<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 10, 1996)
$82,301,477
(APPROXIMATE)
BEAR STEARNS MORTGAGE SECURITIES INC.
PASS-THROUGH CERTIFICATES,
SERIES 1997-2
The Pass-Through Certificates, Series 1997-2 (the "Certificates"),
consist of all Classes identified in the chart below. It is expected that the
original aggregate principal amount of each Class of Certificates will be
reduced prior to their issuance by an amount equal to the principal payments on
the Pooled Certificates (as defined herein) underlying such Class of
Certificates during March 1997. It is a condition to their issuance that each
Class of Certificates receives the ratings (set forth under "Summary of
Terms -- Rating") of Fitch Investors Service, L.P. ("Fitch") and Moody's
Investors Service Inc. ("Moody's") (collectively, the "Rating Agencies").
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN BSMSI, THE
TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NONE OF THE CERTIFICATES, THE
POOLED CERTIFICATES OR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL ENTITY, BSMSI, ANY OF THEIR
AFFILIATES OR ANY OTHER PERSON. DISTRIBUTIONS ON THE CERTIFICATES
WILL BE PAYABLE SOLELY FROM ASSETS TRANSFERRED OR PLEDGED TO
THE TRUST FOR THE BENEFIT OF THE RESPECTIVE
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>
APPROXIMATE
INITIAL PRINCIPAL AMOUNT PASS-THROUGH RATE
<S> <C> <C>
Class A-1 Certificates $ 16,125,845(1) 6.750%
Class A-2 Certificates $ 16,629,916(1) 6.500%
Class A-3 Certificates $ 17,681,374(1) 6.750%
Class A-4 Certificates $ 16,668,278(1) 6.500%
Class A-5 Certificates $ 15,195,964(1) 6.875%
Class R Certificates $ 100 6.500%
</TABLE>
(1) The initial principal amount of each Class of Certificates will be decreased
by an amount equal to the principal payments received on the related Pooled
Certificate Group (as defined herein), during March 1997.
The Certificates will be purchased by Bear, Stearns & Co. Inc. (the
"Underwriter") from BSMSI and will be offered by the Underwriter from time to
time in negotiated transactions at varying prices to be determined at the time
of sale. Proceeds to BSMSI from the sale of the Certificates are expected to be
approximately 94.15% of the aggregate principal balance of the Certificates,
plus accrued interest thereon from March 1, 1997 to but not including the
Closing Date, but before deducting expenses payable by BSMSI, estimated to be
$250,000.
The Certificates are offered by the Underwriter when, as and if issued,
delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that delivery of the Class R 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
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
March 31, 1997.
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is March 24, 1997
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The Certificates will represent, in the aggregate, the entire
beneficial ownership interest in a trust (the "Trust") consisting primarily of
five groups ("Pooled Certificate Group A-1" through "Pooled Certificate Group
A-5," and each, a "Pooled Certificate Group") of mortgage-backed securities
("Group A-1 Pooled Certificates" through "Group A-5 Pooled Certificates,"
respectively, and, collectively, the "Pooled Certificates"). Each of the Pooled
Certificate Groups consists of all or a portion of one senior class of Floating
Rate Certificates (as defined herein) and all or a portion of one or two senior
classes of Inverse Floating Rate Certificates (as defined herein). The Pooled
Certificates were issued pursuant to pooling agreements (each, an "Underlying
Agreement") and evidence interests in trusts ("Underlying Trusts") which in
general consist primarily of a pool of conventional, fixed rate, one- to
four-family, fully amortizing, level payment, first mortgage loans with original
maturities of up to either approximately 15 years or approximately 30 years
(collectively, the "Mortgage Loans" and with respect to any Pooled Certificate,
the "Underlying Mortgage Loans" or a "Mortgage Pool"). The holders of each Class
of Certificates will have the right to receive distributions only from the
Pooled Certificate Group with the same alpha-numeric designation. The holders of
the Certificates will also have the benefit of a reserve fund (the "Prepayment
Interest Shortfall Account") which will be held by the Trustee but not as part
of the REMIC (as herein defined), the funds in which will be available to pay
the aggregate shortfall, if any, in collections of interest resulting from
prepayments of Mortgage Loans in any Mortgage Pool or from the Relief Act (as
defined herein) which is not paid by the servicer or master servicer or covered
through Subordination (as defined herein) or otherwise under the related
Underlying Agreement ("Prepayment Interest Shortfall"). See "Description of the
Certificates -- Prepayment Interest Shortfall Account." The definition used for
each Underlying Series (as herein defined) is set forth under "Description of
the Pooled Certificates - General" and the characteristics of the Pooled
Certificates comprising each Pooled Certificate Group are described herein under
"Description of the Pooled Certificates" and in Annex 1 and Annex 2 attached
hereto.
Distributions of principal and interest on the Certificates with
respect to a month will be made on the day (each, a "Distribution Date") which
is the third Business Day (as defined herein) after the last distribution date
in such month with respect to any Class of Pooled Certificates (each, a "Pooled
Certificate Distribution Date"). Each Pooled Certificate Distribution Date is
the 25th day of each month or if any such day is not a business day as defined
in the related Underlying Agreement, the next succeeding business day. If
distributions on a Pooled Certificate Group or the Pooled Certificate
Distribution Date Statement with respect thereto has not been timely received,
distributions on the related Class of Certificates will be made on a subsequent
date as described under "Description of the Certificates -- Distributions of
Interest and Principal." On each Distribution Date, holders of Certificates of
each Class will be entitled to receive interest from funds received as interest
on the related Pooled Certificate Group and, if applicable, amounts from the
Prepayment Interest Shortfall Account and principal from funds received as
principal on the related Pooled Certificate Group, as more fully described
herein under "Description of the Certificates -- Distributions of Interest and
Principal" and "-- The Prepayment Interest Shortfall Account."
The yield to maturity on each Class of Certificates will depend on the
characteristics of, and the rate and timing of principal payments on, the Pooled
Certificates in the related Pooled Certificate Group which in turn will be
affected by the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations) on the Mortgage Loans included in the
related Mortgage Pool and the amount and timing of mortgagor defaults resulting
in Realized Losses (as defined herein). The Pooled Certificates in each Pooled
Certificate Group were issued as part of the same series (each, an "Underlying
Series"). Each of the Pooled Certificates in each Pooled Certificate Group is a
Senior Certificate (as defined herein). In general, with respect to each of such
Pooled Certificate Groups, until the Subordinate Certificates and, where
applicable, the Mezzanine Certificates (each, as defined herein) constituting
part of the Underlying Series relating to any of such Pooled Certificate Groups
have been reduced to zero, only certain Realized Losses (with respect to any of
such Pooled Certificate Groups) due to special hazards, fraud and bankruptcy in
excess of those covered by Subordination will be allocated to the related Senior
Certificates. The remaining portion of such losses will be covered by
Subordination and will be allocated solely to the related Subordinate
Certificates and Mezzanine Certificates so long as they are outstanding. The
Mortgage Loans generally may be prepaid in full or in part at any time without
penalty. The yield to investors on each Class of Certificates also will be
adversely affected by Prepayment Interest Shortfalls, to the extent not covered
by the Prepayment Interest Shortfall Account.
The yield to maturity of a Class of Certificates purchased at a
discount or premium will be more sensitive to the rate and timing of payments
thereon. Holders of Certificates purchased at a discount (or premium) should
consider the risk that a slower (or faster) than anticipated rate of principal
payments on Mortgage Loans underlying Pooled Certificates in the related Pooled
Certificate Group could result in an actual yield that is lower than the
anticipated yield.
S-2
<PAGE>
To the extent statements contained herein do not relate to historic or
current information, this Prospectus Supplement may be deemed to contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "1934 Act"). Actual results could differ
materially from those projected in such statements as a result of the matters
set forth above, under "Summary of Terms -- Yield and Prepayment Considerations"
and "Yield and Prepayment Considerations" and elsewhere in this Prospectus
Supplement.
There is currently no secondary market for the Certificates and there
can be no assurance that one will develop. The Underwriter intends to establish
a market in each Class of Certificates, but is not obligated to do so. There is
no assurance that any such market, if established, will continue.
An election will be made to treat certain assets of the Trust as a
"real estate mortgage investment conduit" ("REMIC") for Federal income tax
purposes. As described more fully herein and in the Prospectus, each Class of
Certificates (other than the Class R Certificates (sometimes referred to as the
"Residual Certificates")) will be designated as a "regular interest" in a REMIC
and the Class R Certificates will represent the "residual interest" in the
REMIC. See "Federal Income Tax Considerations" herein and "Certain Federal
Income Tax Consequences" in the Prospectus.
Certificates offered by this Prospectus Supplement constitute a
separate series of Certificates being offered by BSMSI pursuant to its
Prospectus dated October 10, 1996, of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
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 DATED OCTOBER 10, 1996 (THE "PROSPECTUS"). A
schedule of the Pooled Certificates being deposited into the Trust along with
the definitions used herein for each such Pooled Certificate is set forth under
"Description of the Pooled Certificates -- General". Unless otherwise specified
herein, references herein to an amount or percentage of Pooled Certificates
refers to the amount or percentage calculated based on the aggregate outstanding
principal balance as reported by the trustee or Servicer (as defined herein)
with respect to the Underlying Series ("Pooled Certificate Principal Balance")
of such Pooled Certificates as of March 24, 1997 after giving effect to
distributions made on the Pooled Certificates on or prior to such date (the
"Pooled Certificate Information Date"). References to a current amount or
percentage of Underlying Mortgage Loans or an average with respect to Underlying
Mortgage Loans shall, unless otherwise specified herein, be to the amount,
percentage or average calculated based on the scheduled principal balances of
such Mortgage Loans, as of February 1, 1997 after giving effect to any payments
made or scheduled to be made and losses realized on the Mortgage Loans on or
prior to such date (the "Mortgage Loan Information Date") as reflected on the
Pooled Certificate Distribution Date Statements (as defined herein) for February
1997.
<TABLE>
<S> <C>
Title of Series................................ Pass-Through Certificates, Series 1997-2, Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class R (the
"Certificates").
Certificates................................... The Certificates will represent the entire beneficial ownership
interest in a trust (the "Trust") consisting primarily of the
Pooled Certificates, with each Class of Certificates (other
than the Class R Certificates) being entitled to distributions
only from the Pooled Certificate Group with the same
alpha-numeric designation.
The initial aggregate principal amount of each Class of Certificates
(each, an "Original Principal Balance") will be equal to the
aggregate Pooled Certificate Principal Balances of the Pooled
Certificate Group with the same alpha-numeric designation as such
Class of Certificates following the March 1997 Pooled Certificate
Distribution Date. On the Pooled Certificate Information Date
(i.e., after payment on the Pooled Certificate Distribution Date
in February 1997) the aggregate "Pooled Certificate Principal
Balance" of each Pooled Certificate Group is as follows:
</TABLE>
<TABLE>
<CAPTION>
Pooled Approximate Aggregate
Certificate Pooled Certificate
Group Principal Balance
<S> <C>
Group A-1 $16,125,845
Group A-2 $16,629,916
Group A-3 $17,681,374
Group A-4 $16,668,278
Group A-5 $15,195,964
</TABLE>
<TABLE>
<S> <C>
The Certificates will be issued pursuant to a Pooling Agreement
(the "Agreement") between Bear Stearns Mortgage Securities
Inc., as depositor ("BSMSI" or the "Depositor"), and First
Trust National Association, as trustee (the "Trustee"). BSMSI
is an affiliate of Bear, Stearns & Co. Inc. (the
"Underwriter"). See "The Depositor" in the Prospectus.
Book-Entry;
Denominations.................................. Each Class of Certificates (other than the Class R
Certificates) will be registered as a single Certificate held
by a nominee of The Depository Trust Company ("DTC"), and
beneficial interests will be held by investors through the
book-entry facilities of DTC in minimum denominations of $25,000
and increments of $1 in excess thereof. Notwithstanding the
foregoing, one Certificate of
S-4
<PAGE>
each Class of Certificates may be held by investors in a different denomination
to accommodate the remainder of the initial principal amount of
the Certificates of such Class. The Class R Certificates will be
issued as a single physical certificate in a denomination of
$100. See "Description of the Certificates -- Book Entry;
Physical Certificates" herein.
Pooled Certificates............................ The Trust will include primarily the Pooled Certificates. Each
of the Pooled Certificate Groups consists of all or a portion
of one class of Floating Rate Pooled Certificates and all or a
portion of one or two classes of Inverse Floating Rate Pooled
Certificates. The Pooled Certificates in each Pooled
Certificate Group were issued as part of the same series (each,
an "Underlying Series").
The Pooled Certificate Groups set forth below which back Certificates
with the same alpha-numeric designation are composed of the
following Pooled Certificates which are identified more fully
under "Description of the Pooled Certificates - General" and in
the indicated Annexes hereto:
</TABLE>
<TABLE>
<CAPTION>
Pooled Certificate Class %
Group Pooled Certificates in Trust Annex
<S> <C> <C> <C>
A-1 Chase 1994 F, 1(a)
Class A-15 100%
Class A-16 100%
Class A-17 100%
A-2 GECAP 1994-11, 1(b)
Class A 7 100%
Class A 8 100%
A-3 PHMSC 1993-29, 1(c)
Class A-14 50.27%
Class A-15 50.27%
Class A-16 50.27%
A-4 PHMSC 1994-7, 1(d)
Class A 7 100%
Class A 8 100%
A-5 PNC 1993-12 1(e)
Class F-1 92.51%
Class S-1 92.51%
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
The Pooled Certificates evidence interests in trusts ("Underlying
Trusts") created pursuant to pooling agreements (collectively,
the "Underlying Agreements") which consist primarily of one or
more pools of conventional, fixed rate, one- to four-family,
fully amortizing, level payment, first mortgage loans with
original maturities of up to approximately 15 years with respect
to Mortgage Loans underlying PHMSC 1993-29 and PHMSC 1994-7 and
up to 30 years with respect to Mortgage Loans underlying the
remaining Pooled Certificates (collectively, the "Mortgage Loans"
and with respect to any Pooled Certificate, the "Underlying
Mortgage Loans" or a "Mortgage Pool"). Additional information
with respect to the Underlying Mortgage Loans as of the Mortgage
Loan Information Date is set forth in Annex 2 hereto.
