<PAGE>
RULE NO. 424(b)(2)
REGISTRATION NO. 33-44658
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 23, 1996)
$213,027,758
(APPROXIMATE)
LOGO ICI FUNDING CORPORATION
MASTER SERVICER AND SELLER
BEAR STEARNS MORTGAGE SECURITIES INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-3
The Mortgage Pass-Through Certificates, Series 1996-3 (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>
<CAPTION>
$45,532,000 6.82% Class A-1 Certificates $16,000,346 7.75% Class A-10 Certificates
<S> <C> <C> <C> <C> <C>
$28,467,000 7.24% Class A-2 Certificates $ 2,500,000 7.75% Class A-11 Certificates
$24,371,000 7.39% Class A-3 Certificates $ 165,945 (1) Class PO Certificates
$18,604,000 7.55% Class A-4 Certificates (2) (2) Class X Certificates
$17,089,000 7.75% Class A-5 Certificates $ 7,608,134 7.75% Class B-1 Certificates
$ 6,502,000 7.75% Class A-6 Certificates $ 4,890,943 7.75% Class B-2 Certificates
$12,175,000 7.75% Class A-7 Certificates $ 2,717,190 7.75% Class B-3 Certificates
$17,149,000 7.75% Class A-8 Certificates $ 100 7.75% Class R-1 Certificates
$ 9,256,000 7.75% Class A-9 Certificates $ 100 7.75% Class R-2 Certificates
</TABLE>
- - - -------
(1) The Class PO Certificates will be principal only Certificates and will not
bear interest.
(2) The Class X Certificates will have a notional principal amount ("Notional
Amount") equal to the Scheduled Principal Balances of the Mortgage Loans
(each as defined herein) 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 (as defined herein) 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 approximately 1.18% per annum.
(3) The Class R-2 Certificates will bear interest on their Current Principal
Amount at a variable Pass-Through equal to the weighted average of the Net
Rates of the Mortgage Loans.
---------------
Each class of Offered Certificates (other than the 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 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 98.83% 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 $350,000.
The Offered Certificates (other than the 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
(other than the Class X 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 June 28, 1996.
BEAR, STEARNS & CO. INC. MORGAN STANLEY & CO.
INCORPORATED
The date of this Prospectus Supplement is June 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 a pool 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 (the "Mortgage Loans"). The characteristics of the Mortgage
Loans 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.
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 July 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 purchased 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 INVESTORS IN 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, WHICH 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 DISCOUNT
MORTGAGE LOANS, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS 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 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 ALSO WILL BE
ADVERSELY AFFECTED BY REALIZED LOSSES AND NET INTEREST SHORTFALLS (EACH AS
DEFINED HEREIN). NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF
PREPAYMENTS ON THE 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.
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. See
"Restrictions on Purchase and Transfer of the Residual Certificates" herein.
S-2
<PAGE>
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 February 23, 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 1996-3
(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
Mortgage Loans having aggregate principal balances
as of the Cut-off Date of approximately
$217,375,265. 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-1 6.82% $45,532,000
Class A-2 7.24% $28,467,000
Class A-3 7.39% $24,371,000
Class A-4 7.55% $18,604,000
Class A-5 7.75% $17,089,000
Class A-6 7.75% $ 6,502,000
Class A-7 7.75% $12,175,000
Class A-8 7.75% $17,149,000
Class A-9 7.75% $ 9,256,000
Class A-10 7.75% $16,000,346
Class A-11 7.75% $ 2,500,000
Class PO (1) $ 165,945
Class X Variable Rate (2)
Class B-1 7.75% $ 7,608,134
Class B-2 7.75% $ 4,890,943
Class B-3 7.75% $ 2,717,190
Class R-1 7.75% $ 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 Scheduled Principal Balances
of the Mortgage Loans.
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,
S-4
<PAGE>
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 $1,412,939,
$978,188 and $1,956,380, respectively. Each of the
Class B-4, Class B-5 and Class B-6 Certificates
will bear interest at the rate of 7.75% 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-1, Class A-2, Class A-3, Class A-4, Class A-
5, Class A-6, Class A-7, Class A-8, Class A-9,
Class A-10, Class A-11, 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 Certificates.... Class A-1, Class A-2, Class A-3, Class A-4, Class A-
5, Class A-6, Class A-7, Class A-8, Class A-9,
Class A-10 and Class A-11 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, Class R-1 and Class R-2
Certificates.
Super Senior
Certificates........... Class A-7, Class A-8 and Class A-9 Certificates.
Senior Support
Certificates........... Class A-11 Certificates.
Subordinate
Certificates........... Class B Certificates.
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, Class R-2 and Class X Certificates.
S-5
<PAGE>
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 and 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 X
Certificates will be issued in minimum
denominations of $25,000 and increments of $1 in
excess thereof and 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
Imperial Credit Industries, Inc., an affiliate of
the Master Servicer ("ICII") through June 30, 1996.
Thereafter, 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-Servicers" herein.
Trustee................... Bankers Trust Company of California, N.A., a national
banking association located in Irvine, California.
Cut-off Date.............. June 1, 1996.
Closing Date.............. On or about June 28, 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
$217,375,265 (the "Cut-off Date Scheduled Principal
Balance"). Approximately 48.82% of the Mortgage
Loans (measured by Cut-off Date Scheduled Principal
Balance) are secured by Mortgaged Properties
located in California. All of the Mortgage Loans
will be acquired by BSMSI on the date of issuance
of the Certificates from the Master Servicer.
S-6
<PAGE>
Approximately $8,615,244 aggregate principal balance
of the Mortgage Loans have original terms to stated
maturity of up to 15 years and approximately
$208,760,021 aggregate principal balance of the
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 Mortgage Loans was approximately
350 months. The original principal balances of the
Mortgage Loans ranged from approximately $20,000 to
approximately $750,000 and the average principal
balance at origination was approximately $151,795.
As of the Cut-off Date, the outstanding principal
balances of the Mortgage Loans ranged from
approximately $19,979 to approximately $749,677,
and the average outstanding principal balance as of
the Cut-off Date was approximately $151,481.
The Mortgage Rates on the Mortgage Loans are fixed
rates ranging from 7.375% per annum to 14.000% per
annum, with a weighted average Mortgage Rate as of
the Cut-off Date of approximately 8.874% per annum.
The weighted average Net Rate as of the Cut-off
Date is approximately 8.609% per annum.
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 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
S-7
<PAGE>
Date (other than a Deficient Valuation, as defined
under "Description of the Certificates--Allocation
of Losses; Subordination" herein) or any moratorium
or similar waiver or grace period) less (ii) any
Principal Prepayments received during or prior to
the month preceding the month in which such
Distribution Date occurs.
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 July 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, the period
from the first day through the last day of the
month preceding the month in which the Distribution
Date occurs (each, a "Prepayment Period").
Distributions 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. The Available Funds
(as defined herein) for such Distribution Date will
be allocated first, to pay interest due the holders
of the interest-bearing Senior Certificates and
then to reduce the Current Principal Amounts of the
Senior 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
designations. 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 will be made on any Class of
Subordinate Certificates on any Distribution Date
until all
S-8
<PAGE>
distributions of interest and principal have been
made on such date on each Class of Certificates
having a higher priority.
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 June 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 X and Class R-2 Certificates) will
bear interest at the fixed Pass-Through Rates set
forth on the cover page hereof.
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 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 approximately 1.18% per annum.
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 Mortgage Loans.
On each Distribution Date, interest will be
distributable on each interest-bearing Class of
Certificates from the Available Funds 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
S-9
<PAGE>
Losses (each as defined herein) and, after the
applicable 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. See "Description
of the Certificates--Distributions on the
Certificates--Interest" and "--Allocation of
Losses; Subordination" herein.
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-11 Certificates will bear
the interest portion of any Realized Losses (other
than Excess Losses) otherwise allocable to the
Super Senior Certificates.
Any 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 Master
Servicing Fee in connection with such Distribution
Date. 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, (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 Scheduled Principal Balances 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 Senior
Optimal Principal Amount and the Class PO Principal
Distribution Amount (each as defined herein) for
such Distribution Date, to the extent of the
Available Funds for such Distribution Date
remaining after distributions of interest are made
on the interest-bearing Senior Certificates on such
date. Subject to such limitation, the Senior
Optimal
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<PAGE>
Principal Amount and the Class PO Principal
Distribution 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 Available
Funds remaining after (i) distributions of interest
and principal have been made on each Senior
Certificate entitled thereto, (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 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 Available Funds remaining after
distributions of interest and principal on the
Senior Certificates have been made 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
remaining after giving effect to the distributions
pursuant to clauses first through third under
"Description of the Certificates--Distributions on
the Certificates" herein 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.
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
S-11
<PAGE>
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 Distributions 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 for the Super Senior
Certificates will be provided 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
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
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 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 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. Holders of Senior Certificates will bear
their proportionate share of any Realized Losses in
excess of the available total subordination amount,
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<PAGE>
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.
As of the Closing Date, the aggregate Current
Principal Amounts of all classes of Subordinate
Certificates and of the Other Certificates will
equal approximately 9% and 2%, 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 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 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 evidenced by the
Subordinate Certificates. See "Description of the
Certificates--Distributions on the Certificates"
and "--Subordination" herein.
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 $2,173,752, $4,347,505 and $100,000,
respectively. All of
S-13
<PAGE>
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 (as
defined herein) 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 the
Senior Certificates (other than the Class PO
Certificates) will be allocated pro rata without
priority among the various classes thereof). The
principal portion of such losses on 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 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) 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 Certificates on or prior to the Cross-Over Date
will be treated as Class PO Deferred Amount. 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 Certificates will be affected by the
amount and timing of principal payments on the
Mortgage Loans, the allocation of Available Funds
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 the Mortgage
Loans or as to the anticipated yield to maturity of
any Certificates.
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<PAGE>
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 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 Mortgage Loans.
The timing of payments on the Mortgage Loans may
significantly affect an investor's yield. In
general, the earlier a prepayment of principal on
the Mortgage Loans, the greater will be the effect
on an investor's yield to maturity. As a result,
the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower)
than the rate anticipated by the investor during
the period immediately following the issuance of
the Certificates will not be offset by a subsequent
like reduction (or increase) in the rate of
principal prepayments. Furthermore, the effective
yield to 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.
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<PAGE>
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 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 could result
in an actual yield that is lower than the
anticipated yield. A discount or premium would be
determined in relation to the price at which a
Certificate will yield its Pass-Through Rate, after
giving effect to any payment delay.
Reinvestment Risk. Because the Mortgage Loans may be
prepaid at any time, it is not possible to predict
the rate at which distributions on the Certificates
will be received. Since prevailing interest rates
are subject to fluctuation, there can be no
assurance that investors in the Certificates will
be able to reinvest the distributions thereon at
yields
equaling or exceeding the yields on the
Certificates. Yields on any such reinvestments may
be lower, and may even be significantly lower, than
yields on the Certificates. Generally, when
prevailing interest rates increase, prepayment
rates on mortgage loans tend to decrease, resulting
in a reduced 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 the Mortgage Loans will be subordinated to such
rights of the holders of the 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 the Senior Certificates, on the one hand, and
the Subordinate Certificates, on the other,
prepayments on Mortgage Loans will be allocated
solely to the 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 the Senior Certificates
and Subordinate
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<PAGE>
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
Senior Certificates while increasing the percentage
interest in the Mortgage Loans evidenced by the
Subordinate Certificates.
As among the Senior Certificates (other than the
Class PO Certificates), prepayments on Mortgage
Loans will be allocated solely to such classes of
Senior Certificates other than the Class A-10 and
A-11 Certificates during the first five years after
the Closing Date, and then such allocation will
decrease 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-10 and Class A-
11 Certificates, while increasing the percentage
interest in the Mortgage Loans evidenced by the
Class A-10 and Class A-11 Certificates.
