master Servicer, the Depositor
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 Depositor and any director, officer,
employee or agent of the Master Servicer or the Depositor 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 Depositor 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
Depositor 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 Depositor, 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 the Depositor,
or to the Master Servicer, the Depositor 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
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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 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 Depositor, 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 Depositor, 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
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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 Depositor, 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
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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
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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 Depositor will transfer
or cause the transfer of physical possession of the Contracts to the Trustee or
its custodian. In addition the Depositor will make or cause to be made an
appropriate filing of a UCC-I 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 Depositor.
The Depositor 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
Depositor, 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 Depositor or the Seller 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 Depositor'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
Depositor or Seller.
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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 Depositor 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 Depositor will
obtain the representation of the Seller 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 sales 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
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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
cancelled 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
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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.
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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 the 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.
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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 Seller had or should have had knowledge of such claim or defense,
the Master Servicer will have the right to require the Seller to repurchase the
Contract because of a breach of its Seller's 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
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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 Seller, and the Certificateholders would
suffer a loss only to the extent that (i) the Seller breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Seller, the Depositor or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Certificateholders against
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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
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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)(1) 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
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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,
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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
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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 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
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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
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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.
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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
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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 REMlCs. 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
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(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 a 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."
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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-
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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 (including a holder which is a
thrift institution) 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
derived 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 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).
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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 "negative-value" 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
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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
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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, currently 35 percent, 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
transferee. 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
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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.
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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 Depositor 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 Depositor 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 Depositor, 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.
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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 any of 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 Non-REMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-REMIC 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
(assuming monthly compounding) 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
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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 Non-REMIC 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 Non-REMIC 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-REMlC Certificates If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Non-REMIC 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."
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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 Non-REMIC 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-REMlC Certificates. A holder that sells a Non-REMIC 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 Non-REMIC 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
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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.
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ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Certificates of a Series that are not divided into classes.
If Certificates are divided into classes, the related Prospectus Supplement
will contain information concerning considerations relating to ERISA and the
Code that are applicable to such Certificates.
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, among other factors, such fiduciary should consider
(i) whether the investment is for the exclusive benefit of plan participants
and their beneficiaries, as required by Section 404(a) (1) (A) of ERISA; (ii)
whether the investment satisfies the diversification requirements of Section
404(a) (1) (C) of ERISA; (iii) whether the investment is in accordance with the
documents and instruments governing the plan as required by Section 404(a) (1)
(D) of ERISA; 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 DOL Regulation (S) 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 applies to 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 (each a
"Plan").
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 Depositor can give no
assurance that the Certificates will qualify for any of the exemptions under
the Regulation. As a result, the Mortgage Pool may be considered the assets of
any Plan which acquires a Certificate, and certain transactions between the
Depositor, the Trustee, the Master Servicer and the Pool Insurer may be
considered prohibited transactions unless some other 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 Depositor 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 Depositor; and (iii) the payments made
to and retained by the Depositor 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 Depositor, the Mortgage Insurer, the Pool Insurer,
the Master Servicer, or the Trustee is a party in interest if
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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 Depositor, the Master
Servicer, the Mortgage 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 Depositor 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 Depositor, the Trustee, the Master Servicer, and the
Mortgage 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 mortgage pools and the purchase, sale and
holding of mortgage pass-through certificates.
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 Corporation, Moody's Investors Service, or Duff & Phelps Inc. or Fitch
Investors Services Inc. ("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 Depositor, the Master
Servicer, each servicer and any mortgagor with respect to Mortgage Loans
constituting more than 5% of the aggregate unamortized principal balance of the
Mortgage Loans 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 Depositor
pursuant to the assignment of the Mortgage Loans 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)
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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 Depositor 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 thc 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 either PTCE 83-1 or PTE 90-30
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) and PTCE 91-38 (regarding investments by bank
collective investments funds). 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.
LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement, 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.
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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. (S) 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe.