Annex 1 and Annex 2 hereto set forth approximate information for
each of the Pooled Certificates as of the Pooled Certificate
Information Date and the Underlying Mortgage Loans as of the
Mortgage Loan Information Date. The tables and the descriptions
of the Pooled Certificates and the Mortgage Loans herein are
subject to and qualified by reference to the provisions of the
Underlying Agreements and the prospectuses and prospectus
supplements relating to the Pooled Certificates or the other
mortgage-backed securities issued as part of the Underlying
Series, as well as any subsequent information related thereto
filed on a Current Report on Form 8-K with the Securities and
Exchange Commission following the closing of the related
Underlying Series. THE INFORMATION SET FORTH IN THE TABLES AND
ELSEWHERE HEREIN THAT IS PECULIARLY WITHIN THE KNOWLEDGE OF THE
VARIOUS UNDERLYING TRUSTEES, PAYING AGENTS, AND SERVICERS OR
MASTER SERVICERS (SERVICERS AND MASTER SERVICERS INDIVIDUALLY OR
TOGETHER, AS APPLICABLE, THE "SERVICER") FOR THE UNDERLYING
TRUSTS HAS BEEN DERIVED FROM DATA PROVIDED BY THEM, INCLUDING
REGULAR PERIODIC REPORTS PROVIDED TO HOLDERS OF POOLED
CERTIFICATES AND LOAN-BY-LOAN INFORMATION PROVIDED IN TAPE FORM
FROM THE RELATED SERVICERS OR UNDERLYING ISSUERS OR DEPOSITORS,
BUT SUCH INFORMATION HAS NOT BEEN INDEPENDENTLY REPRESENTED TO
THE DEPOSITOR OR THE UNDERWRITER AS BEING ACCURATE AND COMPLETE
NOR HAS IT BEEN INDEPENDENTLY VERIFIED BY THE DEPOSITOR OR THE
UNDERWRITER. THIS INFORMATION COMPRISES ALL MATERIAL INFORMATION
ON THE SUBJECT THAT THE DEPOSITOR AND THE UNDERWRITER POSSESS OR
CAN ACQUIRE WITHOUT UNREASONABLE EFFORT AND EXPENSE. COPIES OF
THE PROSPECTUSES, PROSPECTUS SUPPLEMENTS AND MOST RECENT POOLED
CERTIFICATE DISTRIBUTION DATE STATEMENTS RELATING TO EACH POOLED
CERTIFICATE ARE AVAILABLE FROM THE UNDERWRITER AT 245 PARK
AVENUE, NEW YORK, NEW YORK, 10167 ATTENTION: MORTGAGE DEPARTMENT.
Prepayment Interest Shortfall
Account...................................... The holders of the Certificates will have the benefit of a
reserve fund (the "Prepayment Interest Shortfall Account") into
which, on the Closing Date, the Depositor will deposit $20,000
which, together with reinvestment income thereon, will be held
by the Trustee, but will not be part of the REMIC. The
Prepayment Interest Shortfall Account will be available to pay
the shortfall, if any, in collections of interest resulting
from prepayments of a Mortgage Loan in any Mortgage Pool or
incurred as a result of the Soldiers' and Sailors' Relief Act
of 1940, as amended (the "Relief Act"), which is not reimbursed
by the related Servicer or covered by subordination provided
for with respect to the related Underlying Series (a
"Prepayment Interest Shortfall"). Because
S-6
<PAGE>
the Prepayment Interest Shortfall Account will be available to cover
Prepayment Interest Shortfalls in any Pooled Certificate Group,
funds disbursed from the Prepayment Interest Shortfall Account to
cover a Prepayment Interest Shortfall in one Pooled Certificate
Group will reduce the funds remaining to cover Prepayment
Interest Shortfalls in the other Pooled Certificate Groups. If
the rate of Prepayment Interest Shortfalls in any Mortgage Pool
underlying a Pooled Certificate Group is disproportionately
greater than the rate of Prepayment Interest Shortfalls
respecting the Mortgage Pools underlying the other Pooled
Certificate Groups, the funds available to such other Pooled
Certificate Groups from the Prepayment Interest Shortfall Account
may be reduced below that which would otherwise have been
available if each Pooled Certificate Group were covered by a
separate prepayment interest shortfall account.
Trustee Fee Account............................ On the Closing Date, the Depositor will establish an account
(the "Trustee Fee Account") from which the Trustee's Fee (as
defined herein) will be paid. Deductions for the Trustee's Fee
will not be made from distributions of interest or principal on
the Pooled Certificates. See "The Pooling Agreement -- The
Trustee Fee Account."
Closing Date................................... On or about March 31, 1997 (the "Closing Date").
Distribution Dates............................. Distributions of principal and interest on the Certificates
with respect to a month will be made on the day (each, a
"Distribution Date") which is the third Business Day (as
defined below) after the last distribution date in such month
with respect to any class of Pooled Certificates (each, a
"Pooled Certificate Distribution Date"). Each Pooled
Certificate Distribution Date is the 25th day of each month or
if any such day is not a business day as defined in the
applicable Underlying Agreement, then the next succeeding
business day, as so defined in each case. A "Business Day"
means a day other than a Saturday, a Sunday or a day on which
banking institutions in New York, New York or the city in which
the corporate trust office of the Trustee is located are
authorized or obligated by law or executive order to be
closed. The first Distribution Date is expected to be April
30, 1997. If the Trustee has not received a distribution on,
or the Pooled Certificate Distribution Date Statement with
respect to, a Pooled Certificate by 3:00 p.m. on the second
Business Day following the Pooled Certificate Distribution Date
(the "Determination Time"), the distribution allocable to the
related Class of Certificates will not be made on the
immediately following Distribution Date but (i) if such
distribution and such Pooled Certificate Distribution Date
Statement are received by 3:00 p.m. on the fifth Business Day
after the Determination Time, it will be made on the sixth
Business Day after the Determination Time (the "Supplemental
Distribution Date") or (ii) if received after 3:00 p.m. on the
fifth Business Day after the Determination Time, it will be
made on the next succeeding Distribution Date, and in neither
case will additional interest be paid thereon. See
"Description of the Certificates -- Payments of Interest and
Principal." Notwithstanding the foregoing, for accounting
purposes, each Distribution Date is deemed to occur in the same
month as the immediately preceding Pooled Certificate
Distribution Date.
Record Date.................................... Distributions will be made on each Distribution Date to holders
of record as of the close of business on the last Business Day
of the calendar month preceding the month in which such
Distribution Date occurs; provided that for this purpose the
S-7
<PAGE>
Distribution Date is deemed to occur on the 28th of each month,
without regard to whether such day is a Business Day (the
"Record Date"). See "Description of the Certificates --
Distributions of Interest and Principal."
Distributions of Interest and
Principal..................................... The Certificates will accrue interest during each applicable
Interest Accrual Period (as defined herein) at Pass-Through
Rates set forth on the cover page hereof.
On each Distribution Date, holders of the Certificates of each Class
will be entitled to receive interest from (i) funds received as
interest on the related Pooled Certificate Group (ii) if
applicable, amounts from the Prepayment Interest Shortfall
Account, and (iii) in the case of the Class A-1, Class A-3 and
Class A-5 Certificates, amounts from the Interest Account (as
defined herein), and to receive principal from funds received as
principal on the related Pooled Certificate Group, as more fully
described herein under "Description of the Certificates --
Distributions of Interest and Principal" and "The Pooling
Agreement -- Accounts" and in Annex 1 hereto.
Yield and Prepayment
Considerations................................. GENERAL CONSIDERATIONS. The yields to maturity and weighted
average lives of the Certificates will be affected by, among
other things, the amount and timing of principal and interest
payments and severity of losses with respect to the Mortgage
Loans underlying the related Pooled Certificate Group, the
payment priorities and other characteristics of the related
Pooled Certificates, the occurrence of an optional termination
with respect to the related Pooled Certificates and the
purchase prices paid for the Certificates. In addition to the
discussion below, prospective investors should review the
discussion under "Yield and Prepayment Considerations" herein.
The Pooled Certificates were structured as planned amortization
classes ("PAC Classes"), targeted amortization classes ("TAC
Classes"), scheduled amortization classes ("Scheduled Classes"),
or support or companion classes ("Support Classes") as described
under "Description of the Pooled Certificates -- General" and in
Annex 2 hereto.
In general, PAC, TAC or Scheduled Classes will receive distributions
of principal on a given distribution date in a pre-determined
amount if prepayments on the underlying mortgage loans occur at a
constant rate within a certain range or at a certain rate,
thereby providing for relatively stable distributions of
principal, but will receive principal payments at a greater or
lesser rate if prepayments on the underlying mortgage loans occur
at different rates or at non-constant rates within the applicable
range. As a result of receiving principal payments at a different
rate or at non-constant rates, the weighted average life of a
PAC, TAC or Scheduled Class will be shortened or extended. No
Class of Pooled Certificates which was originally a PAC, TAC or
Scheduled Class currently adheres to its schedule, although some
supporting classes are currently outstanding and provide some
prepayment protection to certain of the Pooled Certificates.
A Support Class receives principal payments on a distribution date
only if scheduled payments have been made on specified PAC, TAC
and/or Scheduled Classes in the related series and receives
S-8
<PAGE>
all excess distributions of principal to the extent not required to
make scheduled payments on the related PAC, TAC or Scheduled
Classes.
MORTGAGE LOAN PREPAYMENTS. If prevailing mortgage rates fall
significantly below the mortgage rates on the Underlying Mortgage
Loans, such Underlying Mortgage Loans are likely to be subject to
higher prepayment rates than if prevailing rates remain at or
above the mortgage rates on such Mortgage Loans. Other factors
affecting prepayments of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment, net
equity in the mortgaged properties and servicing decisions. The
Mortgage Loans may be prepaid at any time without penalty and
usually have due-on-sale clauses.
TIMING OF PAYMENTS. The timing and amount of payments on the related
Mortgage Loans may significantly affect an investor's yield. In
general, the earlier a prepayment of principal on a Mortgage
Loan, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than
the rate anticipated during the period immediately following the
issuance of the Certificates will not be offset by a subsequent
like reduction (or increase) in the rate of principal
prepayments. Furthermore, the effective yield to
Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and
purchase price because, while interest generally will accrue on
each Certificate from the first day of the month, the
distribution of such interest will not be made earlier than the
28th day of the month following the month of accrual. Moreover,
any Prepayment Interest Shortfalls to the extent not covered by
the Prepayment Interest Shortfall Account and the interest
portion of any Realized Losses, in each case applicable to the
related Pooled Certificates will reduce the amount of interest
otherwise payable to a Class of Certificates and accordingly will
reduce the yield to investors in such Class.
DISCOUNTS AND PREMIUMS. In the case of any Class of Certificates
purchased at a discount, a slower than anticipated rate of
principal payments, other things being equal, could result in an
actual yield that is lower than the anticipated yield. In the
case of any Class of Certificates purchased at a premium, a
faster than anticipated rate of principal payments, other things
being equal, could result in an actual yield that is lower than
the anticipated yield.
OPTIONAL REDEMPTION OF POOLED CERTIFICATES. The Pooled Certificates
are subject to optional redemption to the extent described in
Annex 1 hereto. Any such optional redemption with respect to
Pooled Certificates in a Pooled Certificate Group will result in
an earlier payment of the related Class of Certificates.
REINVESTMENT RISK. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors in the
Certificates will be able to reinvest the distributions thereon
at yields equaling or exceeding the yield on the respective Class
of Certificates. Yields on any such reinvestment may be lower,
and may even be significantly lower, than yields on the
Certificates. Generally, when prevailing interest rates increase,
prepayment rates on mortgage loans tend to decrease, resulting in
a reduced return of principal to investors at a time when
reinvestment at such higher prevailing rates would be desirable.
Conversely,
S-9
<PAGE>
when prevailing interest rates decline, prepayment rates on mortgage
loans tend to increase, resulting in a greater return of
principal to investors at a time when reinvestment at comparable
yields may not be possible. Prospective investors in the
Certificates should consider the related reinvestment risks in
light of other investments that may be available to such
investors.
Liquidity...................................... There is currently no secondary market for any Class of
Certificates, and there can be no assurance that one will
develop. The Underwriter intends to establish a market in each
Class of Certificates, but it is not obligated to do so. There
is no assurance that any such market, if established, will
continue. Each Certificateholder will receive monthly reports
pertaining to the Certificates as described under "The Pooling
Agreement -- Reports to Certificateholders" herein. There are
a limited number of sources which provide certain information
about mortgage pass-through certificates in the secondary
market; however, there can be no assurance that any of these
sources will provide information about the Certificates.
Investors should consider the effect of limited information on
the liquidity of the various Classes of Certificates.
Certain Federal Income Tax
Consequences................................... An election will be made to treat certain assets of the Trust
as a real estate mortgage investment conduit (a "REMIC") for
federal income tax purposes. The Certificates (other than the
Class R Certificates) will be designated as regular interests
in the REMIC (collectively, the "Regular Certificates" or the
"REMIC Regular Certificates"), and the Class R Certificates
will be designated as the residual interest in the REMIC (the
"Residual Certificates" or the "REMIC Residual Certificates").
See "Federal Income Tax Considerations" herein and "Certain
Federal Income Tax Consequences" in the Prospectus and
"Restrictions on Purchase and Transfer of the Residual
Certificates" herein.
ERISA Considerations........................... Fiduciaries of employee benefit plans subject to Title I of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider the ERISA fiduciary investment
standards before authorizing an investment by a plan in
Certificates. In addition, fiduciaries of employee benefit
plans or other retirement arrangements (such as individual
retirement accounts or certain Keogh plans) which are subject
to Title I of ERISA, and/or Section 4975 of the Code, as well
as any entity, including an insurance company general account,
whose underlying assets include plan assets by reason of a plan
or account investing in such entity (collectively, "Plan(s)"),
should consult with their legal counsel to determine whether an
investment in Certificates will cause the assets of the Trust
("Trust Assets") to be considered plan assets pursuant to the
plan asset regulations set forth in 29 C.F.R. ss. 2510.3-101,
thereby subjecting the Plan to the prohibited transaction rules
with respect to the Trust Assets and the Trustee to the
fiduciary investment standards of ERISA, or cause the excise
tax provisions of Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code") to apply to the Trust Assets,
unless some exemption granted by the Department of Labor
applies to the acquisition, holding or transfer of the
Certificates.
Subject to the considerations set forth under "ERISA Considerations"
herein and in the Prospectus, the purchase or holding of
Certificates by, on behalf of, or with plan assets of, a Plan may
qualify for exemptive relief under Prohibited
S-10
<PAGE>
Transaction Exemption 90-30.
Legal Investment............................... The 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.
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.
Restrictions on Purchase and
Transfer of the Residual
Certificates.................................. The Residual Certificates are not offered for sale to certain
tax exempt organizations that are "disqualified organizations"
as defined in "Certain Federal Income Tax Consequences--REMIC
Residual Certificates--Tax on Disposition of REMIC Residual
Certificates; Restrictions on Transfer; Holding by Pass-Through
Entities" in the Prospectus. Such "disqualified organizations"
are prohibited from acquiring or holding any beneficial
interest in the Residual Certificates. Further, neither the
Residual Certificates nor any beneficial interest therein may
be sold or otherwise transferred without the express written
consent of First Trust National Association acting as the "Tax
Matters Person" (as defined in the Code), which may be withheld
to avoid a risk of REMIC disqualification or REMIC-level tax.
See "Certain Federal Income Tax Consequences--REMIC Residual
Certificates--Tax on Disposition of REMIC Residual
Certificates; Restrictions on Transfer; Holding by Pass-Through
Entities" in the Prospectus and "Restrictions on Purchase and
Transfer of the Residual Certificates" herein. Finally, unless
the Tax Matters Person consents in writing (which consent may
be withheld in the Tax Matters Person's sole discretion), the
Residual Certificates (including a beneficial interest therein)
may not be purchased by or transferred to any person who is not
a "United States person," as such term is defined in Section
7701(a)(30) of the Code. For certain additional tax-related
restrictions on the transfer of Residual Certificates, see
"Certain Federal Income Tax Consequences--REMIC Residual
Certificates--Mismatching of Income and Deductions; Excess
Inclusions" and "Certain Federal Income Tax
Consequences--Foreign Investors--REMIC Residual Certificates" in
the Prospectus.