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. See
"Description of the Certificates--Distributions on
the Certificates" and "--Allocation of Losses;
Subordination" herein.
Sequential Pay Senior Certificates. The Classes of
Senior 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
Mortgage Loans at such time. Distributions on
Classes with a later priority of payment will not
be directly affected by the prepayment rate until
such time as principal is distributable on such
Classes. However, the timing of commencement of
principal distributions and the weighted average
lives of such Classes will be affected by the
prepayment rate experienced both before and after
the commencement of principal distributions on such
Classes. In addition, because principal
distributions are paid to certain Classes of Senior
Certificates before other Classes of Senior
Certificates, holders of Senior Certificates that
receive principal later bear a greater risk of
being allocated Realized Losses on the Mortgage
Loans than holders of such Classes that receive
principal earlier.
Class PO Certificates. The amounts payable with
respect to the Class PO Certificates generally
derive only from principal payments on the Discount
Mortgage Loans. As a result, the
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<PAGE>
yield on the Class PO Certificates will be
adversely affected by slower than expected payments
of principal (including prepayments, defaults and
liquidations) on the Discount Mortgage Loans.
Because the Discount Mortgage Loans have lower Net
Rates than the Non-Discount Mortgage Loans, and
because the Mortgage Loans with lower Net Rates are
likely to have lower Mortgage Rates, the 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
Scheduled Principal Balances of the Mortgage Loans,
the yield on the Class X Certificates will be
sensitive to the rate and timing of principal
prepayments on 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 Offered Certificates
(other than the Class X Certificates), but it is
not obligated to do so. There is no assurance that
any such market, if established, will continue.
Each Certificateholder will receive monthly reports
pertaining to the Certificates as described under
"The Pooling 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
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<PAGE>
sources will provide information about the
Certificates. Investors should consider the effect
of limited information on the liquidity of the
Certificates.
Optional Termination..... On any Distribution Date on which the aggregate
Scheduled Principal Balance of the Mortgage Loans
is less than 10% of the aggregate unpaid 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.
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<PAGE>
ERISA Considerations.... Fiduciaries of employee benefit plans subject to
Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consider
the ERISA fiduciary investment standards before
authorizing an investment by a plan in the
Certificates. In addition, fiduciaries of employee
benefit plans or other retirement arrangements
(such as individual retirement accounts or certain
Keogh plans) which are subject to Title I of ERISA,
and/or Section 4975 of the 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-11 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-11, 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-11, 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
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<PAGE>
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
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 (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
or (iii) an estate or trust that is subject to
federal income tax regardless of the source of its
income. 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.
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<PAGE>
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-1 AAA AAA
Class A-2 AAA AAA
Class A-3 AAA AAA
Class A-4 AAA AAA
Class A-5 AAA AAA
Class A-6 AAA AAA
Class A-7 AAA AAA
Class A-8 AAA AAA
Class A-9 AAA AAA
Class A-10 AAA AAA
Class A-11 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
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.
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<PAGE>
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.
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<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 the Mortgage Loans is
approximately $217,375,265. Mortgage Loans with a Cut-off Date Scheduled
Principal Balance of approximately $8,615,244 have original terms to stated
maturity of up to 15 years and Mortgage Loans with a Cut-off Date Scheduled
Principal Balance of approximately $208,760,021 have original terms to stated
maturity of greater than 15 but not more than 30 years, 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 31 Mortgage Loans with a Cut-off Date Scheduled Principal
Balance of approximately $4,753,770) 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.
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.
- - - -------------
/*/ 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 June 10, 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-24
<PAGE>
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 48.82% of the Mortgage Loans (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 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 has 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. Since March 31, 1996, ICII has 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"), will perform ICI Funding's mortgage loan servicing for a sub-
servicing fee. At March 31, 1996, Wendover serviced approximately $7.9 billion
outstanding principal amount of mortgage loans. ICII and Wendover are each
hereinafter at times referred to herein as a "Sub-Servicer." See "--The Master
Servicer; the Sub-Servicers."
At March 31, 1996, ICI Funding had approximately 61 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.
UNDERWRITING STANDARDS
All of the Mortgage Loans were acquired by ICI Funding. Approximately
84.13% of the Mortgage Loans (by Cut-off Date Scheduled Principal Balance) were
underwritten pursuant to, or in accordance with the
S-25
<PAGE>
standards of, the Progressive Series I Program, 4.66% pursuant to, or in
accordance with the standards of, the Progressive Series II Program, 4.61%
pursuant to, or in accordance with the standards of, the Progressive Series III
Program, 4.07% pursuant to, or in accordance with the standards of, the
Progressive Series III+ Program, 1.69% pursuant to, or in accordance with the
standards of, the Progressive Series IV Program and 0.84% pursuant to, or in
accordance with the standards of, the Progressive Series V Program.
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, III, III+, IV and V Program borrowers are required to
have debt service-to-income ratios within the range of 45% to 60% 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. All mortgage loans
originated under the Series III+, IV and V Programs are underwritten by
employees of ICI Funding. 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. None of the Series III+ Program Mortgage Loans with Loan-to-Value
Ratios at origination in excess of 80% will be insured by a Primary Insurance
Policy. In general, all Series IV and Series V Program Mortgage Loans have
Loan-to-Value Ratios at origination which are less than or equal to 80% and do
not require a Primary Insurance Policy. ICI Funding
S-26
<PAGE>
receives verbal verification of employment prior to funding or acquiring each
Progressive Series Program mortgage loan.
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 Lite 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, year-to-date financial statements, a business credit report and a
signed IRS Form 4506 (Request for Copy of Tax Returns).
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. In addition, the Lite
Documentation Program is available to Series III+, Series IV and Series V self-
employed borrowers where the previous 12 months bank statements are utilized in
lieu of tax returns. Under these programs 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
and Lite Documentation Programs 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
S-27
<PAGE>
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 and a maximum loan amount of $650,000 for cash out refinance
transactions. The maximum loan amount for mortgage loans underwritten in
accordance with Series III+, IV and V Reduced Documentation Program is $400,000.
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 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.
With respect to the Series III+ Program, a borrower may not have more than
two 30-day delinquent mortgage payments within the past 12 months. The borrower
may not have more than two 30-day delinquent payments and one 60-day delinquent
payment on revolving debt in the last 12 months and may not have more than two
30-day delinquent payments and one 60-day delinquent payment on any installment
credit account in the past 12 months. Any open judgments, suits, liens,
collections, charge-offs not to exceed $500 must be paid in full at closing.
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 IV Program, a borrower may not have more than
four 30-day delinquent mortgage payments or three 30-day delinquent mortgage
payments and one 60-day delinquent mortgage payment within the past 12 months.
The borrower may not have more than four 30-day delinquent payments or two 60-
day delinquent payments or one 90-day delinquent payment on revolving debt in
the last 12 months and may not have more than four 30-day delinquent payments or
two 60-day delinquent payments or one 90-day delinquent payment on any
installment credit account in the past 12 months. Any open judgments, suits,
liens,
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<PAGE>
collections, charge-offs not to exceed $1,000 must be paid in full at
closing. Bankruptcies must be at least 18 months old, fully discharged and the
borrower must have re-established a satisfactory credit history. Foreclosures
are not allowed in the past 18 months.
With respect to the Series V Program, a borrower may not have more than five
30-day delinquent mortgage payments or two 60-day delinquent mortgage payments
and one 90-day delinquent mortgage payment within the past 12 months. The
borrower may not have more than six 30-day delinquent payments or three 60-day
delinquent payments or two 90-day delinquent payments on revolving debt in the
last 12 months and may not have more than six 30-day delinquent payments or
three 60-day delinquent payments or two 90-day delinquent payments on any
installment credit account in the past 12 months. Any open judgments, suits,
liens, collections, charge-offs not to exceed $4,000 must be paid in full at
closing. Bankruptcies must be at least 12 months old, fully discharged and the
borrower must have re-established a satisfactory credit history. Foreclosures
are not allowed in the past 12 months.
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 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
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<PAGE>
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-SERVICERS
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, ICII will sub-service the Mortgage Loans through June 30, 1996, in
exchange for a sub-servicing fee. ICII has sold substantially all of its loan
servicing operations. Commencing July 1, 1996, Wendover will sub-service the
Mortgage Loans in exchange for a sub-servicing fee. See "ICI Funding--General."
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.
<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
383 2.3% 862 4.0% 1,395 4.6% 732/2/ =======
(excluding ====== === ====== === ====== === ====== 9.8%/2/
Foreclosures).......... =======
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
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<PAGE>
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 March 31,
1996. As at December 31, 1993, 1994 and 1995, and March 31, 1996, the total
principal balance of loans being serviced by Wendover was (in millions)
$4,785.6, $7,160.8, $7,637.4 and $7,878.3, 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.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 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/1/ 78,372 100% 96,270 100% 94,662 100% ======== 100%
====== ==== ====== ===== ====== ===== 101,101 =====
Period of Delinquency: =======
30-59 days............. 2,778 2.85% 4,093 4.73% 5,364 6.10% 4,579 4.71%
60-89 days............. 679 0.66% 1,162 1.39% 1,291 1.46% 1,239 1.27%
90 days or more........ 8,694 5.67% 10,082 5.98% 8,409 7.31% 7,613 6.49%
------ ---- ------ ----- ------ ----- ------- -----
Total Delinquencies
(excluding
Foreclosures)........... 12,151 9.18% 15,337 12.10% 15,064 14.87% 13,431 12.47%
====== ==== ====== ===== ====== ===== ======= =====
Foreclosures Pending 1,962 3.70% 1,632 2.28% 4,041 4.86% 3,678 4.84%
- - - ------------------
</TABLE>
1 Includes purchased mortgage servicing rights owned by Wendover totalling
6,332 loans for $614.9 million unpaid principal balance and 6,098 loans for
$587.5 million unpaid principal balance as of December 31, 1995 and March 31,
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
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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.
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 1996-3 (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 and increments of $1 in excess
thereof. One Certificate of each such Class may be issued in an initial
principal amount that is not an integral multiple of $1. 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 X Certificates will be issued in certificated fully-registered form
in minimum denominations of $25,000 and increments of $1 in excess thereof. The
Notional Amount of the Class X Certificates will equal the Scheduled Principal
Balances of the Mortgage Loans.
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
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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.
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.
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<PAGE>
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 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 equal the aggregate of the
following amounts with respect to the 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 during
the month in which such Distribution Date occurs and all related payments of
interest;
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<PAGE>
(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.
DISTRIBUTIONS ON THE CERTIFICATES
Allocation of Available Funds. Interest and principal on the Certificates will
be distributed monthly on each Distribution Date, commencing in July 1996, in an
aggregate amount equal to the Available Funds for such Distribution Date.
On each Distribution Date, the Available Funds will be distributed in the
following order of priority among the Certificates:
first, to the interest-bearing Classes of Senior Certificates, the Accrued
Certificate Interest on each such Class for such Distribution Date. As
described below, Accrued Certificate Interest on each Class of Certificates is
subject to reduction in the event of certain Net Interest Shortfalls allocable
thereto. Any Net Interest Shortfalls shall be allocated among the Senior
Certificates as described below;
second, to the interest-bearing Classes of Senior Certificates, any Accrued
Certificate Interest thereon remaining undistributed from previous Distribution
Dates, to the extent of remaining Available Funds, any shortfall in available
amounts being allocated among such Classes in proportion to the amount of such
Accrued Certificate Interest remaining undistributed for each such Class for
such Distribution Date;
third, to the Senior Certificates (other than the Class X Certificates) in
reduction of the Current Principal Amounts thereof;
(a) the Senior Optimal Principal Amount (as defined herein), in the following
order of priority:
(i) concurrently to the Class A-10 and Class A-11 Certificates, pro rata
based upon their Current Principal Amounts up to the Class A-10/Class A-11
Optimal Principal Amount (as defined herein) for such Distribution Date, until
their Current Principal Amounts have been reduced to zero; and
(ii) first, concurrently, to the Class R-1 and Class R-2 Certificates,
pro rata, based upon their current Principal Amounts, and then sequentially to
the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-
7, Class A-8 and Class A-9 Certificates, in that order, until the respective
Current Principal Amounts thereof have been reduced to zero;
(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;
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 fourth, shall not exceed the excess, if any, of (x)
the Available Funds remaining after giving effect to distributions pursuant to
clauses first through third above 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 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; and
fifth, 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.