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 characteristics 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
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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
Interbank 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 Depositor, 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
Depositor. In connection with the sale of the Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
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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 Cutoff
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 Depositor and purchasers of
Certificates of such Series.
The Depositor will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's Mortgage Loans
pending the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the 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
Depositor 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
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than anticipated yield, and, in addition, holders of stripped pass-through
certificates in extreme cases 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.
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GLOSSARY
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Accounts................................................................... 29
APR........................................................................ 6
ARM........................................................................ 83
Accrual Certificates....................................................... 31
Accrual Period............................................................. 68
Agency Securities.......................................................... 1
Agreement.................................................................. 7
Available Funds............................................................ 30
Bear, Stearns.............................................................. 89
Bankruptcy Bond............................................................ 10
Buydown Funds.............................................................. 65
CMO........................................................................ 7
Cede....................................................................... 33
Certificateholders......................................................... 1
Certificate Account........................................................ 46
Certificate Register....................................................... 29
Certificates............................................................... 1
Charter Act................................................................ 20
Cleanup Costs.............................................................. 64
Code....................................................................... 12
Collateral Value........................................................... 16
Commission................................................................. 2
Contracts.................................................................. 1
Cooperative Loans.......................................................... 1
Cooperatives............................................................... 4
Current Principal Amount................................................... 31
Cut-off Date............................................................... 8
Definitive Certificates.................................................... 34
Depositor.................................................................. 1
Detailed Description....................................................... 14
Determination Date......................................................... 30
Distribution Date.......................................................... 2
DTC........................................................................ 33
ERISA...................................................................... 13
Events of Default.......................................................... 53
FDIC....................................................................... 27
FHA........................................................................ 4
FHA Insurance.............................................................. 29
FHA Loans.................................................................. 18
FHLMC...................................................................... 1
FHLMC Act.................................................................. 21
FHLMC Certificate group.................................................... 21
FHLMC Certificates......................................................... 6
FNMA....................................................................... 1
FNMA Certificates.......................................................... 6
FTC Rule................................................................... 62
GNMA....................................................................... 1
</TABLE>
92
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<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
GNMA Certificates.......................................................... 6
GNMA Issuer................................................................ 19
Garn-St Germain Act........................................................ 62
Guaranty Agreement......................................................... 19
HUD........................................................................ 23
Housing Act................................................................ 18
Indirect Participant....................................................... 33
Insurance Proceeds......................................................... 45
Insured Expenses........................................................... 45
LIBOR...................................................................... 89
Liquidation Expenses....................................................... 46
Liquidation Proceeds....................................................... 46
Loan-to-Value Ratio........................................................ 16
Lower Tier REMIC........................................................... 74
Manufactured Homes......................................................... 18
Manufacturer's Invoice Price............................................... 16
Master Servicer............................................................ 1
Mortgage................................................................... 44
Mortgage Assets............................................................ 1
Mortgage Loans............................................................. 4
Mortgage Pool.............................................................. 4
Mortgage Rate.............................................................. 5
Mortgaged Properties....................................................... 14
Mortgagors................................................................. 30
Multifamily Loans.......................................................... 1
Multiple Variable Rate REMIC Regular Certificate........................... 70
National Credit Rating Agencies............................................ 86
Non-REMIC Certificates..................................................... 13
OID Regulations............................................................ 66
Participants............................................................... 33
Pass-Through Rate.......................................................... 2
PMBS Agreement............................................................. 23
Percentage Interests....................................................... 53
Permitted Investments...................................................... 40
Plan....................................................................... 85
Policy Statement........................................................... 88