Rating......................................... As a condition of their issuance, each Class of Certificates
will be rated "AAA" by Fitch
and "Aaa" by Moody's. Fitch
and Moody's are also referred
to herein as the "Rating
Agencies." See "Certificate
Rating" herein.
</TABLE>
S-11
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the
Certificates do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, the Prospectus and the provisions of the
Agreement relating to the Certificates offered hereby.
BOOK ENTRY; PHYSICAL CERTIFICATES
Each Class of Certificates (other than the Class R Certificates) will be
represented by a single certificate registered in the name of Cede & Co.
("Cede") as the nominee of DTC, and beneficial interests therein will be held by
investors through the book-entry facilities of DTC, in minimum denominations of
$25,000 and increments of $1 in excess thereof, except that one Certificate of
each Class may be held by investors in a different denomination. The
Certificates registered in the name of Cede can be held in physical certificate
form by investors 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.
The Class R Certificates will be issued in fully-registered form in a
single certificate in a denomination of $100.
With respect to the Certificates registered in the name of Cede, all
references herein to actions by holders of the Certificates shall refer to
actions taken by DTC upon instructions from its participants, and all references
herein to distributions, notices, reports and statements to holders of the
Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the case may be, for distribution to the beneficial owners of
the Certificates in accordance with DTC procedures. Because DTC can only act on
behalf of participants, who in turn act on behalf of indirect participants and
certain banks, the ability of a beneficial owner of a Certificate to pledge such
Certificate to persons or entities who do not participate in the DTC system may
be limited. In addition, beneficial owners of Certificates held through DTC may
experience delays in the receipt of distributions on such Certificates. The book
entry procedures of DTC are more fully described under "Description of the
Certificates -- Book-Entry Registration" in the Prospectus.
Certificates in physical certificate form will be transferable and
exchangeable on a "Certificate Register" to be maintained by the Trustee at the
office or agency of the Trustee maintained for that purpose in St. Paul,
Minnesota. Certificates surrendered to the Trustee for registration of transfer
or exchange must be accompanied by a written instrument of transfer in form
satisfactory to the Trustee. No service charge will be made for any registration
of transfer or exchange of Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required. Such office or
agency of the Trustee is currently located at 180 East 5th Street, St. Paul,
Minnesota 55101.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
Distributions of principal and interest on the Certificates with respect
to a month will be made on the day (each, a "Distribution Date") which is the
third Business Day (as defined below) after the last distribution date in such
month with respect to any class of Pooled Certificates (each, a "Pooled
Certificate Distribution Date"). Each Pooled Certificate Distribution Date is
the 25th day of each month or if any such day is not a business day as defined
in the applicable Underlying Agreement, then the next succeeding business day,
as so defined in each case. A "Business Day" means a day other than a Saturday,
a Sunday or a day on which banking institutions in New York, New York or the
city in which the corporate trust office of the Trustee is located are
authorized or obligated by law or executive order to be closed. The first
Distribution Date is expected to be April 30, 1997. In addition, if the Trustee
has not received a distribution on, or the distribution date statement (each, a
"Pooled Certificate Distribution Date Statement") with respect to, the Pooled
Certificates of a Pooled Certificate Group by 3:00 p.m. on the second Business
Day following the Pooled Certificate Distribution Date (the "Determination
Time"), the distribution allocable to the related class of Certificates will not
be made on the immediately following Distribution Date, but, (i) if such
distribution and such Pooled Certificate Distribution Date Statement are
received by 3:00 p.m. on the fifth Business Day after the Determination Time, it
will be made on the sixth Business Day after the Determination Time (a
"Supplemental Distribution Date") or (ii) if received after 3:00 p.m. on the
fifth Business Day after the Determination Time, it will be made on the next
succeeding Distribution Date, and in neither case will additional interest be
paid thereon. It is anticipated that payments on all Pooled Certificates will be
made to the Trustee by wire transfer. The Pooled Certificates underlying all of
the Certificates other than the PHMSC 1994-7, Class A-8 Pooled Certificates are
book entry securities so that payment is first made to Cede & Co., as nominee
for DTC before being paid to the Trustee, which may result in a delay in receipt
by the Trustee. Notwithstanding the foregoing, for accounting purposes, each
Distribution Date is deemed to occur in the same month as the immediately
preceding Pooled Certificate Distribution Date.
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<PAGE>
Distributions will be made on each Distribution Date to holders of
record as of the close of business on the last Business Day of the calendar
month preceding the month in which such Distribution Date occurs; provided that
for this purpose the Distribution Date is deemed to occur on the 28th of each
month, without regard to whether such day is a Business Day (the "Record Date").
The Certificates will accrue interest during each one-month period
ending on the last day of the month preceding the month in which a Distribution
Date occurs (each, an "Interest Accrual Period") at the Pass-Through Rates set
forth on the cover page hereof. An account (the "Interest Account") which will
meet the requirements for an Eligible Account as set forth in the Pooling
Agreement will be established and maintained with the Trustee for the benefit of
the holders of the Class A-1, Class A-3 and Class A-5 Certificates in an amount
sufficient to make up the difference between the 6.750%, 6.750% and 6.875%
Pass-Through Rate, respectively, of such Certificates and the actual rates of
6.74954%, 6.74999% and 6.87487%, respectively, scheduled to be passed through on
the related Pooled Certificate Groups. On each Distribution Date, holders of the
Certificates of each Class will be entitled to receive interest from funds
received as interest on the related Pooled Certificate Group and, if applicable,
amounts from the Interest Account and the Prepayment Interest Shortfall Account
and principal from funds received as principal on the related Pooled Certificate
Group. See "The Pooling Agreement -- Accounts" and Annex 1 hereto.
The Trustee shall establish and maintain in the name of the Trustee, for
the benefit of the Certificateholders, an account (the "Certificate Account")
which shall meet the requirements for an Eligible Account as set forth in the
Pooling Agreement. The Certificate Account shall have one subaccount for all
funds collected with respect to each Pooled Certificate Group and one subaccount
relating to the Class R Certificates, into which $100 plus one month's interest
at 6.500% thereon will be deposited on the Closing Date. The Trustee will cause
all distributions received on the Pooled Certificates of each Pooled Certificate
Group by the Trustee in its capacity as holder of the Pooled Certificates, from
whatever source, to be deposited directly into the applicable subaccount of the
Certificate Account.
Following the Determination Time, the Trustee will determine if there is
any Prepayment Interest Shortfall with respect to a Pooled Certificate Group. If
such Shortfall has been allocated to Pooled Certificates in one or more Pooled
Certificate Group, the Trustee will withdraw the lesser of the aggregate amount
thereof and the amount then remaining in the Prepayment Interest Shortfall
Account for deposit in the applicable subaccount or subaccounts of the
Certificate Account. If there is an insufficient amount on deposit in the
Prepayment Interest Shortfall Account, the amount thereof will be allocated
among such subaccounts based upon the amount of Prepayment Interest Shortfall
allocated to the related Pooled Certificate Groups. On each Distribution Date,
the Trustee will apply the Available Funds (as defined herein) on deposit in
each subaccount of the Certificate Account as of such Distribution Date, in the
following manner and order of priority, except that on the first Distribution
Date all amounts in the subaccount relating to the Class R Certificates (other
than investment income) shall be paid to the holders of the Class R
Certificates:
(A) from amounts with respect to interest received on the Pooled
Certificates of such Pooled Certificate Group and from any transfers from the
Interest Account and from the Prepayment Interest Shortfall Account, to the
Certificateholders of the applicable Class as distributions of interest, an
amount equal to interest for such Class accrued at the applicable per annum
Pass-Through Rate during the Interest Accrual Period preceding such Distribution
Date on its Class Balance (as defined herein) immediately prior to such
Distribution Date, LESS the sum of any Prepayment Interest Shortfalls to the
extent not covered by funds transferred from the Prepayment Interest Shortfall
Account and the interest portion of any losses allocated to the Pooled
Certificates in the related Pooled Certificate Group, PLUS the portion, if any,
of interest accrued for such Class for any prior Distribution Date which remains
unpaid; and
(B) from amounts with respect to principal received on the Pooled
Certificates of such Pooled Certificate Group, to the Certificateholders of the
applicable Class as distributions of principal, an amount equal to such
principal received.
Following payment in full of a Class of Certificates (other than the
Class R Certificates), any amounts remaining in the related subaccount of the
Certificate Account (other than investment income) shall be paid to the Class R
Certificateholders. It is not anticipated that there will be any such amounts so
remaining.
"Available Funds" for a Class of Certificates means with respect to any
Distribution Date, the aggregate amount on deposit in the applicable subaccount
of the Certificate Account as of the immediately prior Determination Time (other
than investment income) plus any transfers made to such subaccount from the
Prepayment Interest Shortfall Account and the Interest Account subsequent to
such Determination Time.
The Pooled Certificates underlying each Class of Certificates are
discussed under "Description of the Pooled
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<PAGE>
Certificates" herein and in Annex 1. The full name of each abbreviated
Underlying Series is set forth under "Description of the Pooled Certificates --
General." Copies of the "Underlying Agreements" have been filed with the
Securities and Exchange Commission and also are available from the Underwriter,
at 245 Park Avenue New York, New York, Attention: Mortgage Department.
The "Class Balance" for any Class of Certificates means the aggregate
principal amount of such Class of Certificates outstanding as of any date of
determination, which is equal to the Original Principal Balance of such Class of
Certificates minus the sum of (i) all distributions of principal previously made
on such Class of Certificates pursuant to the distribution provisions of the
Agreement and (ii) the principal portion of any losses allocated to the Pooled
Certificates in the related Pooled Certificate Group on or prior to the
immediately preceding Pooled Certificate Distribution Date.
The sole sources of payment on a Class of Certificates will be
distributions on the Pooled Certificates and payments from the Interest Account
and the Prepayment Interest Shortfall Account, if any. The Certificates will not
be guaranteed by the Depositor, Bear, Stearns & Co. Inc., the Trustee, any
government agency or instrumentality, or any other person.
DESCRIPTION OF THE POOLED CERTIFICATES
GENERAL
The Certificates will represent, in the aggregate, the entire beneficial
ownership interest in the Trust containing primarily the Pooled Certificates.
The following is a list of the Pooled Certificates in each Pooled Certificate
Group:
<TABLE>
<CAPTION>
Full Name of Series Abbreviation Class % in
used herein Trust
<S> <C> <C>
Group A-1 Pooled Certificates
Chase Mortgage Finance Corporation, Multi-Class Mortgage Pass-Through CHASE 1994-F 100%
Certificates, Series 1994 F, Class A-15
Chase Mortgage Finance Corporation, Multi-Class Mortgage Pass-Through CHASE 1994-F 100%
Certificates, Series 1994 F, Class A-16
Chase Mortgage Finance Corporation, Multi-Class Mortgage Pass-Through CHASE 1994-F 100%
Certificates, Series 1994 F, Class A-17
Group A-2 Pooled Certificates
GE Capital Mortgage Services, Inc., REMIC Multi-Class Pass-Through GECAP 1994-11 100%
Certificates, Series 1994-11, Class A7
GE Capital Mortgage Services, Inc., REMIC Multi-Class Pass-Through GECAP 1994-11 100%
Certificates, Series 1994-11, Class A8
Group A-3 Certificates
The Prudential Home Mortgage Securities Company, Inc., Mortgage PHMSC 1993-29 50.27%
Pass-Through Certificates, Series 1993-29, Class A-14
The Prudential Home Mortgage Securities Company, Inc., Mortgage PHMSC 1993-29 50.27%
Pass-Through Certificates, Series 1993-29, Class A-15
The Prudential Home Mortgage Securities Company, Inc., Mortgage
Pass-Through Certificates, Series 1993-29, Class A-16 PHMSC 1993-29 50.27%
S-14
<PAGE>
Group A-4 Pooled Certificates
The Prudential Home Mortgage Securities Company, Inc., Mortgage PHMSC 1994-7 100%
Pass-Through Certificates, Series 1994-7, Class A-7
The Prudential Home Mortgage Securities Company, Inc., Mortgage PHMSC 1994-7 100%
Pass-Through Certificates, Series 1994-7, Class A-8
Group A-5 Pooled Certificates
PNC Mortgage Securities Corp., Mortgage Pass-Through Certificates, PNC 1993-12 92.51%
Series 1993-12, Class F-1
PNC Mortgage Securities Corp., Mortgage Pass-Through Certificates, PNC 1993-12 92.51%
Series 1993-12, Class S-1
</TABLE>
Each Pooled Certificate is a pass-through certificate. The Class to
which each Pooled Certificate belongs received a rating upon its original public
sale of "AAA" or its equivalent from two nationally recognized statistical
rating organizations as set forth in Annex 1 hereto. None of such ratings has
been downgraded or withdrawn.
Each Pooled Certificate Group includes all or a portion of one Class of
Pooled Certificates with an interest rate that is reset periodically based on an
index as set forth in Annex 1 hereto (each, an "Index") and that varies directly
with changes in the Index subject to minimum and maximum rates ("Floating Rate
Certificates") and all or a portion of one or two Classes of Pooled Certificates
with an interest rate that is reset periodically based on an Index and that
varies inversely with changes in the Index subject to minimum and maximum rates
("Inverse Floating Rate Certificates"). The Trust will hold Floating Rate
Certificates and Inverse Floating Rate Certificates in such amounts in each
Pooled Certificate Group that the sum of interest on the Pooled Certificates in
each Pooled Certificate Group will be equivalent to a fixed rate of interest on
the aggregate principal balance of the Pooled Certificates in the applicable
Pooled Certificate Group.
Each of the Pooled Certificates in each Pooled Certificate Group is a
"Senior Certificate" which means with respect to an Underlying Series, a
certificate which has rights which are senior to those of another class or
classes of certificates. Senior Certificates are sometimes referred to as Class
A Certificates although they may include certificates with descriptions which do
not contain the letter A, such as PNC 1993-12, Class F-1, Class S-1 and residual
or Class R Certificates. Each Underlying Series of which a Pooled Certificate is
a part includes one or more Subordinate Certificates (sometimes referred to as
"Class B Certificates") and most Underlying Series also include one or more
Mezzanine Certificates (sometimes referred to as "Class M Certificates").
"Mezzanine Certificates" have rights which are subordinate to those of the
Senior Certificates, but senior to those of the Subordinate Certificates.
"Subordinate Certificates" have rights which are subordinate to both Senior
Certificates and Mezzanine Certificates, if any. Certain classes of each type of
certificate may be senior to other classes of the same type of certificate.