The "Class A-10/Class A-11 Optimal Principal Amount" for any Distribution
Date occurring prior to the Distribution Date in June 2001 will equal zero. The
Class A-10/Class A-11 Optimal Principal Amount for any Distribution Date
occurring after the first five years following the Cut-off Date will be as
follows: for any Distribution Date during the sixth and seventh years after the
Closing Date, 50% of the Class A-10/Class A-11 Pro Rata Optimal Principal Amount
(as defined below) for such Distribution Date; and, for any Distribution Date
thereafter, 100% of the Class A-10/Class A-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 Senior
Certificates (other than the Class A-10, Class A-11 and Class PO Certificates)
has been reduced to zero, the Class A-10/Class A-11 Optimal Principal Amount
shall equal the Senior Optimal Principal Amount to the extent not distributed on
such Distribution Date to other Classes of Senior Certificates.
For any Distribution Date, the "Class A-10/Class A-11 Pro Rata Optimal
Principal Amount" shall be an amount equal to the product of (x) the 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-10 and Class A-11 Certificates immediately prior to such
Distribution Date and the denominator of which is the aggregate Current
Principal Amounts of all Classes of Senior Certificates (other than the Class PO
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.
On each Distribution Date after the Distribution Date on which the Current
Principal Amounts of the Subordinate Certificates are reduced to zero (the
"Cross-Over Date"), distributions of principal on the outstanding Senior
Certificates (other than the Class PO and Class X Certificates) will be made pro
rata among all such Certificates, regardless of the allocation, or sequential
nature, of principal payments described in priority third above, based upon the
then Current Principal Amounts of such Certificates.
If, after distributions have been made pursuant to priorities first and second
above on any Distribution Date, remaining Available Funds are less than the sum
of the Senior Optimal Principal Amount and the Class PO Principal Distribution
Amount for such Distribution Date, such amounts shall be proportionately
reduced, and such remaining Available Funds will be distributed on the Senior
Certificates (other than the Class X Certificates) in accordance with clauses
(a) and (b) of priority 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 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.
On each Distribution Date, any 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. It is not anticipated that there will be any
significant amounts remaining for such distribution.
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<PAGE>
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 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 X and Class R-2
Certificates) will bear interest at the fixed Pass-Through Rates set forth on
the cover page hereof.
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 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 approximately 1.18% per annum. 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 Mortgage Loans.
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-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 Cash Shortfall Amount with respect to the 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 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 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, pro rata among the Classes of
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<PAGE>
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 Scheduled
Principal Balances 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 during the related
Prepayment Period, (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 Master
Servicing Fee in connection with 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 Available Funds is less than the Accrued
Certificate Interest on the Senior Certificates for such Distribution Date, the
shortfall will be allocated among the holders of each Class of interest-bearing
Senior Certificates in proportion to the respective amounts of Accrued
Certificate Interest for such Distribution Date on each such Class. In
addition, the amount of any interest shortfalls that are covered by
subordination will constitute unpaid Accrued Certificate Interest and will be
distributable to holders of the Certificates of such Classes entitled to such
amounts on subsequent Distribution Dates, to the extent of Available Funds 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. All payments and other amounts received in respect of principal of
the Mortgage Loans will be allocated between (i) the Senior Certificates (other
than the Class PO Certificates and the 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 7.75% per annum (each such Mortgage Loan, a "Discount Mortgage Loan") will
be equal to the Net Rate thereof divided by 7.75%. The "Non-PO Percentage" with
respect to any Mortgage Loan with a Net Rate equal to or greater than 7.75%
(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 7.75% minus the Net Rate thereof divided by
7.75%. The "PO Percentage" with respect to any Non-Discount Mortgage Loan will
be 0%.
Distributions in reduction of the Current Principal Amount of each Class of
Senior Certificates (other than the Class X Certificates) will be made on each
Distribution Date pursuant to priority third above and the fourth, fifth and
sixth paragraphs following priority fifth above under "--Allocation of Available
Funds." In accordance with priority third, the Available Funds remaining after
distribution of interest on the interest-bearing Senior Certificates on such
Distribution Date will be allocated to such Certificates in an aggregate amount
not to exceed the sum of the Senior Optimal Principal Amount and the Class PO
Principal Distribution Amount for such Distribution Date. Distributions in
reduction of the Current Principal Amounts of the Subordinate Certificates will
be made pursuant to priority fifth under "--Allocation of Available Funds"
above. In accordance with each such priority, the Available Funds, if any,
remaining after distributions of principal and interest on the Senior
Certificates and payments in respect of the Class PO Deferred
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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 "Senior Optimal Principal Amount" with respect to each Distribution Date
will be an amount equal to the sum of:
(i) the Senior Percentage of the applicable Non-PO Percentage of all
scheduled payments of principal due on each 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 Senior Prepayment Percentage of the applicable Non-PO Percentage of
the Scheduled Principal Balance of each Mortgage Loan which was the subject of
a prepayment in full received by the Master Servicer during the applicable
Prepayment Period (as defined below);
(iii) the Senior Prepayment Percentage of the applicable Non-PO Percentage
of all partial prepayments of principal received during the applicable
Prepayment Period;
(iv) the lesser of (a) the 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 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 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 Senior Percentage of the applicable Non-PO Percentage of the sum of (w) the
Scheduled Principal Balance of each Mortgage Loan 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 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 Senior Percentage of
the applicable Non-PO Percentage of the principal portion of Excess Losses
(other than Debt Service Reductions) incurred during the related Prepayment
Period; and
(v) the Senior Prepayment Percentage of the applicable Non-PO Percentage of
the sum of (a) the Scheduled Principal Balance of each 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
Mortgage Loan 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 from the first day through the last day of the month
preceding the month of such Distribution Date.
The "Senior Percentage" on any Distribution Date will 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 the Senior Certificates
(other than the Current Principal Amount of the Class PO Certificates)
immediately preceding such Distribution Date by the aggregate Current Principal
Amounts of all the Classes of Certificates (other than the Current Principal
Amount of the Class PO Certificates) immediately preceding such Distribution
Date. The initial Senior Percentage is expected to be approximately 91%.
The "Senior Prepayment Percentage" on any Distribution Date occurring during
the periods set forth below will be as follows:
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PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- - - ------------------------ ----------------------------
July 25, 1996 - June 25, 2001.................. 100%
July 25, 2001 - June 25, 2002.................. Senior Percentage plus 70% of
the Subordinate Percentage
July 25, 2002 - June 25, 2003.................. Senior Percentage plus 60% of
the Subordinate Percentage
July 25, 2003 - June 25, 2004.................. Senior Percentage plus 40% of
the Subordinate Percentage
July 25, 2004 - June 25, 2005.................. Senior Percentage plus 20% of
the Subordinate Percentage
July 25, 2005 and thereafter................... Senior Percentage
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%.
In addition, no reduction of the 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, (i) the aggregate Scheduled Principal Balance
of Mortgage Loans 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% and (ii) cumulative Realized Losses 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 July 2001 and June 2002, (b) 35% of the related Original
Subordinate Principal Balance if such Distribution Date occurs between and
including July 2002 and June 2003, (c) 40% of the related Original Subordinate
Principal Balance if such Distribution Date occurs between and including July
2003 and June 2004, (d) 45% of the related Original Subordinate Principal
Balance if such Distribution Date occurs between and including July 2004 and
June 2005, and (e) 50% of the related Original Subordinate Principal Balance if
such Distribution Date occurs during or after July 2005.
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 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 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 received during the applicable Prepayment Period;
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(iv) the lesser of (a) the applicable PO Percentage of the sum of (w) the
net liquidation proceeds allocable to principal on each Discount Mortgage
Loan which became a Liquidated Mortgage Loan during the related Prepayment
Period (other than Discount Mortgage Loans described in clause (x)) and (x)
the Scheduled Principal Balance of each 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 Discount Mortgage Loan which became a Liquidated Mortgage
Loan during the related Prepayment Period (other than Discount Mortgage Loans
described in clause (x)) and (x) the Scheduled Principal Balance of each
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 less (y) in the case of clause (b), the
applicable PO Percentage of the principal portion of Excess Losses (other
than Debt Service Reductions) incurred during the related Prepayment Period;
and
(v) the applicable PO Percentage of the sum of (a) the Scheduled
Principal Balance of each 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 Discount
Mortgage Loan that has been replaced by the Master Servicer with a substitute
Discount Mortgage Loan pursuant to the Agreement in connection with such
Distribution Date and the Scheduled Principal Balance of such substitute
Discount Mortgage Loan.
The "Subordinate Percentage" on any Distribution Date will equal 100% minus
the Senior Percentage. The "Subordinate Prepayment Percentage" on any
Distribution Date will equal 100% minus the Senior Prepayment Percentage, except
that on any Distribution Date after the Current Principal Amounts of the Senior
Certificates (other than the Class PO Certificates) have each been reduced to
zero, the Subordinate Prepayment Percentage will equal 100%. The Initial
Subordinate Percentage is expected to be approximately 9%.
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 Subordinate Percentage of the applicable Non-PO Percentage of all
scheduled payments of principal due on each 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 Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the Scheduled Principal Balance of each Mortgage Loan which was
the subject of a prepayment in full received by the Master Servicer during
the applicable Prepayment Period;
(iii) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received during the
applicable Prepayment Period (plus, on the Distribution Date on which the
Current Principal Amounts of the Senior Certificates (other than the Class PO
Certificates) have all been reduced to zero, 100% of any 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 (other
than Mortgage Loans described in clause (b)) and (b) the principal balance of
each 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 over (c) the sum of the amounts distributable to
Senior Certificateholders pursuant to clause (iv) of each of the definitions
of "Senior Optimal Principal Amount" and Class PO Principal Distribution
Amount on such Distribution Date; and
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(v) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Scheduled Principal Balance of each 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 Mortgage Loan 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 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 on a Mortgage Loan 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) 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 thereof has been
reduced to zero.
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On each Distribution Date, the applicable PO Percentage of the principal
portion of any Realized Loss on a 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 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 fourth under "--Allocation of Available Funds" above. Any
distribution of 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 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 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 0.05% of the aggregate Scheduled Principal Balances of the
Mortgage Loans as of the Cut-off 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
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the the current ratings of the Senior Certificate 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 $4,347,505) 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 $4,347,505, 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 $2,173,752) 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 $2,173,752, 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 9% and 2%, 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 Mortgage Loans will be subordinated to such
rights of the holders of the 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 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. 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
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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 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
Senior Certificates while, in the absence of losses in respect of the Mortgage
Loans, increasing the percentage interest in the principal balance of the
Mortgage Loans evidenced by the Subordinate Certificates.
As among the Senior Certificates (other than the Class PO Certificates),
prepayments on the Mortgage Loans will be allocated solely to such Classes of
Senior Certificates other than the Class A-10 and A-11 Certificates during the
first five years after the Cut-off Date, and then such allocation will decrease
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-10 and Class A-11
Certificates, while increasing the percentage interest in the Mortgage Loans
evidenced by the Class A-10 and Class A-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 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 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.