Pool Insurance Policy...................................................... 9
Pool Insurer............................................................... 36
Prepayment Assumption...................................................... 67
Presumed Single Qualified Floating Rate.................................... 70
Presumed Single Variable Rate.............................................. 70
Primary Insurer............................................................ 50
Primary Insurance Policy................................................... 14
Principal Prepayments...................................................... 31
Private Mortgage-Backed Securities......................................... 1
Protected Account.......................................................... 45
PTCE 83-1.................................................................. 85
PTE 90-30.................................................................. 86
</TABLE>
93
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<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Purchase Price............................................................. 27
REIT....................................................................... 75
REMIC...................................................................... 1
REMIC Certificates......................................................... 65
REMIC Regular Certificates................................................. 12
REMIC Regulations.......................................................... 65
REMIC Residual Certificates................................................ 12
Rating Agency.............................................................. 10
Record Date................................................................ 29
Refinance Loan............................................................. 16
Regulation................................................................. 85
Relief Act................................................................. 63
Reserve Account............................................................ 2
Retained Interest.......................................................... 28
RICs....................................................................... 75
SMMEA...................................................................... 11
Seller..................................................................... 1
Senior Certificates........................................................ 7
Single Family Loans........................................................ 1
Single Variable Rate REMIC Regular Certificate............................. 70
Special Hazard Insurance Policy............................................ 10
Special Hazard Insurer..................................................... 37
Stripped Bond Rules........................................................ 81
Sub-Servicer............................................................... 11
Sub-Servicing Agreement.................................................... 46
Subordinated Certificates.................................................. 7
Superlien.................................................................. 64
Tiered REMICs.............................................................. 66
Title V.................................................................... 62
Trust Fund................................................................. 1
Trustee.................................................................... 1
UCC........................................................................ 33
United States person....................................................... 84
VA......................................................................... 4
VA Guarantees.............................................................. 29
VA Loans................................................................... 18
Variable Rate Non-REMIC Certificates....................................... 82
Variable Rate REMIC Regular Certificate.................................... 69
Yield Supplement Agreement................................................. 64
</TABLE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY BSMSI OR THE UNDERWRITERS. 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 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 EF-
FECTING TRANSACTIONS IN THE CERTIFICATES OFFERED HEREBY, WHETHER OR NOT PARTIC-
IPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLE-
MENT 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms........................................................... S-4
Description of the Mortgage Loans.......................................... S-26
ICI Funding................................................................ S-27
Description of the Certificates............................................ S-34
Yield and Prepayment Considerations........................................ S-52
The Pooling and Servicing Agreement........................................ S-63
Federal Income Tax Considerations.......................................... S-77
ERISA Considerations....................................................... S-78
Legal Investment........................................................... S-79
Restrictions on Purchase and Transfer of the
Residual Certificates..................................................... S-80
Method of Distribution..................................................... S-80
Legal Matters.............................................................. S-81
Ratings.................................................................... S-81
Index of Principal Definitions............................................. S-83
Annex A--Certain Characteristics of the
Mortgage Loans............................................................ A-1
PROSPECTUS
Prospectus Supplement...................................................... 2
Available Information...................................................... 2
Incorporation of Certain Documents By Reference............................ 3
Reports to Certificateholders.............................................. 3
Summary of Terms........................................................... 4
The Trust Fund............................................................. 14
Use of Proceeds............................................................ 25
The Depositor.............................................................. 25
Mortgage Loan Program...................................................... 25
Description of the Certificates............................................ 28
Credit Enhancement......................................................... 35
Yield and Prepayment Considerations........................................ 41
The Pooling and Servicing Agreement........................................ 43
Certain Legal Aspects of the Mortgage Loans................................ 55
Certain Federal Income Tax Consequences.................................... 64
ERISA Considerations....................................................... 85
Legal Investment........................................................... 87
Method of Distribution..................................................... 89
Legal Matters.............................................................. 90
Financial Information...................................................... 90
Rating..................................................................... 90
Glossary................................................................... 92
</TABLE>
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$261,027,642
(APPROXIMATE)
BEAR STEARNS
MORTGAGE SECURITIES INC.
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1996-4
----------------------------
PROSPECTUS SUPPLEMENT
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BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO.
INCORPORATED
SEPTEMBER 25, 1996
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