In general, the "Subordination" is effected by Senior Certificates being
entitled to receive distributions due to such classes prior to distributions
being made on Mezzanine Certificates and Subordinate Certificates, and Realized
Losses (subject to certain limitations as described in Annex 1 hereto) being
allocated to Subordinate Certificates and then to Mezzanine Certificates, if
any, until the principal amounts of such classes have been reduced to zero
before allocating such losses to the Senior Certificates. "Realized Losses"
means, in general, losses realized when Mortgage Loans are liquidated and
include "Special Hazard Losses" (losses not covered by standard hazard insurance
policies, with certain additional exceptions), "Fraud Losses" (in general losses
resulting from a mortgage insurer's failure to pay a claim with respect to a
Mortgage Loan on the grounds of fraud, dishonesty or misrepresentation in
connection with the origination of the Mortgage Loan) and "Bankruptcy Losses"
(losses attributable to certain actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction of the principal
balance of, or interest rate on, a Mortgage Loan or an extension of its
maturity).
The Pooled Certificates were structured as planned amortization classes
("PAC Classes"), targeted amortization classes ("TAC Classes"), scheduled
amortization classes ("Scheduled Classes"), or support or companion classes
("Support Classes"), as described in Annex 2 hereto.
A PAC Class is designed to receive principal payments using a
predetermined principal balance schedule (a "Planned Balance") derived by
assuming two CONSTANT prepayment rates for the underlying Mortgage Loans. These
two rates are the endpoints for the "structuring range" for the PAC Classes. A
TAC Class is designed to receive
S-15
<PAGE>
principal payments using a predetermined principal balance schedule (a "Targeted
Balance") derived by assuming a single CONSTANT prepayment rate for the
underlying Mortgage Loans. A Scheduled Class is designed to receive principal
payments using a predetermined principal balance schedule (a "Scheduled
Balance") but is not designated as a PAC or TAC Class. In many cases, the
schedule is derived by assuming two CONSTANT prepayment rates for the underlying
Mortgage Loans. These two rates are the endpoints for the "structuring range"
for the Scheduled Class. A Support or Companion Class receives principal
payments on a distribution date only if scheduled payments have been made on
specified PAC, TAC and/or Scheduled Classes and receives all excess
distributions of principal to the extent not required to make scheduled payments
on the related PAC, TAC or Scheduled Classes.
In general, since PAC, TAC or Scheduled Classes will receive
distributions of principal on a given distribution date in a pre-determined
amount if prepayments on the underlying mortgage loans occur within a certain
range or at a certain rate, distributions of principal should in such cases be
relatively stable. If prepayments on the underlying mortgage loans occur at
different rates, principal payments will be received at a greater or lesser
rate. As a result of receiving principal payments at a different rate, the
weighted average life of the PAC, TAC or Scheduled Classes will be shortened or
extended. No Class of Pooled Certificates which was originally a PAC, TAC or
Scheduled Class currently adheres to its schedule, although some supporting
classes are currently outstanding and provide some prepayment protection to
certain of the Pooled Certificates.
Additional characteristics of the Pooled Certificates are described in
Annex 1 and Annex 2 hereto.
THE UNDERLYING MORTGAGE LOANS
The Mortgage Loans included in the Underlying Trusts consist of
conventional, fixed rate, one- to four-family, fully-amortizing, level monthly
payment, first mortgage loans with original maturities of up to approximately 15
years with respect to Mortgage Loans underlying PHMSC 1993-29 and PHMSC 1994-7
and up to 30 years with respect to the Mortgage Loans underlying the remaining
Pooled Certificates.
Additional information regarding the characteristics of the Mortgage
Loans included in each of the Underlying Trusts is set forth in Annex 2 hereto.
ADDITIONAL INFORMATION
The descriptions of the Pooled Certificates and the Mortgage Loans do
not purport to be complete. Copies of the respective Prospectus Supplements and
Prospectuses relating to the Pooled Certificates and the February 1997 Pooled
Certificate Distribution Date Statements may be obtained from the Underwriter at
245 Park Avenue, New York, New York 10167, Attention: Mortgage Department.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL CONSIDERATIONS
The yield to maturity and weighted average life of each class of
Certificates will be affected by, among other things, the amount and timing of
interest and principal payments, including prepayments (for this purpose the
term "prepayments" includes payments resulting from refinancing, liquidations,
purchases by the original transferors or others), and the severity of losses
with respect to the Mortgage Loans underlying the related Pooled Certificate
Group, the payment priorities and other characteristics of the related Pooled
Certificates, the occurrence of an optional or mandatory termination with
respect to the related Pooled Certificates and the purchase price paid for such
Certificates. No representation is made as to the anticipated rate of
prepayments on the Mortgage Loans in any Mortgage Pool or the anticipated yield
to maturity of any Class of Certificates. Prospective investors are urged to
consider their own estimates as to the anticipated rate of future prepayments on
the Mortgage Loans and the suitability of the Certificates to their investment
objectives. If prevailing mortgage rates fall significantly below the mortgage
rates on the Mortgage Loans, the Mortgage Loans are likely to be subject to
higher prepayment rates than if prevailing rates remain at or above the mortgage
rates on the Mortgage Loans. Other factors affecting prepayments of Mortgage
Loans include changes in mortgagors' housing needs, job transfers, unemployment,
net equity in the mortgaged properties and servicing decisions. The Mortgage
Loans may be prepaid at any time without penalty and generally have due-on-sale
clauses.
The timing and amount of payments, including prepayments, on the related
Mortgage Loans may significantly affect an investor's yield. In general, the
earlier a prepayment of principal on a Mortgage Loan, the greater will be the
effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal prepayments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Certificates will not be offset by a subsequent
like reduction (or increase)
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<PAGE>
in the rate of principal prepayments.
Since interest generally will be due on each Mortgage Loan on the first
day of the month, but the distribution of such interest will not be made until
the Pooled Certificate Distribution Dates and then the amounts received with
respect to a Pooled Certificate Distribution Date will not be distributed until
the related Distribution Date, the yield to investors in the Certificates will
be lower than the yield produced without such delays. Since the amount of the
distributions is based on information from the Underlying Trustees, if such
information is not received in a timely manner, the yield to investors may be
lower than the yield produced if such information had been received in a timely
manner. In addition, the yield to investors in the related Class of Certificates
will be reduced by interest shortfalls resulting from prepayments, liquidation
and the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, (the
"Relief Act") to the extent not covered by compensating interest or
Subordination provided for in the related Underlying Agreement (a "Prepayment
Interest Shortfall") or by the Prepayment Interest Shortfall Account.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments, other things being equal, could result
in an actual yield that is lower than the anticipated yield. In the case of any
Certificates purchased at a premium, a faster than anticipated rate of principal
payments, other things being equal, could result in an actual yield that is
lower than the anticipated yield.
Since prevailing interest rates are subject to fluctuation, there can be
no assurance that investors in the Certificates will be able to reinvest the
payments thereon at yields equaling or exceeding the yields on the Certificates.
Yields on any such reinvestments may be lower, and may even be significantly
lower, than yields on the Certificates. Prospective investors in the
Certificates should consider the related reinvestment risks in light of other
investments that may be available to such investors.
The Pooled Certificates are subject to optional redemption to the extent
described in Annex 1 hereto. Any such optional redemptions with respect to
Pooled Certificates in a Pooled Certificate Group will result in an earlier
payment of the related Class of Certificates.
ASSUMED FINAL DISTRIBUTION DATES
The "Assumed Class Final Distribution Date" for distributions on each
Class of Certificates is as follows:
Assumed Class Final
Class of Certificate Distribution Date
- -------------------- -----------------
Class A-1 April 2025
Class A-2 April 2024
Class A-3 August 2008
Class A-4 March 2009
Class A-5 January 2024
Each Assumed Class Final Distribution Date is one month after the Pooled
Certificate Distribution Date on which the final scheduled distribution on the
last to mature of the related Pooled Certificates is scheduled to be made. Since
the rate of payment of principal on the Mortgage Loans can be expected to exceed
the rate of payments used in calculating each such final scheduled distribution,
the date of the final distribution on each class of Certificates is expected to
be earlier, and could be substantially earlier, than its Assumed Class Final
Distribution Date. The "Assumed Final Trust Distribution Date" of April 2025 is
the latest to occur of the Assumed Class Final Distribution Dates.
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 (i) multiplying the amount of
payments made in respect of principal on such Certificate on each Distribution
Date by the number of years from the Closing Date to such Distribution Date;
(ii) summing the results and (iii) dividing the sum by the aggregate amount of
the principal payments on such Certificate referred to in clause (i). The
weighted average lives of the Certificates will be influenced by, among other
factors, the rate at which principal is paid on the related Underlying Mortgage
Loans.
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<PAGE>
SPA MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The standard prepayment assumption model used in
this Memorandum ("SPA") represents an assumed rate of prepayment each month of
the then outstanding principal balance of a pool of new mortgage loans. SPA DOES
NOT PURPORT TO BE EITHER A HISTORICAL DESCRIPTION OF THE PREPAYMENT EXPERIENCE
OF ANY POOL OF MORTGAGE LOANS OR A PREDICTION OF THE ANTICIPATED RATE OF
PREPAYMENT OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE MORTGAGE LOANS
UNDERLYING ANY POOLED CERTIFICATE GROUP. 100% SPA assumes prepayment rates of
0.2% per annum of the then outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter (for example 0.4% per annum in the second month)
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the mortgage loans, 100% SPA assumes a CONSTANT
prepayment rate of 6% per annum. Multiples will be calculated from this
prepayment rate series; for example, 125% SPA assumes prepayment rates will be
0.25% per annum in month one, 0.5% per annum in month two, reaching 7.5% per
annum in month 30 and remaining CONSTANT at 7.5% per annum thereafter. 0% SPA
assumes no prepayments.
DECREMENT AND WEIGHTED AVERAGE LIFE TABLES
The following tables indicate the percentages of the Original Principal
Balance of each Class of Certificates outstanding after certain dates and the
weighted average lives (in years) of each Class of Certificates, assuming
various constant percentages of SPA.
For each of the following tables it was assumed, among other things,
that (i) the Trust consists of the Pooled Certificates in the principal amounts
as of the Pooled Certificate Information Date described on Annex 1 hereto after
giving effect to distributions payable thereon in February 1997; (ii) the
principal balance of each Mortgage Loan is as of the Mortgage Loan Information
Date and is based on the Pooled Certificate Distribution Date Statement for
February 1997; (iii) the Original Principal Balance of each class of
Certificates will be as set forth on the cover page, less the aggregate
principal distribution on the Pooled Certificates in the related Pooled
Certificate Group in March 1997 based upon the specified percentage of SPA; (iv)
Distribution Dates on the Certificates occur on the 28th of the month commencing
in April 1997; (v) each Mortgage Loan has a mortgage rate, remaining term to
maturity and loan age based on information provided by the Underlying Trustees,
paying agents or Servicers as of the Mortgage Loan Information Date; (vi) the
Mortgage Loans prepay at the constant percentages of SPA specified in the tables
and all principal prepayments constitute prepayments in full of the Mortgage
Loans and are received on the last day of each month commencing February 28,
1997; (vii) all amounts due with respect to the Mortgage Loans underlying the
Pooled Certificates are applied to the payment of such Pooled Certificates on
the 25th day of each month; (viii) there have occurred no delinquencies or
losses on the Mortgage Loans after the time period covered by the Pooled
Certificate Distribution Date Statements for February 1997; (ix) there are no
optional terminations of the Pooled Certificates; (x) the Closing Date is March
31, 1997; (xi) each month consists of 30 days; (xii) any reinvestment income on
funds in the Certificate Account will be paid to the Trustee and will not be
available to make principal and interest payments on the Certificates; (xiii) no
expenses will be paid on any Distribution Date by the Trust since the Trustee
Fee will be paid from the Trustee Fee Account (as defined herein); and (xiv)
scheduled monthly payments of principal and interest on the Mortgage Loans will
be timely received on the first day of the month, commencing March 1997.
S-18
<PAGE>
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
% OF SPA % OF SPA
75% 100% 125% 150% 200% 75% 100% 125% 150% 200%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100 100 100 100 100 100 100 100
March 1998................................... 100 100 100 100 100 100 100 100 100 100
March 1999................................... 100 100 100 100 100 100 100 100 100 100
March 2000................................... 100 100 100 100 100 100 100 100 100 88
March 2001................................... 100 100 100 100 100 100 100 100 100 64
March 2002................................... 100 100 100 100 100 100 100 100 91 33
March 2003................................... 100 100 100 100 100 100 100 96 61 1
March 2004................................... 100 100 100 100 100 100 100 66 30 0
March 2005................................... 100 100 100 100 100 100 76 35 0 0
March 2006................................... 100 100 100 100 40 91 45 4 0 0
March 2007................................... 100 100 100 94 0 62 15 0 0 0
March 2008................................... 100 100 100 33 0 35 0 0 0 0
March 2009................................... 100 100 42 0 0 8 0 0 0 0
March 2010................................... 100 62 0 0 0 0 0 0 0 0
March 2011................................... 93 3 0 0 0 0 0 0 0 0
March 2012................................... 31 0 0 0 0 0 0 0 0 0
March 2013................................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)................................... 14.7 13.2 11.9 10.8 8.9 10.5 8.9 7.5 6.4 4.4
</TABLE>
S-19
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A-3 CERTIFICATES CLASS A-4 CERTIFICATES
% OF SPA % OF SPA
75% 100% 125% 150% 200% 75% 100% 125% 150% 200%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100 100 100 100 100 100 100 100
March 1998................................... 100 100 100 100 100 100 100 100 100 100
March 1999................................... 100 100 100 100 100 100 100 100 100 100
March 2000................................... 100 100 100 100 100 100 100 100 100 100
March 2001................................... 100 100 100 100 100 100 100 100 100 100
March 2002................................... 100 100 100 100 100 100 100 100 100 72
March 2003................................... 100 100 100 100 85 100 100 99 74 29
March 2004................................... 100 100 100 91 65 100 76 51 28 0
March 2005................................... 100 93 79 67 46 49 25 4 0 0
March 2006................................... 73 61 51 43 28 0 0 0 0 0
March 2007................................... 35 29 24 20 13 0 0 0 0 0
March 2008................................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)................................... 9.6 9.4 9.1 8.8 7.9 8.0 7.6 7.1 6.6 5.5
</TABLE>
S-20
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A-5 CERTIFICATES
% OF SPA
75% 100% 125% 150% 200%
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................................................... 100 100 100 100 100
March 1998............................................................................. 100 100 100 92 88
March 1999............................................................................. 100 100 94 88 88
March 2000............................................................................. 100 100 88 88 88
March 2001............................................................................. 100 88 88 88 88
March 2002............................................................................. 99 88 88 88 88
March 2003............................................................................. 88 88 88 88 88
March 2004............................................................................. 88 88 88 88 88
March 2005............................................................................. 88 88 88 88 74
March 2006............................................................................. 88 88 88 88 53
March 2007............................................................................. 88 88 88 88 33
March 2008............................................................................. 88 88 88 75 15
March 2009............................................................................. 88 88 88 54 0
March 2010............................................................................. 88 88 71 36 0
March 2011............................................................................. 88 88 51 18 0
March 2012............................................................................. 88 71 33 3 0
March 2013............................................................................. 88 52 16 0 0
March 2014............................................................................. 76 33 0 0 0
March 2015............................................................................. 54 15 0 0 0
March 2016............................................................................. 33 0 0 0 0
March 2017............................................................................. 13 0 0 0 0
March 2018............................................................................. 0 0 0 0 0
Weighted Average Life
(in years)............................................................................. 17.0 15.0 13.0 11.3 8.5
</TABLE>
S-21
<PAGE>
ACTUAL EXPERIENCE WILL VARY FROM ASSUMPTIONS
Discrepancies will exist between the characteristics of the actual
Pooled Certificates and Mortgage Loans and characteristics of the Pooled
Certificates and Mortgage Loans assumed in preparing the tables contained
herein. To the extent that Pooled Certificates and underlying Mortgage Loans
have characteristics which differ from those assumed in preparing the tables,
the related Class of Certificates may mature earlier or later than indicated by
the tables, and the weighted average life and the cash flows on such Class of
Certificates may also differ. In addition, it is unlikely that the Mortgage
Loans will prepay at any constant rate. The timing of changes in the rate of
prepayment may significantly affect the yield realized by a holder of
Certificates.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling Agreement between
BSMSI, as the depositor, and First Trust National Association as the Trustee
(the "Agreement" ). BSMSI will provide to a prospective or actual
Certificateholder without charge, upon written request, a copy (without
exhibits) of the Agreement. Requests should be addressed to Bear Stearns
Mortgage Securities Inc., 245 Park Avenue, New York, New York 10167.