S-46
<PAGE>
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 June 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 Scheduled Principal Balance of the Mortgage Loans is less than 10% of
the aggregate unpaid
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 the Mortgage Loans. 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 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%
S-47
<PAGE>
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 Mortgage Loans consist of four Mortgage Loans with the following
characteristics:
Principal Approximate Approximate Original Term Remaining Term
Balance Mortgage Rate Net Rate to Maturity to Maturity
- - - --------- ------------- ------------ (in months) (in months)
-------------- ---------------
$202,101,835 8.922% 8.657% 360 357
6,658,186 7.84526022 7.58026022 360 357
7,435,035 8.652 8.387 180 177
1,180,209 7.88289314 7.61789314 180 176
(ii) the Mortgage Loans prepay at the specified constant percentages of the
Prepayment Assumption, (iii) no defaults in the payment by Mortgagors of
principal of and interest on the Mortgage Loans are experienced, (iv) scheduled
payments on the Mortgage Loans are received on the first day of each month
commencing in July 1996 and are computed prior to giving effect to prepayments
received on the last day of the prior month, (v) prepayments are allocated as
described herein without giving effect to loss and delinquency tests, (vi) 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 June 1996, (vii) 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 will amortize in amounts
sufficient to repay the balance of such Mortgage Loan by its remaining term to
maturity, (viii) 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", (ix) interest accrues on each Class of Certificates at the
applicable interest rate or in the amounts described herein, (x) distributions
in respect of the Certificates are received in cash on the 25th day of each
month, commencing in July 1996, (xi) the Offered Certificates are purchased on
June 28, 1996 and (xii) 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
S-48
<PAGE>
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 June 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-49
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES CLASS A-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 Percentage...... 100 100 100 100 100 100 100 100 100 100
June 1997............... 66 51 36 21 5 100 100 100 100 100
June 1998............... 27 0 0 0 0 100 95 47 2 0
June 1999............... 0 0 0 0 0 87 19 0 0 0
June 2000............... 0 0 0 0 0 35 0 0 0 0
June 2001 and thereaf-
ter.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life to
Maturity (years)**..... 1.5 1.1 0.8 0.7 0.6 3.7 2.6 2.0 1.6 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-50
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-3 CERTIFICATES CLASS A-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 Percentage...... 100 100 100 100 100 100 100 100 100 100
June 1997............... 100 100 100 100 100 100 100 100 100 100
June 1998............... 100 100 100 100 51 100 100 100 100 100
June 1999............... 100 100 48 0 0 100 100 100 75 0
June 2000............... 100 44 0 0 0 100 100 46 0 0
June 2001............... 85 0 0 0 0 100 69 0 0 0
June 2002............... 39 0 0 0 0 100 2 0 0 0
June 2003............... 0 0 0 0 0 98 0 0 0 0
June 2004............... 0 0 0 0 0 54 0 0 0 0
June 2005............... 0 0 0 0 0 15 0 0 0 0
June 2006 and thereaf-
ter.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life to
Maturity
(years)**.............. 5.8 4.0 3.0 2.4 2.0 8.2 5.3 4.0 3.2 2.7
</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-51
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-5 CERTIFICATES CLASS A-6 CERTIFICATES
----------------------- -----------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION 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
June 1997....................... 100 100 100 100 100 100 100 100 100 100
June 1998....................... 100 100 100 100 100 100 100 100 100 100
June 1999....................... 100 100 100 100 93 100 100 100 100 100
June 2000....................... 100 100 100 44 0 100 100 100 100 0
June 2001....................... 100 100 45 0 0 100 100 100 0 0
June 2002....................... 100 100 0 0 0 100 100 29 0 0
June 2003....................... 100 41 0 0 0 100 100 0 0 0
June 2004....................... 100 0 0 0 0 100 92 0 0 0
June 2005....................... 100 0 0 0 0 100 0 0 0 0
June 2006....................... 79 0 0 0 0 100 0 0 0 0
June 2007....................... 45 0 0 0 0 100 0 0 0 0
June 2008....................... 13 0 0 0 0 100 0 0 0 0
June 2009....................... 0 0 0 0 0 56 0 0 0 0
June 2010 and thereafter........ 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity (years)**..... 10.9 6.9 5.0 4.0 3.3 13.1 8.5 5.9 4.6 3.8
</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-52
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-7 CERTIFICATES CLASS A-8 CERTIFICATES
------------------------ ------------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
------------------------ ------------------------
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
June 1997..................... 100 100 100 100 100 100 100 100 100 100
June 1998..................... 100 100 100 100 100 100 100 100 100 100
June 1999..................... 100 100 100 100 100 100 100 100 100 100
June 2000..................... 100 100 100 100 85 100 100 100 100 100
June 2001..................... 100 100 100 64 0 100 100 100 100 56
June 2002..................... 100 100 100 0 0 100 100 100 81 4
June 2003..................... 100 100 37 0 0 100 100 100 35 0
June 2004..................... 100 100 0 0 0 100 100 91 13 0
June 2005..................... 100 97 0 0 0 100 100 64 0 0
June 2006..................... 100 54 0 0 0 100 100 43 0 0
June 2007..................... 100 16 0 0 0 100 100 26 0 0
June 2008..................... 100 0 0 0 0 100 88 11 0 0
June 2009..................... 100 0 0 0 0 100 67 0 0 0
June 2010..................... 92 0 0 0 0 100 49 0 0 0
June 2011..................... 57 0 0 0 0 100 34 0 0 0
June 2012..................... 27 0 0 0 0 100 20 0 0 0
June 2013..................... 0 0 0 0 0 99 9 0 0 0
June 2014..................... 0 0 0 0 0 80 0 0 0 0
June 2015..................... 0 0 0 0 0 63 0 0 0 0
June 2016..................... 0 0 0 0 0 48 0 0 0 0
June 2017..................... 0 0 0 0 0 33 0 0 0 0
June 2018..................... 0 0 0 0 0 20 0 0 0 0
June 2019..................... 0 0 0 0 0 8 0 0 0 0
June 2020 and thereafter...... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life to
maturity (years)**........... 15.3 10.2 6.9 5.2 4.2 20.0 14.2 9.9 6.9 5.2
</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-53
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-10 AND CLASS A-11
CLASS A-9 CERTIFICATES 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
June 1997............... 100 100 100 100 100 100 100 100 100 100
June 1998............... 100 100 100 100 100 100 100 100 100 100
June 1999............... 100 100 100 100 100 100 100 100 100 100
June 2000............... 100 100 100 100 100 100 100 100 100 100
June 2001............... 100 100 100 100 100 100 99 99 99 98
June 2002............... 100 100 100 100 100 94 92 89 85 81
June 2003............... 100 100 100 100 48 89 84 79 72 64
June 2004............... 100 100 100 100 32 80 72 63 54 43
June 2005............... 100 100 100 94 22 72 62 51 41 30
June 2006............... 100 100 100 74 17 65 53 42 32 22
June 2007............... 100 100 100 58 12 58 46 35 25 17
June 2008............... 100 100 100 45 9 52 39 28 20 12
June 2009............... 100 100 99 35 7 47 33 23 15 9
June 2010............... 100 100 80 27 5 42 29 19 12 7
June 2011............... 100 100 65 21 4 37 24 15 9 5
June 2012............... 100 100 53 16 3 33 21 12 7 4
June 2013............... 100 100 43 12 2 29 17 10 5 3
June 2014............... 100 98 34 10 1 26 15 8 4 2
June 2015............... 100 82 27 7 1 22 12 6 3 1
June 2016............... 100 68 22 5 1 19 10 5 2 1
June 2017............... 100 56 17 4 1 17 8 4 2 1
June 2018............... 100 45 13 3 * 14 7 3 1 *
June 2019............... 100 36 10 2 * 12 5 2 1 *
June 2020............... 93 28 7 2 * 10 4 2 1 *
June 2021............... 74 21 5 1 * 8 3 1 * *
June 2022............... 56 15 4 1 * 6 2 1 * *
June 2023............... 39 10 2 * * 4 2 1 * *
June 2024............... 24 6 1 * * 2 1 * * *
June 2025............... 10 2 * * * 1 * * * *
June 2026 and thereaf-
ter.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life to
Maturity (years)**..... 26.5 22.2 17.3 12.7 8.2 13.9 11.9 10.5 9.5 8.5
</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-54
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS PO CERTIFICATES
-------------------------------
% OF PREPAYMENT ASSUMPTION
-------------------------------
PERIOD 50% 75% 100% 125% 150%
- - - ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage............................. 100 100 100 100 100
June 1997...................................... 92 89 86 83 80
June 1998...................................... 84 77 71 65 60
June 1999...................................... 76 67 59 52 45
June 2000...................................... 69 58 49 41 33
June 2001...................................... 62 50 40 32 25
June 2002...................................... 56 43 33 25 19
June 2003...................................... 50 37 27 20 14
June 2004...................................... 45 32 22 15 10
June 2005...................................... 41 27 18 12 8
June 2006...................................... 36 23 15 9 6
June 2007...................................... 32 20 12 7 4
June 2008...................................... 29 17 10 6 3
June 2009...................................... 25 14 8 4 2
June 2010...................................... 22 12 6 3 2
June 2011...................................... 19 10 5 2 1
June 2012...................................... 17 9 4 2 1
June 2013...................................... 15 7 3 1 1
June 2014...................................... 13 6 3 1 *
June 2015...................................... 12 5 2 1 *
June 2016...................................... 10 4 2 1 *
June 2017...................................... 9 3 1 * *
June 2018...................................... 7 3 1 * *
June 2019...................................... 6 2 1 * *
June 2020...................................... 5 2 1 * *
June 2021...................................... 4 1 * * *
June 2022...................................... 3 1 * * *
June 2023...................................... 2 1 * * *
June 2024...................................... 1 * * * *
June 2025...................................... 1 * * * *
June 2026 and thereafter....................... 0 0 0 0 0
Weighted Average
Life to maturity (years)**.................... 9.0 6.8 5.3 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-55
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS R-1 AND CLASS R- CLASS B-1, CLASS B-2 AND
2 CERTIFICATES CLASS B-3 CERTIFICATES
---------------------- ------------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
---------------------- ------------------------
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
June 1997....................... 0 0 0 0 0 99 99 99 99 99
June 1998....................... 0 0 0 0 0 98 98 98 98 98
June 1999....................... 0 0 0 0 0 97 97 97 97 97
June 2000....................... 0 0 0 0 0 96 96 96 96 96
June 2001....................... 0 0 0 0 0 95 95 95 95 95
June 2002....................... 0 0 0 0 0 91 90 89 88 86
June 2003....................... 0 0 0 0 0 87 84 82 79 76
June 2004....................... 0 0 0 0 0 81 77 72 68 64
June 2005....................... 0 0 0 0 0 75 68 62 56 50
June 2006....................... 0 0 0 0 0 67 59 51 44 37
June 2007....................... 0 0 0 0 0 61 51 42 34 28
June 2008....................... 0 0 0 0 0 54 43 34 27 21
June 2009....................... 0 0 0 0 0 49 37 28 21 15
June 2010....................... 0 0 0 0 0 43 32 23 16 11
June 2011....................... 0 0 0 0 0 38 27 18 12 8
June 2012....................... 0 0 0 0 0 34 23 15 10 6
June 2013....................... 0 0 0 0 0 30 19 12 7 4
June 2014....................... 0 0 0 0 0 27 16 10 6 3
June 2015....................... 0 0 0 0 0 23 14 8 4 2
June 2016....................... 0 0 0 0 0 20 11 6 3 2
June 2017....................... 0 0 0 0 0 17 9 5 2 1
June 2018....................... 0 0 0 0 0 15 7 4 2 1
June 2019....................... 0 0 0 0 0 12 6 3 1 1
June 2020....................... 0 0 0 0 0 10 5 2 1 *
June 2021....................... 0 0 0 0 0 8 4 2 1 *
June 2022....................... 0 0 0 0 0 6 3 1 * *
June 2023....................... 0 0 0 0 0 4 2 1 * *
June 2024....................... 0 0 0 0 0 3 1 * * *
June 2025....................... 0 0 0 0 0 1 * * * *
June 2026 and thereafter........ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life to
Maturity (years)**............. 0.1 0.1 0.1 0.1 0.1 14.0 12.3 11.1 10.2 9.6
</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
numbers 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>
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 58% for 100% of such Class of
Certificates and such Certificates are purchased on June 28, 1996.