ASSIGNMENT OF POOLED CERTIFICATES
At the time of issuance of the Certificates, the Depositor will cause
the Pooled Certificates to be assigned to the Trustee. The Depositor will
represent, among other things, that as of the Closing Date (i) it is the owner
of the Pooled Certificates free and clear of any lien or adverse interests of
any person and (ii) that it has acquired its ownership in the Pooled
Certificates in good faith without notice of any adverse claim.
Upon discovery or receipt of notice by either the Depositor or the
Trustee of a breach of any of the representations and warranties regarding the
Pooled Certificates which materially and adversely affects the interests of the
Certificateholders, the Depositor or the Trustee, the party discovering such
breach will give prompt notice to the other. Within thirty days of the earlier
of either discovery by or notice to the Depositor of any such breach, the
Depositor shall use its best efforts promptly to cure such breach in all
material respects and, if such breach cannot be cured, the Depositor shall, at
the election of the Majority Certificateholders (as defined herein), repurchase
each Pooled Certificate affected by the breach, as well as all of the Pooled
Certificates within the same Pooled Certificate Group containing the Pooled
Certificate with respect to which a breach has occurred, each at a repurchase
price equal to the outstanding Pooled Certificate Principal Balance thereof as
of the date of repurchase plus interest thereon at the applicable Pooled
Certificate Pass-Through Rates through the next succeeding Pooled Certificate
Distribution Date unless the repurchase is made on a Pooled Certificate
Distribution Date, then interest through such date (net of interest received by
the Trust on such Pooled Certificates on such date).
Notwithstanding the foregoing, for a period of two years following the
Closing Date, in lieu of repurchasing Pooled Certificates as described above,
the Depositor may substitute therefor one or more pass-through mortgage related
securities issued by the same depositor or the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC") (each, a "Substitute Pooled
Certificate") which meet the following criteria: (i) if any of the Substitute
Pooled Certificates has a fixed interest rate, the rate shall be no lower than
the rate of the related Certificate, (ii) if any Substitute Pooled Certificate
does not have a fixed interest rate, then substitution shall be with at least
one Floating Rate Certificate and at least one Inverse Floating Rate
Certificate, the interest rates on which taken together, result in a fixed
pass-through rate no lower than the fixed pass-through rate borne by the related
Class of Certificates, (iii) the sum of the outstanding principal amounts of the
Substitute Pooled Certificates equals or exceeds the sum of the outstanding
principal amounts of the Pooled Certificates being substituted for and (iv) for
any Pooled Certificate being substituted for, the Substitute Pooled Certificate
as of the date of substitution, (a) has Underlying Mortgage Loans with a
weighted average gross coupon no more than 50 basis points below or no more than
50 basis points above the weighted average gross coupon of the Underlying
Mortgage Loans relating to the Pooled Certificate being substituted for, (b) has
Underlying Mortgage Loans consisting of conventional, fixed rate, one- to
four-family, fully amortizing, level payment, first lien mortgage loans with
original maturities of up to 15 years if the Pooled Certificates being
substituted for are from PHMSC 1993-29 or PHMSC 1994-7 or up to 30 years if any
of the remaining Pooled Certificates are being substituted for, (c) if not
issued by GNMA, FNMA or FHLMC, is rated as of the date of substitution in at
least the same rating category as the Pooled Certificate being substituted for
is rated as of the date of substitution, in each case, by each Rating Agency,
(d) the inclusion of which in the Trust Fund will not result in a withdrawal or
downgrading in the ratings assigned to the Certificates by either Rating Agency,
written confirmation of which shall be provided by each Rating Agency to the
Trustee and (f) will not cause the assets of the Trust as to which a REMIC
election has been made to lose their status as a REMIC for
S-22
<PAGE>
federal income tax purposes as indicated in an opinion of counsel to be provided
to the Trustee.
ACCOUNTS
The Trustee shall establish and maintain the Certificate Account in the
name of the Trustee for the benefit of the Certificateholders. The Certificate
Account shall be an Eligible Account as defined in the Agreement. The
Certificate Account shall have one subaccount for all funds collected with
respect to each Pooled Certificate Group. The Trustee will cause all
distributions received on the Pooled Certificates of each Pooled Certificate
Group by the Trustee in its capacity as holder of the Pooled Certificates, from
whatever source, to be deposited directly into the applicable subaccount of the
Certificate Account. Amounts on deposit in the Certificate Account will be
invested in certain investments permitted by the Agreement ("Permitted
Investments"). Any income on such investments will be paid to the Trustee as
additional compensation and losses on such investments shall be reimbursed by
the Trustee from its own funds.
The Interest Account, which will meet the requirements for an Eligible
Account as set forth in the Pooling Agreement, will be established on the
Closing Date with a deposit of $2,613.00 and will be maintained with the Trustee
for the benefit of the holders of the Class A-1, Class A-3 and Class A-5
Certificates. The amount deposited therein is sufficient to make up the
difference between the 6.750%, 6.750% and 6.875% Pass-Through Rate,
respectively, of such Certificates and the actual rates of 6.74954%, 6.74999%
and 6.87487%, respectively, scheduled to be passed through on the related Pooled
Certificate Groups. Any funds remaining in such account after the Class A-1,
Class A-3 and Class A-5 Certificates have been paid in full shall be transferred
to the Prepayment Interest Shortfall Account.
The holders of the Certificates will have the benefit of a reserve fund
account (the "Prepayment Interest Shortfall Account") into which, on the Closing
Date, the Depositor will deposit $20,000 which will be held by the Trustee and
invested in Permitted Investments, but will not be part of the REMIC, and which
will be available to pay Prepayment Interest Shortfalls. Because the Prepayment
Interest Shortfall Account will be available to cover Prepayment Interest
Shortfalls in any Pooled Certificate Group, funds disbursed from the Prepayment
Interest Shortfall Account to cover a Prepayment Interest Shortfall in one
Pooled Certificate Group will reduce the funds remaining to cover Prepayment
Interest Shortfalls in the other Pooled Certificate Groups. If the rate of
Prepayment Interest Shortfalls in any Mortgage Group underlying one Pooled
Certificate Group is disproportionately greater than the rate of Prepayment
Interest Shortfalls respecting the Mortgage Groups underlying the other Pooled
Certificate Groups, the funds available to such other Pooled Certificate Groups
from the Prepayment Interest Shortfall Account may be reduced below that which
would otherwise have been available if each Pooled Certificate Group were
covered by a separate Prepayment Interest Shortfall Account. The Prepayment
Interest Shortfall Account will be an Eligible Account as described in the
Agreement. Amounts in the Prepayment Interest Shortfall Account will be
transferred to the appropriate subaccounts of the Certificate Account in
connection with each applicable Distribution Date for distributions on the
Certificates to the extent of Prepayment Interest Shortfalls. Following payment
in full of all Classes of Certificates, any amounts remaining in the Prepayment
Shortfall Account shall be paid to the Depositor.
TRUSTEE FEE ACCOUNT
On the Closing Date, the Depositor will establish a trustee fee account
(the "Trustee Fee Account") and deposit an amount to be agreed to by the
Depositor and the Trustee and deemed acceptable by the Rating Agencies (the
"Trustee Fee") into such account. Amounts in the Trustee Fee Account may be
invested at the discretion of the Trustee. The Trustee Fee Account will be held
by the Trustee and will be available to pay the Trustee Fee. As compensation for
its services in connection with the Certificates, on each Distribution Date the
Trustee may withdraw from the Trustee Fee Account such amount as will be
specified in the Pooling Agreement together with all investment earnings on
amounts in the Trustee Fee Account as of each such date of withdrawal. Upon
payment in full of the Certificates, any amounts remaining in the Trustee Fee
Account are payable to the Trustee.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date and on each Supplemental Distribution Date
(with respect only to each Class as to which a distribution is then being made),
the Trustee will prepare, and will forward by mail, a statement to each
Certificateholder and to the Depositor stating:
(i) the Available Funds for each Class of Certificates for such
Distribution Date;
(ii) the amount of interest and principal being distributed on each
Class of Certificates for such Distribution Date, separately
stating the amount of interest provided from the Prepayment
Interest Shortfall Account;
S-23
<PAGE>
(iii) the Class Balances for each Class of Certificates before and
after applying payments on such Distribution Date;
(iv) the remaining amount in the Prepayment Interest Shortfall
Account following the payment on such Distribution Date;
(v) the outstanding principal amount immediately prior to and
after taking into account distributions made on the
immediately prior Pooled Certificate Distribution Date of, and
the current interest rate, Prepayment Interest Shortfalls and
Realized Losses allocated to, each of the Pooled Certificates
in each Pooled Certificate Group on the immediately prior
Pooled Certificate Distribution Date; and
(vi) any amount in the Trustee Fee Account applied to pay the
Trustee Fee and the balance of the Trustee Fee Account as of
such Distribution Date.
In the case of the information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall also be expressed as a dollar amount per single
Certificate.
In addition, the Trustee promptly will furnish to the Depositor and,
upon request, to each Certificateholder, copies of any notices, statements,
reports or other information, including, without limitation, the Pooled
Certificate Distribution Date Statement received by the Trustee in its capacity
as the holder of the Pooled Certificates, with respect to the Pooled
Certificates related to the Certificates held by such Certificateholder.
On or before March 31st of each calendar year, commencing in 1998, the
Trustee will prepare and deliver by first class mail to the Depositor and each
person who at any time during the prior calendar year was a Certificateholder of
record a statement containing the information required to be contained in the
regular monthly report to Certificateholders, as set forth in clause (ii) above
aggregated for such prior calendar year or in the case of a Certificateholder,
the applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Trustee will be satisfied to the extent that
substantially comparable information is provided by the Trustee pursuant to any
requirements of the Internal Revenue Code of 1986, as amended, and regulations
thereunder as from time to time are in force.
AMENDMENTS
The Agreement may be amended by the Depositor and the Trustee, without
the prior written consent of any Certificateholder (i) to cure any ambiguity or
mistake, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Agreement that
are not materially inconsistent with other provisions of the Agreement and (iv)
to make such modifications as may be required in connection with a substitution
or repurchase of a Pooled Certificate permitted under the Agreement; provided,
however, that such amendment will not, as evidenced by an opinion of counsel
delivered to the Trustee, adversely affect in any material respect the interests
of any Certificateholder. In addition, the 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 assets as to which a REMIC election has been
made 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. The Agreement may also be amended by the Depositor and the
Trustee and the holders of Certificates evidencing more than 50% of the
aggregate Class Balances of the Certificates (or, with respect to any amendment
affecting only one Class of Certificates, with the consent of the holders of
Certificates evidencing more than 50% of the Class Balance of the affected
Class) (as applicable, the "Majority Certificateholders") for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or modifying in any manner the rights of
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, amounts required to be
distributed on any Certificate without the consent of the holder of such
Certificate; (ii) modify the provisions of the Section of the Agreement
governing amendments of the Agreement, without the consent of the holders of all
Certificates; or (iii) be made unless the Trustee has received an opinion of
counsel (at the expense of the party seeking such amendment) that such amendment
will not adversely affect the status of certain assets of the Trust as to which
a REMIC election has been made, as a REMIC for federal income tax purposes.
ACTION WITH RESPECT TO UNDERLYING SERIES
The Trustee will exercise all voting rights provided to the holders of
the Pooled Certificates pursuant to an Underlying Agreement (in the case of book
entry Pooled Certificates, by directing Cede & Co.) solely upon the direction of
Majority Certificateholders of the related Class of Certificateholders.
S-24
<PAGE>
CERTIFICATEHOLDER ACTION
No Certificateholder will have any right to institute any action, suit
or proceeding in equity or at law upon or under or with respect to the Agreement
unless such holder previously has given to the Trustee and the Depositor a
written notice of default and unless also the Majority Certificateholders have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee thereunder and have offered to the Trustee
such reasonable indemnity as the Trustee may require against the costs, expenses
and liabilities to be incurred therein or thereby, and the Trustee, for 30 days
after its receipt of such notice, request and offer of indemnity, will have
neglected or refused to institute any such action, suit or proceeding.
TERMINATION
The respective obligations and responsibilities of the Depositor and
the Trustee created by the Agreement will terminate upon the final distribution
to Certificateholders by the Trustee of all amounts required to be distributed
pursuant to the Agreement.
INDEMNIFICATION OF THE TRUSTEE
The Trustee and its directors, officers, employees and agents, will be
indemnified by the Trust against any loss, liability or expense arising out of
or incurred in connection with, the exercise and performance of any powers and
duties of the Trustee under the Agreement, with certain exceptions described in
the Agreement. The Trustee and its directors, officers, employees and agents
will not be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of the
obligations and duties of the Trustee.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee for the Certificates will be First Trust National
Association. The Trustee's corporate office is located at 180 East 5th Street,
St. Paul, Minnesota 55101, Attention: Structured Finance Department, and its
Bondholder Services telephone number is (612) 973-6700.
The Trustee may at any time resign and be discharged from the trust by
giving 30 days' written notice thereof to the Depositor and the
Certificateholders. Upon receiving such notice of resignation, the Depositor
shall promptly appoint a successor trustee. If no successor trustee has been so
appointed and has accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. If at any time the
Trustee fails to meet the eligibility requirements or is incapable of acting, or
certain insolvency events occur, then the Depositor shall remove the Trustee and
appoint a successor trustee. The Majority Certificateholders may at any time
remove the Trustee and appoint a successor trustee. No resignation, discharge or
removal of the Trustee will become effective until a successor trustee shall
have assumed the Trustee's responsibilities and obligations under the Agreement.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based on the assumption that all of the
Pooled Certificates are REMIC regular interests. Such assumption is based upon
information contained in each of the prospectuses (each, an "Underlying
Prospectus") and in each of the prospectus supplements (each, an "Underlying
Prospectus Supplement") pursuant to which the Pooled Certificates were initially
offered. Neither the Depositor nor the Underwriter has independently
investigated any of the Underlying Trusts (whether through review of
organizational documentation or investigation of events occurring subsequent to
the dates of the related Underlying Prospectuses or Underlying Prospectus
Supplements or otherwise) to determine whether all the Underlying Trusts
actually qualify as REMICs and the related Pooled Certificates actually qualify
as REMIC regular interests.
An election will be made to treat certain assets of the Trust as a
REMIC for federal income tax purposes. The Certificates (other than the Class R
Certificates) will be designated as regular interests in the REMIC
(collectively, the "Regular Certificates" or the "REMIC Regular Certificates"),
and the Class R Certificates will be designated as the residual interest in the
REMIC (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.
S-25
<PAGE>
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. Some or
all of the Classes of Regular Certificates may 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, in any, of
the original issue discount provisions and regulations on the purchase of the
Regular Certificates. In determining the rate of accrual of original issue
discount with respect to the Certificates a prepayment assumption of 100% SPA
will be used. See "Yield and Prepayment Considerations--SPA Model" herein for a
description of the standard prepayment assumption model. However, no
representation is made as to the rate at which prepayments actually will occur.
In addition, certain Classes of Regular Certificates may be treated as having
been issued as a premium. See "Certain Federal Income Tax Consequences--REMIC
Regular Certificates--Premium" in the Prospectus.
A REMIC that would be classified as a grantor trust but for its
qualification as a REMIC, or that is substantially similar to a grantor trust
and is structured with the principal purpose of avoiding the allocation of
investment expenses to certain regular interest holders is classified as a
"single-class REMIC." The REMIC does not intend to report its investment
expenses as would a single-class REMIC. If, however, the REMIC were considered a
single-class REMIC, certain expenses of the REMIC (and an equivalent amount of
income) would be allocated to the holders of the REMIC Regular Certificates and
the deductibility of such expenses by a holder who is an individual or
pass-through entity might be limited as described in "Certain Federal Income Tax
Consequences--Deductibility of Trust Fund Expenses" in the Prospectus.
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 the REMIC. 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. One such circumstance may occur if certain of the Pooled
Certificates have negative yields which may not be taken into account when
determining the taxable income of the holders of the Residual Certificates.
Another such circumstance may occur as a result of income on the Pooled
Certificates being reported to the REMIC using faster prepayment assumptions
than those used with respect to the Certificates.
The Certificates (including the Residual Certificates) will be treated
as "regular" or "residual interests" in a REMIC for domestic building and loan
associations, and "real estate assets" for real estate investment trusts
("REITs"), subject to the limitations described in "Certain Federal Income Tax
Consequences--REMIC Certificates--Status of REMIC Certificates as Real Property
Loans" in the Prospectus. Similarly, interest on such Certificates will be
considered "interest on obligations secured by mortgages on real property" for
REITs, subject to the limitations described in "Certain Federal Income Tax
Consequences--REMIC Certificates--Status of REMIC Certificates as Real Property
Loans" in the Prospectus.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impossible to
predict the income tax consequences to the Certificateholders in all of the
state taxing jurisdictions in which they are subject to tax. Certificateholders
are urged to consult their own advisors with respect to state income and
franchise taxes.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA
should consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in 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
S-26
<PAGE>
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 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. ss. 2510.3-101 (the "Plan
Asset Regulations"), thereby subjecting the Plan to the prohibited transaction
rules with respect to the Trust Assets and the Trustee to the fiduciary
investments standards of ERISA, or cause the excise tax provisions of Section
4975 of the Code to apply to the Trust Assets, unless an exemption granted by
the Department of Labor applies to the purchase, sale, transfer or holding of
the Certificates and the operation and management of the Trust and its assets.
In particular, investors that are insurance companies should consult with their
legal counsel with respect to the United States Supreme Court case John Hancock
Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 114 S.Ct. 517
(1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be plan assets under
certain circumstances. Investors should analyze whether that decision or federal
legislation recently enacted affecting insurance company general accounts (see
Section 1460 of the Small Business Job Protection Act of 1996) may have an
impact with respect to purchases of Certificates.
Prohibited Transaction Exemption 90-30 ("PTE 90-30") may be applicable
to the purchase, sale or transfer of Certificates and the operation and
management of the Trust and its assets. The Department of Labor has clarified
that the definition of a trust to which an individual prohibited transaction
exemption such as PTE 90-30 will be applicable includes a "two-tiered" trust
structure under which certificates (such as the Pooled Certificates) are issued
by a trust (such as each of the Underlying Trusts) which contain a pool of
receivables (such as the Underlying Mortgage Loans) and then are transferred to
another trust (such as the Trust) which issues certificates which are sold to
Plans; provided that the certificates issued by an underlying trust are not
subordinated to any other class of certificates issued by the same underlying
trust. BSMSI believes that none of the Pooled Certificates which are being
transferred to the Trust are subordinated to any other class of certificates
which were issued by any of the same Underlying Trusts. However, any Plan
fiduciary which proposes to cause a Plan to purchase Certificates should consult
with its own counsel and should make its own determination as to the
availability of exemptive relief under PTE 90-30, both in the context of a
two-tiered trust structure and with regard to whether all of the specific and
general conditions of PTE 90-30 are satisfied with respect to any potential
prohibited transaction relating to the purchase, sale and transfer of the
Certificates and the operation and management of the Trust and its assets.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such governmental plan may be subject
to Federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for the availability of any exemptive relief under any Similar Law.
LEGAL INVESTMENT
Institutions whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory authorities
may be subject to restrictions on investment in the Certificates. Any such
institution should consult its legal advisors in determining whether and to what
extent there may be restrictions on its ability to invest in the Certificates.
The Certificates will constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("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. 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 First Trust National Association,
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
United States person (as defined below), an affidavit that it is a United States
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
S-27
<PAGE>
tax. In the event that legislation is enacted which would subject the Trust to
tax (or disqualify the assets of the Trust as to which a REMIC election has been
made as a REMIC) on the transfer of an interest in a Residual Certificate to any
other person or persons, the Tax Matters Person may, without action on the part
of Holders, amend the Agreement to restrict or prohibit prospectively such
transfer. A transfer in violation of the restrictions set forth herein may
subject a Residual Certificateholder to taxation. See "Certain Federal Income
Tax Consequences--REMIC Residual Certificates--Transfers of REMIC Residual
Certificates--Tax on Disposition of REMIC Residual Certificates" and
"--Restrictions on Transfer; Holding by Pass-Through Entities" in the
Prospectus. Moreover, certain transfers of Residual Certificates that are
effective to transfer legal ownership may nevertheless be ineffective to
transfer ownership for federal income tax purposes, if at the time of the
transfer the Residual Certificate represents a "non-economic residual interest"
as defined in the REMIC Regulations and if avoiding or impeding the assessment
or collection of tax is a significant purpose of the transfer. See "Certain
Federal Income Tax Consequences--REMIC Residual Certificates--Transfers of REMIC
Residual Certificates" and "--Restrictions on Transfer; Holding by Pass-Through
Entities" in the Prospectus. Further, unless the Tax Matters Person consents in
writing (which consent may be withheld in the Tax Matters Person's sole
discretion), the Residual Certificates (including a beneficial interest therein)
may not be purchased by or transferred to any person who is not a "United States
person," as such term is defined in Section 7701(a)(30) of the Code.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Certificates are being purchased from BSMSI by the Underwriter,
an affiliate of BSMSI, upon issuance. Distribution of such Certificates will be
made from time to time in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. In connection with the purchase and sale
of the Certificates, the Underwriter may be deemed to have received compensation
from BSMSI in the form of underwriting discounts. BSMSI will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
1933 Act, or will contribute to payments the Underwriter may be required to make
in respect thereof. BSMSI will acquire the Pooled Certificates from the
Underwriter.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for BSMSI and the Underwriter by Stroock & Stroock & Lavan LLP, New York, New
York.
CERTIFICATE RATING
As a condition to their issuance, each Class of Certificates will be
rated "AAA" by Fitch and "Aaa" by Moody's.
The rating assigned by Moody's to the Certificates address the
likelihood of the receipt by Certificateholders of all distributions to which
such Certificateholders are entitled. The rating is based principally on the
guarantees of FNMA and FHLMC on the Pooled Certificates. Moody's ratings do not
represent any assessment of the likelihood that prepayments will be made by
borrowers or the degree to which such prepayments will differ from that
originally anticipated. The rating does not address the possibility that, as a
result of prepayments, Certificateholders may suffer a lower than anticipated
yield on the Certificates.
The rating by Fitch on the Certificates addresses the likelihood of the
receipt by Certificateholders of all distributions to which such
Certificateholders are entitled. Fitch takes into consideration the credit
quality of the Mortgage Loans, structural and legal aspects associated with the
Certificates and the extent to which the payment stream on the Pooled
Certificates is adequate to make payments required under the Certificates. The
rating of Fitch does not constitute a statement regarding frequency of
prepayments on the Mortgage Loans or the corresponding effects on yield to
investors, and does not represent any assessment of the likelihood or rate of
prepayments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Certificates are subsequently lowered for any reason,
no person or entity is obligated to provide any additional credit support or
credit enhancement with respect to the Certificates.
BSMSI has not requested a rating of the Certificates by any rating
agency other than Fitch and Moody's. However, there can be no assurance as to
whether any other rating agency will rate any Class of Certificates or, in such
event, what rating would be assigned by such other rating agency. The rating
assigned by such other rating agency may be lower than the ratings assigned by
Fitch and Moody's.
S-28
<PAGE>
GLOSSARY
The abbreviations used for each Pooled Certificate are set forth under
"Description of the Pooled Certificates -- General"
Agreement...............................................................S-4
Assumed Class Final Distribution Date...................................S-17
Assumed Final Trust Distribution Date...................................S-17
Available Funds.........................................................S-13
Bankruptcy Losses.......................................................S-15
BSMSI...................................................................S-4
Business Day ...........................................................S-7
Cede....................................................................S-12
Certificates............................................................S-1
Certificate Account.....................................................S-13
Certificate Rating......................................................S-11
Certificate Register....................................................S-12
Class B Certificates....................................................S-15
Class Balance...........................................................S-14
Class M Certificates....................................................S-15
Closing Date............................................................S-7
Code....................................................................S-10
Depositor...............................................................S-4
Determination Time......................................................S-7
Distribution Date.......................................................S-2
DTC.....................................................................S-4
ERISA...................................................................S-10
Fitch...................................................................S-1
Floating Rate Certificates..............................................S-15
Fraud Losses............................................................S-15
Group A-1 Pooled Certificates through Group A-5 Pooled Certificates.....S-2
Index...................................................................S-15
Interest Account........................................................S-13
Interest Accrual Period.................................................S-13
Inverse Floating Rate Certificates......................................S-15
Majority Certificateholders.............................................S-24
Mezzanine Certificates..................................................S-15
Mortgage Loans..........................................................S-2
Mortgage Loan Information Date..........................................S-4
Mortgage Pool...........................................................S-2
Original Principal Balance..............................................S-4
PAC Classes.............................................................S-8
Pass-Through Rate.......................................................S-1
Permitted Investments...................................................S-23
Plan(s).................................................................S-10
Plan Asset Regulations..................................................S-27
Planned Balance.........................................................S-15
Pooled Certificates.....................................................S-2
Pooled Certificate Distribution Date....................................S-2
Pooled Certificate Distribution Date Statement..........................S-12
Pooled Certificate Group................................................S-2
Pooled Certificate Group A-1 through Pooled Certificate Group A-5.......S-2
Pooled Certificate Information Date.....................................S-4
Pooled Certificate Principal Balance....................................S-4
Prepayments.............................................................S-16
Prepayment Interest Shortfall...........................................S-2
Prepayment Interest Shortfall Account...................................S-2
Prospectus..............................................................S-4
PTE 90-30...............................................................S-27
Rating Agencies.........................................................S-11
Realized Losses.........................................................S-15
Regular Certificates....................................................S-10
S-29
<PAGE>
Record Date.............................................................S-8
Relief Act..............................................................S-6
REMIC...................................................................S-3
REMIC Regular Certificates..............................................S-10
REMIC Residual Certificate..............................................S-10
Residual Certificates...................................................S-3
Scheduled Balance.......................................................S-15
Scheduled Classes.......................................................S-8
Senior Certificate......................................................S-15
Servicer................................................................S-6
SMMEA...................................................................S-11
SPA.....................................................................S-18
Special Hazard Losses...................................................S-15
Subordinate Certificates................................................S-15
Subordination...........................................................S-15
Substitute Pooled Certificate...........................................S-22
Supplemental Distribution Date..........................................S-7
Support Classes.........................................................S-8
TAC Classes.............................................................S-8
Targeted Balance........................................................S-15
Tax Matters Person......................................................S-11
Trust...................................................................S-2
Trust Assets............................................................S-10
Trustee.................................................................S-4
Trustee Fee.............................................................S-23
Trustee Fee Account.....................................................S-7
Underlying Agreement....................................................S-2
Underlying Mortgage Loans...............................................S-2
Underlying Series.......................................................S-2
Underlying Trusts.......................................................S-2
Underwriter.............................................................S-1
United States person....................................................S-11
1933 Act................................................................S-3
1934 Act................................................................S-3
S-30
<PAGE>
ANNEX 1
The descriptions of the Pooled Certificates herein are
summaries, do not purport to be complete and are subject to and qualified by
reference to the provisions of the Underlying Agreements and the prospectuses
and prospectus supplements (collectively the "Prospectus") related to the Pooled
Certificates, as well as any subsequent information related thereto filed on a
Current Report on Form 8-K with the Securities and Exchange Commission following
the closing of the related Underlying Series. Reference should be made to the
Prospectuses and Underlying Agreements for the definitions of certain terms used
in the Underlying Agreements which are not defined herein and for the balance
tables relating to any PAC Classes, TAC Classes or Scheduled Classes included in
the Underlying Series. Current information set forth in Annex 1 herein that is
peculiarly within the knowledge of the various Underlying Trustees, paying
agents and servicers for the Underlying Trusts has been derived from data
provided by them, including regular periodic reports provided to holders of
Pooled Certificates and information provided in tape form from the related
servicers or underlying issuers or depositors, but such information has not been
independently represented to the Depositor or the Underwriter as being accurate
or complete nor has it been independently verified by the Depositor or the
Underwriter. This information comprises all material information on the subject
that the Depositor and the Underwriter possess or can acquire without
unreasonable expense or effort. Copies of the respective Prospectuses,
Underlying Agreements and the Pooled Certificate Distribution Date Statements
for February 1997 may be obtained from the Underwriter at 245 Park Avenue, New
York, New York 10167, Attention: Mortgage Department.
1-1
<PAGE>
Annex 1(a)
PAYMENT TERMS OF THE CHASE 1994-F CERTIFICATES
SERIES INFORMATION
Series Information...........................................CHASE 1994-F
Pooled Certificates.................Class A-15, Class A-16 and Class A-17
Pooled Certificates
Ratings at Date of Issuance........."Aaa" by Moody's and "AAA" by Fitch
Issue Date.................................................March 29, 1994
Cut-off Date................................................March 1, 1994
Pooled Certificate Trustee.................................Citibank, N.A.