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 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.. 7.5% 10.3% 13.3% 16.5% 19.8%
</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 of the
Class X Certificates is approximately 3.25% for 100% of such Class of
Certificates and such Certificates are purchased on June 28, 1996.
S-57
<PAGE>
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 (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
161% 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)
% of Prepayment Assumption
---------------------------------
50% 75% 100% 125% 200%
---- ---- ---- --- -----
Pre-Tax Yields to Maturity.. 23.8% 18.1% 12.7% 7.5% (8.2)%
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.
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 31 Mortgage Loans
with a Cut-off Date Scheduled Principal Balance of approximately
$4,753,770, 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 84.13% of the Mortgage Loans (by Cut-off Date Scheduled
Principal Balance) were underwritten pursuant to, or in accordance with the
standards of, the Progressive Series I Program, 4.66% pursuant to, or in
accordance with the standards of, the Progressive Series II Program, 4.61%
pursuant to, or in
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accordance with the standards of, the Progressive Series III Program, 4.07%
pursuant to, or in accordance with the standards of, the Progressive Series
III+ Program, 1.69% pursuant to, or in accordance with the standards of,
the Progressive Series IV Program and 0.84% pursuant to, or in accordance
with the standards of, the Progressive Series V Program;
(h) at the time of origination of the Mortgage Loans, at least 91% of
the 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
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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 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
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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 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
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historically appreciated in value over time, in the event of partial loss,
hazard insurance proceeds may be insufficient to restore fully the damaged
property.
Where the property securing a Mortgage Loan is located 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
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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
Classes of Certificates and the Master 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
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 Master
Servicing Fee in connection with such Distribution Date (the amount of the
Master Servicing Fee used to offset Interest Shortfalls is referred to herein as
"Compensating Interest Payments") and 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,
any income earned on the Certificate Account and certain other accounts and any
Excess Liquidation Proceeds (i.e., the amount, if any, by which Liquidation
Proceeds with respect to a Liquidated Mortgage Loan exceed the sum of (i) the
Outstanding Principal Balance of such Mortgage Loan and accrued but unpaid
interest at the related Mortgage Rate through the related Liquidation Date, 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.
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
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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 a 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, 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 Trustee will deposit in the
Certificate Account, as received, the following amounts:
(i) Any amounts withdrawn from a Protected Account or other permitted
account;
(ii) Any Monthly Advance and Compensating Interest Payments;
(iii) Any Insurance Proceeds or Liquidation Proceeds received by the
Master Servicer which were not deposited in a Protected Account or other
permitted account;
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(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 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;
(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
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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;
(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
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
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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 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 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
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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 aggregate of scheduled payments on the Mortgage Loans that were due
on the Due Date in the month of a Distribution Date and are delinquent other
than as a result of application of the Relief Act exceeds the amount deposited
in the Certificate Account which will be used for a Certificate Account Advance
(as defined below) with respect to the Mortgage Loans, the Master Servicer will
deposit in 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 Fees except to the extent the Master
Servicer determines any such advance to be nonrecoverable from Liquidation
Proceeds, Insurance Proceeds or from future payments on any Mortgage Loan.
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 Certificate Account
on or before any future date to the extent that funds in the Certificate Account
on such date are less than the amount required to be transferred to the
Certificate Account. If applicable, on the fifth Business Day preceding each
Distribution Date, the Master Servicer shall present an Officer's Certificate to
the Trustee (i) 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.
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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.
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
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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 eighteen separate interest-bearing components (the
"Separate Components"), each of which corresponds to a Class of Certificates
(other than the Class X, Class PO or Class R-2 Certificates). Each Separate
Component will have a notional amount equal to the principal balance of the
corresponding Class of Certificates and will 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 Mortgage Loan determined by multiplying the
principal balance of each Mortgage Loan by the Net Rate of the Mortgage Loan, by
(ii) the sum of the amounts computed for each Mortgage Loan determined by
multiplying the Non-PO Percentage with respect to each Mortgage Loan by the
principal balance of the Mortgage Loan over (b) the Pass-Through Rate of the
corresponding Class of Certificates.
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 fair market value of the Class R-2 Certificates will not equal or
exceed 2% of the aggregate fair market value of all interests in REMIC II as of
the Closing Date and the fair market value of the Class R-1 Certificates will
not equal or exceed 2% of the aggregate fair market value of all interests in
REMIC I as of the Closing Date. Although thrift institutions may use net
operating losses and current deductions to offset excess inclusion income from
certain residual interests in REMICs, under Treasury Department regulations,
thrifts will not be able to use net operating losses or current deductions to
offset excess inclusion income from
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the Residual Certificates. See "Certain Federal Income Tax Consequences--REMIC
Residual Certificates--Mismatching of Income and Deductions; Excess Inclusions"
in the Prospectus.
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 "qualifying real property loans" for
domestic building and loan associations and mutual savings banks, "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 as "interest on
obligations secured by mortgages on real property" for REITs, subject to the
limitations described in "Certain Federal Income Tax Consequences--REMIC
Certificates--Status of REMIC Certificates as Real Property Loans" in the
Prospectus.
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 recent 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 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-11 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-11 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.
The Exemptions do not apply to the Class A-11 or Class B Certificates
because the rights and interests evidenced by such Class A-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 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 X Certificates. However,
if the 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
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has been granted an underwriters' prohibited transaction exemption similar to
the Exemptions, such Class X Certificates 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-11, 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 (X) will result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code or will 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) and (Y) either: (i)
will cause the assets of the Trust Fund to be regarded as plan assets for
purposes of the Plan Asset Regulations 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 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 X Certificates 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 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.
S-74
<PAGE>
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 (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 or (iii) an
estate or trust that is subject to federal income tax regardless of the source
of its income (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 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 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
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to BSMSI are expected to be approximately 98.83% 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
S-75
<PAGE>
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.
Rating
-------------
Class S&P Fitch
----- --- -----
Class A-1 AAA AAA
Class A-2 AAA AAA
Class A-3 AAA AAA
Class A-4 AAA AAA
Class A-5 AAA AAA
Class A-6 AAA AAA
Class A-7 AAA AAA
Class A-8 AAA AAA
Class A-9 AAA AAA
Class A-10 AAA AAA
Class A-11 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
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" 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
S-76
<PAGE>
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-77
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
----
Accrued Certificate Interest............................. S-9
Adjustment Amount........................................ S-45
Aggregate Expense Rate................................... S-7
Agreement................................................ S-4
Allocable Share.......................................... S-42
Assumed Final Distribution Date.......................... S-47
Available Funds.......................................... S-34
Bankruptcy Coverage Termination Date..................... S-44
Bankruptcy Loss.......................................... S-43
Bankruptcy Loss Amount................................... S-45
Book-Entry Certificates.................................. S-6
BSMSI.................................................... S-2
Business Day............................................. S-33
Cede..................................................... S-32
Certificate Account...................................... S-66
Certificate Account Advance.............................. S-70
Certificate Owner........................................ S-32
Certificate Register..................................... S-34
Certificateholder........................................ S-33
Certificates............................................. S-1
Class A Certificates..................................... S-5
Class A-10/Class A-11 Optimal Principal Amount........... S-36
Class A-10/Class A-11 Pro Rata Optimal Principal Amount.. S-36
Class B Certificates..................................... S-5
Class PO Cash Shortfall.................................. S-36
Class PO Deferred Amount................................. S-11
Class PO Deferred Payment Writedown Amount............... S-37
Class PO Principal Distribution Amount................... S-40
Class Prepayment Distribution Trigger.................... S-42
Closing Date............................................. S-6
CLTV..................................................... S-26
Code..................................................... S-20
Compensating Interest Payments........................... S-65
CPR...................................................... S-47
Cross-Over Date.......................................... S-36
Current Principal Amount................................. S-10
Cut-off Date............................................. S-6
Cut-off Date Scheduled Principal Balance................. S-6
Debt Service Reduction................................... S-43
Defaulted Mortgage Loan.................................. S-64
Definitive Certificates.................................. S-34
Depositor................................................ S-6
Determination Date....................................... S-42
Discount Mortgage Loan................................... S-38
Distribution Date........................................ S-2
DTC...................................................... S-32
Due Date................................................. S-7
Due Period............................................... S-8
ERISA.................................................... S-20
Events of Default........................................ S-69
S-78
<PAGE>
Page
----
Excess Bankruptcy Losses................................. S-14
Excess Fraud Losses...................................... S-14
Excess Losses............................................ S-14
Excess Special Hazard Losses............................. S-14
Exemptions............................................... S-20
FHA...................................................... S-24
Fitch.................................................... S-22
Fraud Coverage Termination Date.......................... S-45
Fraud Loss............................................... S-43
Fraud Loss Amount........................................ S-45
ICII..................................................... S-6
ICI Funding.............................................. S-24
Indirect Participants.................................... S-33
Insurance Proceeds....................................... S-42
Interest Accrual Period.................................. S-9
Interest Shortfall....................................... S-38
Liquidated Mortgage Loan................................. S-43
Liquidation Proceeds..................................... S-43
Loss Allocation Limitation............................... S-44
Master Servicer.......................................... S-3
Master Servicing Fee..................................... S-66
Material Defect.......................................... S-59
Monthly Advance.......................................... S-13
Monthly Payment.......................................... S-43
Mortgage File............................................ S-59
Mortgage Loans........................................... S-2
Mortgage Rate............................................ S-7
Mortgaged Properties..................................... S-6
Net Interest Shortfalls.................................. S-38
Net Liquidation Proceeds................................. S-43
Net Rate................................................. S-7
Non-Discount Mortgage Loan............................... S-38
Non-SMMEA Certificates................................... S-22
Non-PO Percentage........................................ S-38
Notional Amount.......................................... S-1
Offered Certificates..................................... S-1
Original Subordinate Principal Balance................... S-40
Other Certificates....................................... S-5
Outstanding Principal Balance............................ S-60
Participants............................................. S-33
Pass-Through Rate........................................ S-9
Permitted Investments.................................... S-62
Physical Certificates.................................... S-5
Plan(s).................................................. S-20
Plan Asset Regulations................................... S-73
PO Percentage............................................ S-38
Prepayment Assumption.................................... S-47
Prepayment Period........................................ S-8
Primary Insurance Policy................................. S-24
Principal Prepayment..................................... S-42
S-79
<PAGE>
Page
----
Protected Account........................................ S-32
PTE 90-30................................................ S-73
Rating Agencies.......................................... S-22
Realized Loss............................................ S-43
Record Date.............................................. S-8
Regular Certificates..................................... S-19
REITs.................................................... S-73
Relief Act............................................... S-38
REMIC.................................................... S-2
REMIC I.................................................. S-19
REMIC II................................................. S-19
REMIC Regular Certificates............................... S-19
REMIC Residual Certificates.............................. S-19
REO Property............................................. S-43
Repurchase Price......................................... S-59
Repurchase Proceeds...................................... S-42
Residual Certificates.................................... S-5
Rules.................................................... S-33
Scheduled Principal Balance.............................. S-7
Senior Certificates...................................... S-5
Senior Optimal Principal Amount.......................... S-39
Senior Percentage........................................ S-39
Senior Prepayment Percentage............................. S-40
Senior Prepayment Percentage Stepdown Limitation......... S-40
Senior Support Certificates.............................. S-5
Separate Components...................................... S-72
Servicing Account........................................ S-62
SMMEA.................................................... S-22
S&P...................................................... S-22
Special Hazard Loss...................................... S-43
Special Hazard Loss Amount............................... S-45
Special Hazard Termination Date.......................... S-45
Subordinate Certificates................................. S-5
Subordinate Certificate Writedown Amount................. S-37
Subordinate Optimal Principal Amount..................... S-41
Subordinate Percentage................................... S-41
Subordinate Prepayment Percentage........................ S-41
Sub-Servicer............................................. S-25
Super Senior Certificates................................ S-5
Tax Matters Person....................................... S-21
Trust.................................................... S-2
Trust Assets............................................. S-20
Trustee.................................................. S-4
Underwriters............................................. S-1
U.S. Person.............................................. S-75
VA....................................................... S-24
Wendover................................................. S-6
S-80
<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 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 June 10, 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 as
they will be constituted at the time the Certificates are issued, although
certain characteristics of the Mortgage Loans may vary.
YEAR OF FIRST PAYMENT OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
YEAR OF FIRST PAYMENT LOANS AS OF CUT-OFF DATE LOANS
- - - --------------------- --------- ------------------- --------
<S> <C> <C> <C>
1994..................................... 1 $ 74,161 0.03%
1995..................................... 19 3,215,357 1.48
1996..................................... 1,415 214,085,747 98.49
----- ------------ ------
Total 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
- - - --------
(1) As of the Cut-off Date, the weighted average seasoning of the Mortgage
Loans is expected to be approximately 2 months.
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PROPERTY TYPE LOANS AS OF CUT-OFF DATE LOANS
- - - ------------- --------- ------------------- --------
<S> <C> <C> <C>
Single-Family............................ 1,051 $160,205,034 73.70%
Two- to Four-Family...................... 123 17,562,941 8.08
Planned Unit Development................. 167 31,102,957 14.31
Condominium.............................. 94 8,504,332 3.91
----- ------------ ------
Total................................ 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE LOANS
- - - ---------------- --------- ------------------- --------
<S> <C> <C> <C>
Primary Residence........................ 1,225 $198,059,889 91.11%
Second Home.............................. 58 6,321,591 2.91
Investor Property........................ 152 12,993,786 5.98
----- ------------ ------
Total................................ 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
- - - --------
(1) Based on representations of the Mortgagor at the time of Mortgage Loan
origination.
A-1
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGE PROPERTIES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
STATES LOANS AS OF CUT-OFF DATE LOANS
- - - ------ --------- ------------------- --------
<S> <C> <C> <C>
Alabama.................................. 2 $ 535,389 0.25%
Arizona.................................. 17 1,739,160 0.80
Arkansas................................. 1 193,897 0.09
California............................... 540 106,125,991 48.82
Colorado................................. 26 4,806,833 2.21
Connecticut.............................. 2 252,532 0.12
Delaware................................. 5 469,887 0.22
District of Columbia..................... 4 768,188 0.35
Florida.................................. 250 25,758,488 11.85
Georgia.................................. 13 1,675,869 0.77
Hawaii................................... 8 2,382,255 1.10
Idaho.................................... 3 181,074 0.08
Illinois................................. 35 4,575,779 2.11
Indiana.................................. 1 47,785 0.02
Iowa..................................... 1 87,843 0.04
Louisiana................................ 4 539,879 0.25
Maryland................................. 8 1,333,237 0.61
Massachusetts............................ 22 2,897,587 1.33
Minnesota................................ 3 256,836 0.12
Mississippi.............................. 2 221,489 0.10
Missouri................................. 4 188,613 0.09
Montana.................................. 3 214,826 0.10
Nebraska................................. 2 475,234 0.22
Nevada................................... 33 4,644,760 2.14
New Hampshire............................ 5 418,410 0.19
New Jersey............................... 163 21,623,039 9.95
New Mexico............................... 6 1,056,046 0.49
New York................................. 91 12,406,194 5.71
North Carolina........................... 31 3,286,867 1.51
Ohio..................................... 5 495,743 0.23
Oklahoma................................. 2 175,285 0.08
Oregon................................... 19 2,539,345 1.17
Pennsylvania............................. 29 2,855,539 1.31
Rhode Island............................. 1 58,367 0.03
South Carolina........................... 1 69,878 0.03
Tennessee................................ 1 68,959 0.03
Texas.................................... 15 1,524,944 0.70
Utah..................................... 25 3,387,451 1.56
Virginia................................. 11 2,030,744 0.93
Washington............................... 41 5,005,024 2.30
----- ------------ ------
Total................................ 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
- - - --------
(1) As of the Cut-off Date, no more than approximately 0.66% of the aggregate
Outstanding Principal Balance of the Mortgage Loans is expected to be
secured by properties located in any one zip code.
A-2
<PAGE>
LOAN PURPOSE OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOANS
- - - ------------ --------- ------------------- --------
<S> <C> <C> <C>
Purchase................................. 617 $ 92,359,491 42.49%
Rate and Term Refinance.................. 270 47,323,481 21.77
Cash-Out Refinance....................... 548 77,692,292 35.74
----- ------------ ------
Total................................ 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
DISTRIBUTION OF 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 LOANS
- - - ----------------------------- --------- ------------------- --------
<S> <C> <C> <C>
$50,000 or less.......................... 114 $ 4,816,504 2.22%
$ 50,001 - $100,000...................... 465 36,042,884 16.58
$100,001 - $150,000...................... 350 43,273,399 19.91
$150,001 - $200,000...................... 196 34,151,161 15.71
$200,001 - $250,000...................... 93 20,686,287 9.52
$250,001 - $300,000...................... 72 19,742,163 9.08
$300,001 - $350,000...................... 51 16,610,150 7.64
$350,001 - $400,000...................... 35 13,232,646 6.09
$400,001 - $450,000...................... 24 10,082,170 4.64
$450,001 - $500,000...................... 19 9,022,006 4.15
$500,001 - $550,000...................... 2 1,093,967 0.50
$550,001 - $600,000...................... 10 5,899,524 2.71
$600,001 - $650,000...................... 2 1,293,128 0.59
$650,001 - $700,000...................... 1 679,599 0.31
$700,001 - $750,000...................... 1 749,677 0.35
----- ------------ ------
Total................................ 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
- - - --------
(1) As of the Cut-off Date, the average Outstanding Principal Balance of the
Mortgage Loans is expected to by approximately $151,481.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE 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 LOANS
- - - ----------------------------- --------- ------------------- --------
<S> <C> <C> <C>
50.00% or less........................... 178 $ 19,065,237 8.77%
50.01% - 55.00%.......................... 48 5,706,636 2.63
55.01% - 60.00%.......................... 87 12,504,508 5.75
60.01% - 65.00%.......................... 93 12,281,046 5.65
65.01% - 70.00%.......................... 198 29,940,663 13.77
70.01% - 75.00%.......................... 345 55,638,506 25.60
75.01% - 80.00%.......................... 368 63,223,362 29.08
80.01% - 85.00%.......................... 38 6,469,358 2.98
85.01% - 90.00%.......................... 66 8,926,703 4.11
90.01% - 95.00%.......................... 14 3,619,245 1.66
----- ------------ ------
Total................................ 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
- - - --------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 71.39%.
A-3
<PAGE>
MORTGAGE RATES OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MORTGAGE RATE LOANS AS OF CUT-OFF DATE LOANS
- - - ------------- --------- ------------------- --------
<S> <C> <C> <C>
7.375%.................................. 1 $ 99,770 0.05%
7.500%.................................. 4 534,945 0.25
7.625%.................................. 2 201,463 0.09
7.750%.................................. 10 1,538,413 0.71
7.875%.................................. 13 3,028,131 1.39
8.000%.................................. 20 2,435,674 1.12
8.125%.................................. 30 5,031,834 2.31
8.250%.................................. 78 14,474,097 6.66
8.375%.................................. 85 17,634,057 8.11
8.500%.................................. 158 25,895,434 11.91
8.625%.................................. 129 20,051,438 9.22
8.750%.................................. 178 26,680,977 12.27
8.875%.................................. 192 28,634,006 13.17
9.000%.................................. 98 14,963,372 6.88
9.050%.................................. 1 82,864 0.04
9.125%.................................. 80 12,031,037 5.53
9.200%.................................. 4 284,385 0.13
9.250%.................................. 83 11,946,989 5.50
9.375%.................................. 55 7,738,169 3.56
9.400%.................................. 3 331,958 0.15
9.450%.................................. 1 94,857 0.04
9.500%.................................. 33 4,189,013 1.93
9.625%.................................. 19 1,994,522 0.92
9.750%.................................. 21 3,298,490 1.52
9.850%.................................. 1 88,751 0.04
9.875%.................................. 17 1,464,034 0.67
9.990%.................................. 1 133,260 0.06
10.000%.................................. 11 864,385 0.40
10.125%.................................. 8 1,232,594 0.57
10.250%.................................. 14 1,593,428 0.73
10.375%.................................. 4 488,907 0.22
10.450%.................................. 1 38,061 0.02
10.500%.................................. 12 1,283,238 0.59
10.600%.................................. 1 110,893 0.05
10.625%.................................. 5 672,224 0.31
10.650%.................................. 2 169,684 0.08
10.700%.................................. 1 312,881 0.14
10.750%.................................. 11 877,346 0.40
10.875%.................................. 3 243,577 0.11
11.000%.................................. 6 659,609 0.30
11.125%.................................. 1 208,105 0.10
11.250%.................................. 6 439,964 0.20
11.375%.................................. 2 313,693 0.14
11.500%.................................. 3 426,557 0.20
11.600%.................................. 1 154,613 0.07
11.640%.................................. 1 134,144 0.06
11.650%.................................. 1 71,958 0.03
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MORTGAGE RATE LOANS AS OF CUT-OFF DATE LOANS
- - - ------------- --------- ------------------- --------
<S> <C> <C> <C>
11.750%.................................. 3 $ 450,205 0.21%
11.825%.................................. 3 440,352 0.20
11.850%.................................. 1 23,956 0.01
11.865%.................................. 1 135,792 0.06
11.875%.................................. 2 222,603 0.10
12.000%.................................. 1 45,547 0.02
12.250%.................................. 1 89,951 0.04
12.375%.................................. 1 184,852 0.09
12.490%.................................. 1 19,979 0.01
12.500%.................................. 1 112,283 0.05
12.750%.................................. 4 167,737 0.08
13.000%.................................. 1 63,605 0.03
13.125%.................................. 1 48,989 0.02
13.950%.................................. 1 43,887 0.02
14.000%.................................. 2 147,725 0.07
----- ------------ ------
Total................................ 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
- - - --------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 8.874% per annum.
ORIGINAL TERM OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL TERM LOANS AS OF CUT-OFF DATE LOANS
- - - ------------- --------- ------------------- --------
<S> <C> <C> <C>
180 or less.............................. 83 $ 8,615,244 3.96%
181 to 360............................... 1,352 208,760,020 96.04
----- ------------- ------
Total 1,435 $ 217,375,265 100.00%
===== ============= ======
</TABLE>
- - - --------
(1) As of the Cut-off Date, the weighted average calculated remaining term of
the Mortgage Loans is expected to be approximately 350 months.
DOCUMENTATION TYPE OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE LOANS
- - - ------------------ --------- ------------------- --------
<S> <C> <C> <C>
Full..................................... 385 $ 62,689,217 28.84%
Alternative.............................. 20 2,862,343 1.32
Reduced/Stated Income.................... 947 140,613,816 64.69
No Income/No Asset....................... 83 11,209,888 5.16
----- ------------ ------
Total 1,435 $217,375,265 100.00%
===== ============ ======
</TABLE>
A-5
<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 February 23, 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
Certificates........... Each Certificate will represent a beneficial owner-
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
Certificates........... Distributions on the Certificates entitled thereto
will be made monthly, quarterly, semi-annually or at
such other intervals and on such other Distribution
Dates specified in the Prospectus Supplement solely
out of the payments received in respect of the 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.