DESCRIPTION OF CERTIFICATES
Certificate
Class Designations Pass-Through Initial Principal Balance
Rate Certificate as of Pooled
Principal Certificate
Balance Information Date
Class A-1 Floating Rate (1) $20,329,000.00 $ 3,557,470.66
Class A-2 Inverse Floating Rate (1) $ (2) $ (2)
Class A-3 5.00% $14,522,000.00 $ 2,541,275.46
Class A-4 6.00% $19,713,000.00 $19,713,000.00
Class A-5 6.75% $22,054,000.00 $22,054,000.00
Class A-6 2.50% $ (3) $ (3)
Class A-7 6.50% $10,511,000.00 $10,511,000.00
Class A-8 6.30% $19,703,000.00 $19,703,000.00
Class A-9 6.75% $11,446,000.00 $11,446,000.00
Class A-10 6.75% $ 1,675,000.00 $ 1,675,000.00
Class A-11 6.75% $13,860,000.00 $13,666,698.79
Class A-12 6.75% $ 7,795,000.00 $ 7,795,000.00
Class A-13 6.75% $43,733,000.00 $43,668,754.40
Class A-14 6.75% $ 735,000.00 $ 735,000.00
Class A-15 Floating Rate (1) $11,595,000.00 $11,457,057.22
Class A-16 Inverse Floating Rate (1) $ 3,566,000.00 $ 3,523,576.20
Class A-17 Inverse Floating Rate (4) $ 1,159,000.00 $ 1,145,211.67
Class A-18 6.75% $15,094,000.00 $15,094,000.00
Class A-Z 6.75% $13,791,000.00 $15,922,260.09
Class A-P (5) $ 410,743.09 $ 383,448.16
Class M 6.75% $ 3,049,171.22 $ 2,948,687.83
Class M-1 6.75% $ 2,438,000.00 $ 2,357,657.33
Class B-1 6.75% $ 3,049,450.03 $ 2,948,957.35
Class B-2 6.75% $ 1,829,149.98 $ 1,768,871.54
Class B-3 6.75% $ 853,603.33 $ 825,473.42
Class B-4 6.75% $ 243,886.66 $ 235,849.56
Class B-5 6.75% $ 731,660.00 $ 707,548.66
Class B-R(6) 0.00% $ 0.00 $ 0.00
Class A-X (7) $ (7) $ (7)
Class A-I (8) $ (8) $ (8)
1(a)-1
<PAGE>
- ------------------
1 Each Class listed below accrued interest during the applicable Interest
Accrual Period at the respective initial Pass-Through Rates set forth
below, and accrued and will accrue interest during each subsequent such
period at the respective rates determined as set forth below:
<TABLE>
<CAPTION>
Interest
Initial Pass- Maximum Pass- Minimum Pass- Formula for Calculation Accrual
Class Through Rate Through Rate Through Rate of Pass-Through Rate Period
<S> <C> <C> <C> <C> <C>
Class A-1 3.50% 8.00% 0.25% 0.25% + LIBOR LIBOR-based (a)
Class A-2 4.50% 7.75% 0.00% 7.75% - LIBOR LIBOR- based (a)
Class A-15 5.229% 9.50% 1.35% 1.35% + COFI COFI-based (b)
Class A-16 10.14806% 22.760796% 0.00% 22.760796% - COFI-based (b)
(3.251542 x COFI)
</TABLE>
(a) Each one-month period commencing on the 25th day of the month
preceding the month in which the Pooled Certificate
Distribution Date occurs and ending on the 24th day of the
month in which the Pooled Certificate Distribution Date
occurs.
(b) Each one-month period ending on the last day of the month
preceding the month in which the Pooled Certificate
Distribution Date occurs (a "COFI Interest Accrual Period").
2 The Class A-2 Certificates will have no principal balance, but accrued
and will accrue interest on the Class A-2 Notional Amount (initially
$20,329,000 and, as of the Pooled Certificate Information Date,
$3,557,470.66).
3 The Class A-6 Certificates will have no principal balance, but accrued
and will accrue interest on the Class A-6 Notional Amount (initially
and as of the Pooled Certificate Information Date, $10,511,000).
4 The Class A-17 Certificates accrued interest at a per annum rate of
11.51143% during the one-month period commencing March 1, 1994.
Thereafter, the Class A-17 Certificates accrued and will accrue
interest during each succeeding COFI Interest Accrual Period at a per
annum rate calculated as follows: (i) if COFI for such period is less
than or equal to 7.00%, the Pass-Through Rate on the Class A-17
Certificates will equal 11.51143%, and (ii) if COFI for such period is
greater than 7.00%, the Pass-Through Rate on the Class A-17
Certificates will equal approximately 81.541631% minus the product of
(A) 10.004314 and (B) COFI, but not less than 0.00%.
5 The Class A-P Certificates will be entitled to principal only.
6 Represents the residual interest and has no principal balance and bears
no interest.
7 On each Pooled Certificate Distribution Date, the Class A-X
Certificates will be entitled to receive interest due on each Mortgage
Loan on the related Due Date in excess of the sum of (i) the applicable
Pass-Through Rate, (ii) the Servicing Fee and (iii) Level One Excess
Interest (defined below) (less any Prepayment Interest Shortfalls
allocable to the Class A-X Certificates, which Prepayment Interest
Shortfalls may be reduced on any Pooled Certificate Distribution Date
to the extent of the Servicing Fee). "Level One Excess Interest" means,
with respect to each Mortgage Loan, the rate of interest specified in a
table to the Pooling and Servicing Agreement for such Mortgage Loan
accruing on such Mortgage Loan on each Due Date.
8 On each Pooled Certificate Distribution Date, the Class A-I
Certificates will be entitled to receive interest in an amount equal to
the Level One Excess Interest. It is unclear whether such Level One
Excess Interest will be reduced by any Prepayment Interest Shortfalls
allocable to the Class A-I Certificates and, if so, whether any such
Prepayment Interest Shortfalls would be reduced on any Pooled
Certificate Distribution Date to the extent of the Servicing Fee.
1(a)-2
<PAGE>
<TABLE>
<S> <C>
Mortgage Loans..................... The Mortgage Loans are conventional, fixed rate, one- to four-family
residential property, fully-amortizing, level monthly payment, first
mortgage loans with terms to maturity of 20, 25 or 30 years from the date
of origination.
Priority of Distributions
on the Certificates................ Principal received as part of a regularly scheduled monthly payment on each
Mortgage Loan will be passed through monthly on the Pooled Certificate
Distribution Date occurring in the month in which the related Due Date
occurs. The Non-PO Class A Certificates will be entitled to an amount
equal to the Non-PO Class A Percentage of the applicable Non-PO Percentage
(defined below) of scheduled principal amounts due with respect to each
Mortgage Loan. Principal prepayments and certain other unscheduled amounts
of principal received during the period from the first day of any month to
the last day of such month (a "Principal Prepayment Period") will be passed
through on the Pooled Certificate Distribution Date occurring in the month
following the month of receipt. The Non-PO Class A Certificates will be
entitled to an amount equal to the Non-PO Class A Prepayment Percentage
(defined below) of the applicable Non-PO Percentage of such unscheduled
amounts of principal.
The Class A Certificates (exclusive of the Class A-P Certificates) are
sometimes collectively referred to herein as the "Non-PO Class A
Certificates."
The Class A-1, Class A-3, Class A-4, Class A-5, Class A-7, Class A-8, Class
A-9 and Class A-10 Certificates are sometimes collectively referred to herein
as the "Level One PACs."
The Class A-13 and Class A-14 Certificates each are comprised of two portions
as to which principal distributions are determined by reference to a Planned
Amortization Balance. The first such portion is sometimes referred to herein
as the "Level Two PACs" or the "Level Two PAC Segment," and the other such
portion is sometimes referred to herein as the "Level Three PAC Segment."
The Level One PACs, the Level Two PACs and the Level Three PACs are sometimes
collectively referred to herein as the "PACs."
The Class A-11 and Class A-12 Certificates, together with the Level Three PAC
Segment, are sometimes collectively referred to herein as the "Level Three
PACs."
The Non-PO Class A Certificates (exclusive of the Class A-2, Class A-6 and
Class A-Z Certificates) are sometimes collectively referred to as the "Segment
Certificates."
The Class A-15, Class A-16, Class A-17 and Class A-18 Certificates are
sometimes collectively referred to as the "Segment Companions."
On any Pooled Certificate Distribution Date, the "Class A-2 Notional Amount"
will equal the then outstanding principal balance of the Class A-1
1(a)-3
<PAGE>
Certificates, and the "Class A-6 Notional Amount" will equal the then
outstanding principal balance of the Class A-7 Certificates.
"Subordinated Certificates" means the Class M, Class M-1, Class B-1, Class
B-2, Class B-3, Class B-4 and Class B-5 Certificates, referred to
collectively.
On any Pooled Certificate Distribution Date, for any PAC, the "Planned
Amortization Balance" means the principal balance specified for such Class or
Segment for such Pooled Certificate Distribution Date in an Annex to the
Pooling and Servicing Agreement.
On any Pooled Certificate Distribution Date, with respect to the Segment
Certificates, the "Segment Targeted Balance" means the principal balance
specified for such Classes for such Pooled Certificate Distribution Date in an
Annex to the Pooling and Servicing Agreement.
With respect to each Mortgage Loan, the "PO Percentage" will equal a fraction,
expressed as a percentage (but not less than 0%), the numerator of which will
equal the difference between the Remittance Rate (defined below) and the
applicable Net Mortgage Rate (defined below) and the denominator of which will
equal the Remittance Rate. The PO Percentage will be 0% with respect to
Mortgage Loans for which the Net Mortgage Rate is greater than or equal to
6.750%.
With respect to each Mortgage Loan, the "Non-PO Percentage" will equal a
fraction, expressed as a percentage (but not greater than 100%), the numerator
of which will equal the applicable Net Mortgage Rate and the denominator of
which will equal the Remittance Rate. The Non-PO Percentage will be 100% with
respect to Mortgage Loans for which the Net Mortgage Rate is greater than or
equal to 6.750%.
The "Discount Mortgage Loans" are those Mortgage Loans having a Net Mortgage
Rate less than the Remittance Rate.
The Class A-P Certificates will not be entitled to receive interest and will
be entitled to receive principal only with respect to Discount Mortgage Loans.
With respect to each Mortgage Loan, the "Net Mortgage Rate" equals the
applicable Mortgage Rate less the applicable Servicing Fee.
The "PO Allocated Amount" will be calculated as of any date by (i) multiplying
the outstanding principal balance of each Mortgage Loan as of such date by the
PO Percentage with respect to such Mortgage Loan and (ii) summing the results.
As of any Pooled Certificate Distribution Date, the principal balance of the
Class A-P Certificates will equal the PO Allocated Amount.
The "Non-PO Allocated Amount" will be calculated as of any date by (i)
multiplying the outstanding principal balance of each Mortgage Loan as of such
date by the Non-PO Percentage with respect to such Mortgage Loan and (ii)
summing the results.
Distributions in respect of principal will be made on each Pooled Certificate
Distribution Date to the Class A-P Certificates in an amount (the "Class A-P
Amount") equal to the difference between (i) the PO Allocated Amount as of
1(a)-4
<PAGE>
the first day of the related Due Period and (ii) the PO Allocated Amount as of
the last day of the related Due Period (after application of payments received
during such Due Period).
Except during such time as the aggregate principal balance of the Subordinated
Certificates equals zero, distributions in respect of principal will be made
on each Pooled Certificate Distribution Date to the Non-PO Class A
Certificates as described below. On each Pooled Certificate Distribution Date,
the portion of the Non-PO Class A Distribution Amount (defined below)
remaining after the payment of interest as described below to the Class A
Certificateholders (but in any case including the Class A-Z Accrual Amount)
will be distributed to the Non-PO Class A Certificateholders as follows:
FIRST, to the Segment Certificates, up to the amount necessary to reduce the
aggregate principal balance of the Segment Certificates to the Segment
Targeted Balance, in accordance with the priorities listed below under
"PRINCIPAL DISTRIBUTIONS TO THE SEGMENT CERTIFICATES."
SECOND, to the Class A-Z Certificates, until their principal balance has
been reduced to zero; and
THIRD, to the Segment Certificates, until their aggregate principal balance
has been reduced to zero, in accordance with the priorities listed below under
"PRINCIPAL DISTRIBUTIONS TO THE SEGMENT CERTIFICATES," without regard to the
Segment Targeted Balance.
PRINCIPAL DISTRIBUTIONS TO THE SEGMENT CERTIFICATES. The aggregate of the
amounts distributable to the Segment Certificates with respect to principal on
any Pooled Certificate Distribution Date pursuant to clauses FIRST and THIRD
above will be distributed in the following priority:
(1) to the Level One PACs, in each case up to the amount necessary to reduce
the principal balance of each such Class to its respective Planned
Amortization Balance, as follows:
(a) to the Class A-1 and Class A-3 Certificates, pro rata based upon
their outstanding principal balances;
(b) 50.365374192928% to the Class A-4 Certificates, 22.262124724120% to
the Class A-7 Certificates and 27.372501082952% to the Class A-8 Certificates,
until the principal balance of the Class A-4 Certificates has been reduced to
zero;
(c) 67.153832266123% to the Class A-5 Certificates, 5.473666664687%
to the Class A-7 Certificates and 27.372501069190% to the Class A-8
Certificates; and
(d) to the Class A-9 and Class A-10 Certificates, sequentially, in
that order.
(2) to the Level Two PAC Segment, up to the amount necessary to reduce its
aggregate outstanding principal balance to its Planned Amortization Balance;
1(a)-5
<PAGE>
(3) to the Level Three PACs, in each case up to the amount necessary to
reduce the principal balance of each such Class or Segment to its respective
Planned Amortization Balance, as follows:
(a) to the Class A-11 Certificates; and
(b) to the Class A-12 Certificates and the Level Three PAC Segment, pro
rata based on their outstanding principal balances.
(4) to the Class A-15, Class A-16 and Class A-17 Certificates, pro rata
based upon their outstanding principal balances, until their principal
balances have been reduced to zero;
(5) to the Class A-18 Certificates, until their principal balance has
been reduced to zero;
(6) to the Level Three PACs in accordance with clause (3) above, without
regard to their Planned Amortization Balances, until their principal balances
have been reduced to zero;
(7) to the Level Two PAC Segment in accordance with clause (2) above,
without regard to its Planned Amortization Balance, until its aggregate
principal balance has been reduced to zero; and
(8) to the Level One PACs in accordance with clause (1) above, without
regard to their Planned Amortization Balances, until their principal balances
have been reduced to zero.
On any Pooled Certificate Distribution Date, any amounts distributable with
respect to principal to the Level Two PAC Segment or the Level Three PAC
Segment will be distributed to the Class A-13 and Class A-14 Certificates,
sequentially, in that order.
If the aggregate outstanding principal balance of the Subordinated
Certificates is reduced to zero, distributions among the remaining Classes of
Non-PO Class A Certificates will be made pro rata in accordance with their
respective outstanding principal balances and not in accordance with the
priorities set forth above (and without regard to the Planned Amortization
Balances and the Targeted Balances).
Principal distributions made to each Class of Certificates will be paid pro
rata among the Certificates of such Class in accordance with their respective
outstanding principal balances.