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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
Policy................. A mortgage pool insurance policy or policies (the
"Pool Insurance Policy") may be obtained and main-
tained for each Series pertaining to
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<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
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<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.
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<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"). To the
extent provided herein and in the related Prospectus
Supplement, REMIC Regular Certificates and REMIC Re-
sidual Certificates will be considered "qualifying
real property loans" within the meaning of Section
593(d) of the Code, "real estate assets" for pur-
poses of Section 856(c)(5)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code.
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
12
<PAGE>
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.
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.
To the extent provided herein and in the related Pro-
spectus Supplement, Non-REMIC Certificates will rep-
resent interests in "qualifying real property loans"
within the meaning of Section 593(d) of the Code,
"real estate assets" for purposes of Section
856(c)(5)(A) of the Code and "Loans . . . princi-
pally secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of
the Code.
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.
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<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
15
<PAGE>
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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<PAGE>
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 Certificate. 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.
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 Fund and of certain agreements (each, a "Yield Supplement Agreement")
under which payment will be made from the Reserve Fund in the event that
interest accrued on the Mortgage Loans
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at their Mortgage Interest Rates is insufficient to pay interest on the
Certificates of such Series (a "Basic 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 Depositor, 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, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Fund
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. REMIC Regular
Certificateholders 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 "qualifying real property loans" within the meaning of Section 593(d)
of the Code, "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 more of those sections, applying each section
separately, "qualifying assets") to the extent that the REMIC's assets are
qualifying assets, but not to the extent that the REMIC's assets consist of
Yield Supplement Agreements. However, if at least 95 percent of the REMIC's
assets are qualifying assets, then 100 percent of the REMIC Certificates will
be qualifying assets. Similarly, income on the REMIC Certificates will be
treated as "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Mortgage Loans, the
REMIC's assets will include payments on Mortgage Loans held pending
distribution to holders of REMIC Certificates, amounts in reserve accounts (if
any), other credit enhancements (if any) and possibly buydown funds ("Buydown
Funds"). The Mortgage Loans will be qualifying assets under all three of 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
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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 reserve funds or Buydown Funds would also
constitute qualifying assets under any of those provisions. The Prospectus
Supplement for each series will indicate (if applicable) that it has Buydown
Funds.
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
Pooling and Servicing Agreement and applicable provisions of the Code and
applicable Treasury regulations and rulings, the Tiered REMICs will each
qualify 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
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and assets
described in Section 7701(a)(19)(C) of the Code, and whether the income on such
Certificates is interest described in Section 856(c)(3)(B) of the Code, the
Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of
a specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for
purposes of the rules governing original issue discount set forth in Sections
1271 through 1275 of the Code and the regulations thereunder (the "OID
Regulations") with certain modifications and permissible variations. See "REMIC
Regular Certificates--Current Income on REMIC Regular Certificates--Original
Issue Discount--Variable Rate REMIC Regular Certificates," below, for a
discussion of the definition of a qualified floating rate for purposes of the
OID Regulations. In contrast to the OID Regulations, for purposes of the REMIC
Regulations, a qualified floating rate does not include any multiple of a
qualified floating rate (also excluding multiples of qualified floating rates
that themselves would constitute qualified floating rates under the OID
Regulations), and the characterization of a variable rate that is subject to a
cap, floor or similar restriction as a qualified floating rate for purposes of
the REMIC Regulations will not depend upon the OID Regulations relating to
caps, floors, and similar restrictions. See "REMIC Regular Certificates--
Current Income on REMIC Regular Certificates--Original Issue Discount--Variable
Rate REMIC Regular Certificates," below, for a discussion of the OID
Regulations relating to caps, floors and similar restrictions. A qualified
floating rate, as defined above for purposes of the REMIC Regulations (a "REMIC
qualified floating rate"), qualifies as a variable rate for purposes of the
REMIC Regulations if such REMIC qualified floating rate is set at a "current
rate" as defined in the OID Regulations. In addition, a rate equal to the
highest, lowest or an average of two or more REMIC qualified floating rates
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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 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. The OID Regulations
are effective April 4, 1994. Proposed OID Regulations concerning contingent
payments have not been finalized.
These rules provide that, in the case of a debt instrument such as a REMIC
Regular Certificate, (i) the amount and rate of accrual of original issue
discount will be calculated based on a reasonable assumed prepayment rate (the
"Prepayment Assumption"), and (ii) adjustments will be made in the amount and
rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued with
original issue discount if its stated redemption price at maturity exceeds its
issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations," and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less
than 0.25% of its stated redemption price at maturity multiplied by its
weighted average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the
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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 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. Interest payments will not qualify as
qualified stated
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interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest is expected to be penalized or reasonable remedies
exist to compel payment. The meaning of "penalized" under the OID Regulations
is unclear. The Internal Revenue Service has taken the position that a penalty
must inure directly to the benefit of the debt instrument holder and must be
large enough to ensure that, at the time the debt instruments are issued, it is
reasonably certain that, absent insolvency, the issuer will make interest
payments when due. In a Revenue Ruling, the Internal Revenue Service concluded
that the accrual of interest on past-due interest payments at a penalty rate
that is two percentage points above the stated yield of a debt instrument is
not a sufficient penalty, but the accrual of interest on past-due interest
payments at a penalty rate that is twelve percentage points above the stated
yield of the debt instrument might be a sufficient penalty, depending on the
facts and circumstances. Accordingly, interest payments on REMIC Regular
Certificates which do not provide an adequate penalty for the nonpayment of
interest, or which do not have reasonable remedies to compel timely payment of
interest may not be qualified stated interest, and such REMIC Regular
Certificates may have original issue discount.
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 and (ii) it provides for stated interest, paid or compounded at
lease 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.
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 zero but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than zero but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for
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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
(i) one or more qualified floating rates, (ii) one or more rates where each
rate would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Variable Rate REMIC Regular
Certificate is denominated, (iii) either the yield or changes in the price of
one of more items of actively traded personal property or (iv) a combination of
rates described in (i), (ii) and (iii). 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. 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. 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 cost of newly borrowed
funds. 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 and (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.
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
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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
amount or 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.
The OID Regulations do not clearly address the treatment of a Variable Rate
REMIC Regular Certificate that is based on a weighted average of the interest
rates on underlying qualified mortgages. Under the OID Regulations, interest
payments on such a Variable Rate REMIC Regular Certificate may be characterized
as qualified stated interest which is includable in income in a manner similar
to that described in the previous paragraph. However, it is also possible that
interest payments on such a Variable Rate REMIC Regular Certificate would be
treated as contingent interest (possibly includable in income when the payments
become fixed) or in some other manner.
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.
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.
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Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise,
market discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue
discount, in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to
certain categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25%
of the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular Certificates--
Original Issue Discount"), taking into account distributions (including
prepayments) prior to the date of acquisition of such REMIC Regular Certificate
by the subsequent purchaser. If market discount on a REMIC Regular Certificate
is treated as zero under this rule, the actual amount of such discount must be
allocated to the remaining principal distributions on the REMIC Regular
Certificate in proportion to the amounts of such principal distributions, and
when each such distribution is made, gain equal to the discount, if any,
allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such
debt instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market
discount, as adjusted to account for any premium. Holders of REMIC Regular
Certificates should consult their own tax advisors regarding the availability
or advisability of such an election.
Single-Class 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
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accrued thereon at a rate equal to 110% of "the applicable Federal rate"
(generally, an average of current yields on Treasury securities), determined as
of the date of purchase of the REMIC Regular Certificate, over (ii) the amount
actually includable in the seller's income. In addition, gain recognized on the
sale of a REMIC Regular Certificate by a seller who purchased the REMIC Regular
Certificate at a market discount would be taxable as ordinary income in an
amount not exceeding the portion of such discount that accrued during the
period the REMIC Regular Certificate was held by such seller, reduced by any
market discount includable in income under the rules described above under
"Current Income on REMIC Regular Certificates--Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
a sale of a REMIC Regular Certificate by a bank or other financial institution
to which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate, if not earlier, shortly following the
REMIC's receipt of the final payment in respect of the underlying qualified
mortgages. The last distribution on a REMIC Regular Certificate should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS.
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests
is "portfolio income" which cannot be offset by "passive activity losses" in
the hands of individuals or other persons subject to the passive loss rules.
The Code also provides that all residual interests must be issued on the
REMIC's startup day and designated as such. For this purpose, "startup day"
means the day on which the REMIC issues all of its regular and residual
interests, and under the REMIC Regulations may, in the case of a REMIC to which
property is contributed over a period of up to ten consecutive days, be any day
designated by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC
must be the calendar year. The basis of property contributed to the REMIC in
exchange for regular or residual interests is its fair market value immediately
after the transfer. The REMIC Regulations determine the fair market value of
the contributed property by deeming it equal to the aggregate issue prices of
all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Loans held by 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
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to which individuals are generally entitled. Income or loss in connection with
a "prohibited transaction" is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original issue
discount, if any, on a REMIC Regular Certificate is uncertain. As a result, the
timing of recognition of the related REMIC taxable income is also uncertain.
Although not entirely free from doubt, the related REMIC taxable income may be
recognized when the adjusted issue price of such REMIC Regular Certificate
would exceed the maximum amount of future payments with respect to such REMIC
Regular Certificate. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (i.e., the purchase
price of the REMIC Residual Certificate), and will be reduced (but not below
zero) by the holder's share of cash distributions and losses and increased by
its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code Section
754 to increase or decrease the partnership's basis in its assets by reference
to the adjusted basis to subsequent partners of their partnership interest.
Consequently, a subsequent purchaser of a REMIC Residual Certificate at a
premium will not be able to use the premium to reduce his share of the REMIC's
taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable income
recognized by the holder of a REMIC Residual Certificate in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest and discount income (or deductions for amortization
of premium) with respect to qualified mortgages, on the one hand, and the
timing of deductions for interest (including original issue discount) on the
REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
the REMIC Regular Certificates, will increase over time as the shorter term,
lower yielding classes of REMIC Regular Certificates are paid, whereas interest
income from the Mortgage Loans may not increase over time as a percentage of
the outstanding principal amount of the Mortgage Loans.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Loans (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the
original issue discount provisions. Therefore, the Trust Fund will calculate
the taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will be
subject to certain special rules. The excess inclusions with respect to a REMIC
Residual Certificate are equal to the excess, if any, of
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its share of REMIC taxable income for the quarterly period over the sum of the
daily accruals for such quarterly period. The daily accrual for any day on
which the REMIC Residual Certificate is held is determined by allocating to
each day in a quarter its allocable share of the product of (A) 120% of the
long-term applicable Federal rate (for quarterly compounding) that would have
applied to the REMIC Residual Certificates (if they were debt instruments) on
the closing date under Code Section 1274(d) (1) and (B) the adjusted issue
price of such REMIC Residual Certificates at the beginning of a quarterly
period. For this purpose, the adjusted issue price of such REMIC Residual
Certificate at the beginning of a quarterly period is the issue price of such
Certificates plus the amount of the daily accruals of REMIC taxable income for
all prior quarters, decreased by any distributions made with respect to such
Certificates prior to the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return. An exception exists for organizations to which Code Section 593 applies
(generally, certain thrift institutions); however, the Code grants the Treasury
Department authority to issue regulations providing that this exception will
not apply to the extent necessary or appropriate to prevent avoidance of tax.
The REMIC Regulations provide that the exception for thrifts applies only if a
REMIC Residual Certificate has "significant value." For this purpose, a REMIC
Residual Certificate has significant value if (i) the aggregate issue price of
the residual interest in the REMIC equals at least two percent of the total
issue prices of all interests in the REMIC, and (ii) the REMIC Residual
Certificate has an anticipated weighted average life at least equal to 20
percent of the anticipated weighted average life of the REMIC. The anticipated
weighted average life of the REMIC is the weighted average of the anticipated
weighted average lives of all classes of interests in the REMIC. This weighted
average is determined under a formula provided in the REMIC Regulations,
applied by treating all payments taken into account in computing the
anticipated weighted average lives of the regular and residual interests in the
REMIC as principal payments on a single regular interest.
Legislation has been introduced with respect to the relationship between
excess inclusions and the alternative minimum tax. This legislation provides
that (i) the alternative minimum taxable income of a taxpayer is based on the
taxpayer's regular taxable income computed without regard to the rule that
taxable income cannot be less than the amount of excess inclusions, (ii) the
alternative minimum taxable income of a taxpayer for a taxable year cannot be
less than the amount of excess inclusions for that year, and (iii) the amount
of any alternative minimum tax net operating loss is computed without regard to
any excess inclusions. No prediction can be made whether such legislation or
similar legislation will be enacted.
The rule permitting thrift institutions to offset excess inclusions with
their net operating losses generally applies only when the thrift institution
itself (rather than an affiliate of the thrift) holds the residual interest.
However, excess inclusions of a "qualified subsidiary" of a thrift institution
(defined generally as a subsidiary organized and operated exclusively in
connection with the organization and operation of one or more REMICs) may be
offset by net operating losses of its parent thrift as if the parent thrift
held the residual interest directly.
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.
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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).
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 Certificate, 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.
Pursuant to the temporary regulations, the Commissioner has the authority to
treat REMIC Residual Certificates which have the same economic effect as a
negative-value REMIC Residual Certificate as not being a security for purposes
of Section 475 of the Code. Proposed regulations would provide that all REMIC
Residual Certificates acquired on or after January 4, 1995, and similar
interests or arrangements acquired on or after January 4, 1995 that are
determined by the Commissioner to have substantially the same economic effect
as a REMIC Residual Certificate, 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
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property other than a capital asset, resulting in ordinary income or loss.
Although the tax treatment with respect to a REMIC Residual Certificate that
has unrecovered basis after all funds of the Trust Fund have been distributed
is unclear, the holder presumably would be entitled to claim a loss in the
amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event,
any loss realized by the seller on the sale generally will not be currently
deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where
the transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and
telephone cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total
anticipated excess inclusions for periods after such transfer with respect to
the interest transferred multiplied by the highest corporate rate of tax. The
transferor (or agent, as the case may be) will be relieved of liability so long
as the transferee furnishes an affidavit that it is not a disqualified
organization and the transferor or agent does not have actual knowledge that
the affidavit is false. Under the REMIC Regulations, an affidavit will be
sufficient if the transferee furnishes (A) a social security number, and states
under penalties of perjury that the social security number is that of the
transferee, or (B) a statement under penalties of perjury that it is not a
disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a REMIC
Residual Certificate. The federal income tax consequences of any consideration
paid to a transferee on a transfer of an interest in a REMIC Residual
Certificate are unclear. The preamble to the REMIC Regulations indicates that
the Internal Revenue Service is considering the tax treatment of these types of
residual interests. A transferee of such an interest should consult its own tax
advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. An entity or
segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(i.e., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring
the REMIC Residual Certificate is a disqualified organization. In addition, as
to the requirement that reasonable arrangements be made to ensure that
disqualified organizations do not hold a residual interest in the REMIC, the
REMIC Regulations require that notice of the prohibition be provided either
through a legend on the certificate that evidences ownership, or through a
conspicuous statement in the prospectus or other offering document used to
offer the residual interest for sale. As to the requirement that sufficient
information be made available to calculate the tax on transfers to disqualified
organizations (or the tax, discussed below, on pass-through entities, interests
in which are held by disqualified organizations), the REMIC Regulations further
require that such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests where
a disqualified organization is a record holder of an interest in the pass-
through entity. "Pass-through entity" is defined for this purpose
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to include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the
entity.
The Agreement provides that any attempted transfer of a beneficial or record
interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee
is not a disqualified organization.
Legislation has been introduced which would provide that partners of certain
partnerships having a large number of partners will be treated as disqualified
organizations for purposes of the tax imposed on pass-through entities if such
partnerships hold residual interests in a REMIC. When applicable, the
legislation would disallow 70 percent of a large partnership's miscellaneous
itemized deductions, including deductions for servicing and guaranty fees and
any expenses of the REMIC, although the remaining deductions would not be
subject to the 2 percent floor applicable to individual partners. See
"Deductibility of Trust Fund Expenses" below. No prediction can be made
regarding whether such legislation or similar legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
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
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deductions will include servicing, guarantee, and administrative fees paid to
the servicer of the Mortgage Loans. These deductions will be allocated entirely
to the holders of the REMIC Residual Certificates in the case of REMIC Trust
Funds with multiple classes of REMIC Regular Certificates that do not pay their
principal amounts ratably. As a result, the REMIC will report additional
taxable income to holders of REMIC Residual Certificates in an amount equal to
their allocable share of such deductions, and individuals, estates, or trusts
holding an interest in such REMIC Residual Certificates may have taxable income
in excess of the cash received. In the case of a "single-class REMIC", the
expenses will be allocated, under Treasury regulations, among the holders of
the REMIC Regular Certificates and the REMIC Residual Certificates on a daily
basis in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In the case of a holder of a REMIC Regular
Certificate who is an individual or a "pass-through interest holder" (including
certain pass-through entities, but not including REITs), the deductibility of
such expenses will be subject to the limitations described above. The reduction
or disallowance of these deductions may have a significant impact on the yield
of REMIC Regular Certificates to such a holder. In general terms, a single-
class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income purposes) or (ii) is similar to such a trust and which is structured
with the principal purpose of avoiding the single-class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a "10-
percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of
a residual interest in the REMIC, and (iv) the holder is not engaged in a
United States trade or business, or otherwise subject to federal income tax as
a result of any direct or indirect connection to the United States other than
through its ownership of a REMIC Regular Certificate. For these purposes, the
term "United States person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity created or organized in
or under the laws of the United States or any political subdivision thereof, or
(iii) an estate or trust whose income is includable in gross income for United
States federal income taxation regardless of its source.
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,
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the withholding tax will be imposed when REMIC gross income is paid or
distributed to the holder of a residual interest or there is a disposition of
the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual Certificate
to a foreign transferee will be disregarded for all federal income tax purposes
if the transfer has "tax avoidance potential." A transfer to a foreign
transferee will be considered to have tax avoidance potential unless at the
time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed
at or after the time at which the excess inclusion accrues, but not later than
the close of the calendar year following the calendar year of accrual. A safe
harbor in the REMIC Regulations provides that the reasonable expectation
requirement will be satisfied if the above test would be met at all assumed
prepayment rates for the Mortgage Loans from 50 percent of the Prepayment
Assumption to 200 percent of the Prepayment Assumption. A transfer by a foreign
transferor to a domestic transferee will likewise be disregarded under the
REMIC Regulations if the transfer would have the effect of allowing the foreign
transferor to avoid the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and Schedules Q
thereto) must be filed as if the Trust Fund were a partnership for federal
income tax purposes. Information on Schedule Q must be provided to holders of
REMIC Residual Certificates with respect to every calendar quarter. Each holder
of a REMIC Residual Certificate will be required to treat items on its federal
income tax returns consistently with their treatment on the Trust Fund's
information returns unless the holder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from an incorrect
schedule received from the Trust Fund. The Trust Fund also will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC taxable income by the Internal Revenue Service. Holders of REMIC Residual
Certificates will have certain rights and obligations with respect to any
administrative or judicial proceedings involving the Internal Revenue Service.
Under the Code and Regulations, a REMIC generally is required to designate a
tax matters person. Generally, subject to various limitations, the tax matters
person has authority to act on behalf of the REMIC and the holders of the REMIC
Residual Certificates in connection with administrative determinations and
judicial review respecting returns of taxable income of the REMIC. Treasury
regulations exempt from certain of these procedural rules REMICs having no more
than one residual interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the 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.
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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.
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. Moreover, 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 "qualifying real property loans" within the
meaning of Section 593(d) of the Code, "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, reserve funds, or
payments on mortgages held pending distribution to Certificateholders.
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 Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the 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 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.
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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 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
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interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Mortgage Loans. However, original issue discount could arise with respect
to a Mortgage Loan ("ARM") that provides for interest at a rate equal to the
sum of an index of market interest rates and a fixed number. The original issue
discount for ARMs generally will be determined under the principals discussed
in "REMIC Regular Certificates--Current Income on REMIC Regular Certificates--
Original Issue Discount--Variable Rate REMIC Regular Certificates."
If discount on the Mortgage Loans other than original issue discount exceeds
a de minimis amount (described below), the holder will also generally be
required to include in income in each month the amount of such discount accrued
through such month and not previously included in income, but limited, with
respect to the portion of such discount allocable to any Mortgage Loan, to the
amount of principal on such Mortgage Loan received by the Trust Fund in that
month. Because the Mortgage Loans will provide for monthly principal payments,
such discount may be required to be included in income at a rate that is not
significantly slower (and, under certain circumstances, faster) than the rate
at which such discount accrues (and therefore at a rate not significantly
slower than the rate at which such discount would be included in income if it
were original issue discount). The holder may elect to accrue such discount
under a constant yield method based on the yield of the Non-REMIC Certificate
to such holder. In the absence of such an election, it may be necessary to
accrue such discount under a more rapid straight-line method. Under the de
minimis rule, market discount with respect to a Non-REMIC Certificate will be
considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Loans allocable to the Non-REMIC Certificate
and (ii) the weighted average life (determined using complete years) of the
Mortgage Loans remaining at the time of purchase of the Non-REMIC Certificate.
See "REMIC Regular Certificates--Current Income on REMIC Regular Certificates--
Market Discount."
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize, as an offset to interest
income, the portion of such premium that is allocable to a Mortgage Loan under
a constant yield method based on the yield of the Mortgage Loan to such holder,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should
be allocated among the principal payments on the Mortgage Loan and allowed as
an ordinary deduction as principal payments are made or, perhaps, upon
termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a 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
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extent of the portion of such discount that accrued during the period in which
the seller held the Non-REMIC Certificate and that was not previously included
in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a "United
States person" (as defined below) and is not subject to federal income tax as a
result of any direct or indirect connection to the United States other than its
ownership of a Non-REMIC Certificate will not be subject to United States
income or withholding tax in respect of payments of interest or original issue
discount on a Non-REMIC Certificate to the extent attributable to Mortgage
Loans that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
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, or an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
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
88
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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.
91
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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
<PAGE>
<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
<PAGE>
<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 INFORMA-
TION 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 PRO-
SPECTUS 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-24
ICI Funding................................................................ S-25
Description of the Certificates............................................ S-32
Yield and Prepayment Considerations........................................ S-47
The Pooling and Servicing Agreement........................................ S-58
Federal Income Tax Considerations.......................................... S-71
ERISA Considerations....................................................... S-73
Legal Investment........................................................... S-74
Restrictions on Purchase and Transfer of the Residual Certificates......... S-75
Method of Distribution..................................................... S-75
Legal Matters.............................................................. S-76
Ratings.................................................................... S-76
Index of Principal Definitions............................................. S-78
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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$213,027,758
(APPROXIMATE)
BEAR STEARNS
MORTGAGE SECURITIES INC.
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1996-3
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO.
INCORPORATED
June 25, 1996
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