Interest received on each Mortgage Loan at a rate of 6.75% per annum (the
"Remittance Rate") will be passed through monthly on the Pooled Certificate
Distribution Date occurring in the month in which the related Due Date occurs.
Interest will be payable to each Class of the Class A, Class M and Class M-1
Certificates (other than the Class A-P Certificates) at the rate (the
"Pass-Through Rate") set forth above less any Prepayment Interest Shortfalls
allocated thereto, on the respective outstanding principal balances (or
Notional Amounts in the case of the Class A-2 and Class A-6 Certificates) of
such Certificates as of the relevant Determination Date. The Class A-Z
1(a)-6
<PAGE>
Certificates are Compound Interest Certificates. Until the aggregate principal
balance of the Subordinated Certificates equals zero, interest on the Class
A-Z Certificates will accrue but will not be paid as interest, and the amount
so accrued will be added to the principal balance of the Class A-Z
Certificates on each Pooled Certificate Distribution Date.
On each Pooled Certificate Distribution Date, there will be distributed to the
holders of the Non-PO Class A Certificates from the Available Distribution
Amount and Advances made by the Master Servicer an amount, to the extent
available, equal to the Non-PO Class A Distribution Amount.
The "Available Distribution Amount" means, generally, as of any Pooled
Certificate Distribution Date, an amount equal to the amount on deposit in the
Certificate Account as of the close of business on the related Determination
Date, except: (a) amounts received on Mortgage Loans as late payments or other
recoveries of principal or interest (including net liquidation proceeds and
insurance proceeds) and respecting which the Master Servicer previously made
an unreimbursed Advance; (b) amounts representing reimbursement for Advances
determined to be nonrecoverable and amounts representing reimbursement for
certain losses and expenses incurred by the Master Servicer; (c) the Servicing
Fee, as adjusted with respect to principal prepayments; (d) all amounts
representing Monthly Payments due after the related Due Date; (e) all
principal prepayments, liquidation proceeds, insurance proceeds, condemnation
proceeds and repurchase proceeds received after the related Principal
Prepayment Period; (f) certain portions of net liquidation proceeds and
insurance proceeds representing unpaid Servicing Fees; and (g) any other
amounts not included in accordance with the Pooling and Servicing Agreement.
The "Non-PO Class A Distribution Amount" means generally as of any Pooled
Certificate Distribution Date, an amount, not in excess of the Non-PO Class A
Principal Balance plus interest thereon at the Remittance Rate, equal to the
sum of: (a) an amount equal to the Non-PO Class A Percentage of the applicable
Non-PO Percentage of the principal portion of all Monthly Payments whether or
not received, which were due on the related Due Date on outstanding Mortgage
Loans as of such Due Date, plus the Class A Percentage of the interest portion
thereof, adjusted to the Remittance Rate; (b) an amount equal to the Non-PO
Class A Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments received during the related Principal Prepayment Period,
plus the Class A Percentage of interest paid thereon by the Mortgagor and the
amount of compensating interest paid by the Master Servicer pursuant to the
Agreement, each adjusted to the Remittance Rate; (c) with respect to each
Mortgage Loan not described in (d) below, an amount equal to the Non-PO Class
A Percentage of the applicable Non-PO Percentage of the sum of the principal
portion of all insurance proceeds, condemnation awards and any other cash
proceeds from a source other than the Mortgagor, to the extent required to be
deposited in the Certificate Account, which were received during the related
Principal Prepayment Period, plus the Class A Percentage of the interest
portion thereof, adjusted to the Remittance Rate, net of related unreimbursed
servicing advances and net of any portion thereof which, as to any Mortgage
Loan, constitutes a late collection with respect to which an Advance has
previously been made; (d) with respect to each Mortgage Loan which has become
a liquidated Mortgage Loan during the related Principal Prepayment
1(a)-7
<PAGE>
Period, an amount equal to the Non-PO Class A Prepayment Percentage of the
applicable Non-PO Percentage of an amount equal to the principal balance of
such Mortgage Loan (net of Advances with respect to principal) as of the Due
Date immediately preceding the date on which it became a liquidated Mortgage
Loan plus the Class A Percentage of one month's interest thereon at the
Remittance Rate; (e) with respect to each Mortgage Loan repurchased during the
related Principal Prepayment Period, an amount equal to the Non-PO Class A
Prepayment Percentage of the applicable Non-PO Percentage of the principal
portion on the purchase price thereof plus the Class A Percentage of the
interest portion of the purchase price thereof, adjusted to the Remittance
Rate (net of amounts with respect to which a distribution has previously been
made to the Non-PO Class A Certificateholders); and (f) an amount equal to any
amounts that were not distributed to the Non-PO Class A Certificateholders on
any prior Pooled Certificate Distribution Date that would have constituted
part of the Non-PO Class A Distribution Amount had they been so distributed,
together with interest thereon at the Remittance Rate (net of amounts with
respect to which a distribution has been previously made to the Non-PO Class A
Certificateholders).
As of any Pooled Certificate Distribution Date, the "Non-PO Class A
Percentage" will equal a fraction, expressed as a percentage, the numerator of
which is the Non-PO Class A Principal Balance and the denominator of which is
the Non-PO Allocated Amount immediately prior to the Due Date in the month of
such Pooled Certificate Distribution Date.
The "Non-PO Class A Principal Balance" means, generally, as of any Pooled
Certificate Distribution Date, (a) the Non-PO Class A Principal Balance for
the preceding Pooled Certificate Distribution Date less (b) amounts
distributed to the Non-PO Class A Certificateholders on such preceding Pooled
Certificate Distribution Date allocable to principal (including Advances) and
any losses allocated to the Non-PO Class A Certificates plus (c) the Class A
Interest Shortfall, if any, for such preceding Pooled Certificate Distribution
Date plus (d) the Class A-Z Accrual Amount for such preceding Pooled
Certificate Distribution Date. On any Pooled Certificate Distribution Date,
the "Class A Interest Shortfall" will equal the excess, if any, of the amounts
payable to the Class A Certificateholders allocable to interest over amounts
actually distributed with respect to interest to the Class A
Certificateholders. On any Pooled Certificate Distribution Date, the "Class
A-Z Accrual Amount" will equal the amount of accrued but unpaid interest on
the Class A-Z Certificates for such Pooled Certificate Distribution Date less
any Prepayment Interest Shortfalls in excess of the Servicing Fee allocable to
such Class.
The "Non-PO Class A Prepayment Percentage" means, generally, subject to
certain conditions set forth in the Pooling and Servicing Agreement, as of any
Pooled Certificate Distribution Date up to and including the Pooled
Certificate Distribution Date in March, 1999, 100%; subject to certain loss
delinquency tests, the Non-PO Class A Prepayment Percentage will gradually
reduce over a five year period to equal the Class A Percentage; provided that,
if the Class A Percentage as of any such Pooled Certificate Distribution Date
is greater than the initial Class A Percentage, the Non-PO Class A Prepayment
Percentage shall be 100%.
1(a)-8
<PAGE>
The rights of the Subordinated Certificates to receive distributions of both
principal and interest are subordinated to the rights of the Class A
Certificates to receive distributions of both principal and interest.
Allocation of Scheduled
Principal Payments on
Mortgage Loans to Pooled
Certificates....................... For any Pooled Certificate Distribution Date, the Non-PO Class A
Certificates will be allocated an amount equal to the Non-PO Class A
Percentage of the applicable Non-PO Percentage of all scheduled principal
payments on the Mortgage Loans, as described in the "Non-PO Class A
Distribution Amount" definition in "Priority of Distributions on
Certificates" above.
Allocation of Non-Scheduled
Principal Payments on
Mortgage Loans to Pooled
Certificates....................... For any Pooled Certificate Distribution Date, the Non-PO Class A
Certificates will be allocated on amount equal to the Non-PO Class A
Prepayment Percentage of the applicable Non-PO Percentage of all
non-scheduled principal payments on the mortgage loans, as described in the
"Non-PO Class A Distribution Amount" definition in "Priority of
Distributions on Certificates" above.
External First-Loss
Coverage........................... None
Allocation of Losses and
Shortfalls......................... During such time as the Subordinated Certificates are outstanding, all
Realized Losses (defined below) on the Mortgage Loans will be allocated to
the Subordinated Certificates until the aggregate principal balance of the
Subordinated Certificates has been reduced to zero. If the aggregate
principal balance of the Subordinated Certificates has been reduced to zero
subject to the next succeeding sentence, all future Realized Losses on the
Mortgage Loans (other than any portion thereof allocated to the Class A-P
Certificates) will be allocated among the outstanding Non-PO Class A
Certificates pro rata based upon their respective outstanding principal
balances (or, in the case of the Class A-Z Certificates, the lesser of
their original or outstanding balance). If the aggregate principal balance
of the Subordinated Certificates has been reduced to zero, any future
Realized Losses on a Mortgage Loan having a PO Percentage greater than 0%
will be allocated (i) to the Class A-P Certificates in an amount equal to
the product of (A) the applicable PO Percentage and (B) the amount of the
Realized Loss and (ii) the remainder to the Non-PO Class A Certificates as
described in the immediately preceding sentence. In addition, if the
aggregate principal balance of the Subordinated Certificates is reduced to
zero, (i) payments to the Non-PO Class A Certificateholders based upon
principal on the Mortgage Loans will be made pro rata among the Classes of
Non-PO Class A Certificates in accordance with their respective outstanding
principal balances, and not in accordance with the priorities set forth
herein and (ii) interest on the Class A-Z Certificates will be payable on a
current basis.
A "Realized Loss" is generally the amount, if any, with respect to any
defaulted Mortgage Loan which has been liquidated in accordance with the
Pooling and Servicing Agreement, by which the unpaid principal balance and
1(a)-9
<PAGE>
accrued interest thereon at a rate equal to the Remittance Rate exceeds the
amount actually recovered by the Master Servicer with respect thereto (net of
reimbursement of certain expenses) at the time such defaulted Mortgage Loan
was liquidated.
Prepayment Interest Shortfalls will be offset to the extent of the aggregate
amount of the Servicing Fee. Any Prepayment Interest Shortfalls (adjusted to
the Remittance Rate) in excess of the aggregate amount of the Servicing Fee
will be allocated PRO RATA among the outstanding Classes of Certificates based
upon the amount of interest which each such Class would otherwise be paid on a
Pooled Certificate Distribution Date and will consequently reduce the yield on
the applicable Classes of Certificates.
Early Termination
Provisions......................... The Master Servicer may, on any Pooled Certificate Distribution Date,
repurchase from the Trust Fund all Mortgage Loans remaining outstanding at
such time as the aggregate unpaid principal balance of such Mortgage Loans
is less than 10% of the aggregate unpaid scheduled principal balance of the
Mortgage Pool on the Cut-off Date. The repurchase price will equal the
greater of (i) the fair market value of the assets in the Trust Fund and
(ii) the unpaid principal amount of such Mortgage Loans, plus accrued
interest thereon at the applicable Mortgage Rate (net of the Servicing Fee)
to the next Due Date, less any unreimbursed Advances made with respect to
such Mortgage Loans. Upon any such repurchase, the Holders of the Class A,
Class M and Class M-1 Certificates will receive the outstanding principal
balance of such Certificates plus accrued interest thereon at the
applicable Remittance Rate. Such amounts will be distributed to such
Certificate-holders on the Pooled Certificate Distribution Date in the
month following the month of repurchase.
Advance Obligations................ If the amount available for distribution to the Certificateholders on any
Pooled Certificate Distribution Date is less than the amount which is due
the Certificateholders on such Pooled Certificate Distribution Date, the
Master Servicer is obligated to make advances of cash for distribution to
the Certificateholders to the extent such deficiency is due to delinquent
monthly payments due on the immediately preceding due date; provided that
the Master Servicer is under no obligation to make an advance with respect
to any Mortgage Loan if the Master Servicer determines, in its sole
discretion, that such advance will not be recoverable from future payments
and collections, including liquidation proceeds, on such Mortgage Loan.
1(a)-10
<PAGE>
ANNEX 1(B)
PAYMENT TERMS OF THE GECAP 1994-11 CERTIFICATES
SERIES INFORMATION
Series Information..............................................GECAP 1994-11
Pooled Certificates.....................................Class A7 and Class A8
Pooled Certificates
Ratings at Date of Issuance................"AAA" by Fitch and "AAA" by "S&P
Issue Date....................................................March 30, 1994
Cut-off Date...................................................March 1, 1994
Pooled Certificate Trustee...................State Street Bank and Trust Company
Remaining Subordination Coverage as of Pooled
Certificate Information Date for:
Special Hazard Losses...............................$5,305,255.00(1)
Fraud Losses......................................$10,610,511.00 (1)
Bankruptcy Losses....................................$180,174.00 (1)
DESCRIPTION OF CERTIFICATES
</TABLE>
<TABLE>
<CAPTION>
Principal Balance
as of Pooled
Certificate Initial Certificate Certificate
Class Designations Pass-Through Rate Principal Balance Information Date
- ------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C>
Class A1 6.50% $131,869,000.00 $ 78,696,682.26
Class A2 10.00% $ 8,256,513.00 $ 8,256,513.00
Class A3 6.50% $30,581,000.00 $ 13,876,698.69
Class A4 5.90% $48,167,487.00 $ 48,167,487.00
Class A5 6.50% $22,591,000.00 $ 22,591,000.00
Class A6 6.50% $17,376,000.00 $ 17,376,000.00
Class A7 Floating Rate (2) $12,493,722.00 $ 12,010,494.99
Class A8 Inverse Floating Rate (2) $ 4,805,278.00 $ 4,619,421.45
Class A9 6.50% $16,543,000.00 $ 15,903,156.68
Class A10 6.50% $29,528,000.00 $ 29,528,000.00
Class A11 6.50% $ 46,000,000.00 $ 41,733,924.41
Class A12 6.50% $ 59,000,000.00 $ 57,666,634.75
Class A13 6.50% $51,282,000.00 $ 50,947,578.04
Class A14 6.50% $ 19,200,000.00 $ 23,188,393.73
Class A15 6.50% $1,000,000.00 $ 1,207,728.82
Class M 6.50% $ 11,936,000.00 $ 11,553,026.26
Class B-1 6.50% $7,957,000.00 $ 7,701,694.91
Class B-2 6.50% $5,305,000.00 $ 5,134,785.89
Class B-3 6.50% $3,183,000.00 $ 3,080,871.52
Class B-4 6.50% $ 530,000.00 $ 512,994.66
Class B-5 6.50% $2,920,541.74 $ 2,788,373.74
Class S (3) $530,525,541.74* $456,541,460.80*
Class R 6.50% $1,000.00 $0.00
</TABLE>
* Notional Amount
- ---------------
1 Reflects reduction from original amount only for actual losses, if any.
1(b)-1
<PAGE>
2 Each Class listed below accrued interest during the initial "Interest
Accrual Period" (i.e., the calendar month preceding the month in which
the Pooled Certificate Distribution Date occurs) at the respective
initial Pass-Through Rates set forth below, and accrued and will accrue
interest during each subsequent Interest Accrual Period at the
respective rates determined as set forth below:
Formula for
Initial Pass- Maximum Pass- Minimum Pass- Calculation of
Class Through Rate Through Rate Through Rate Pass-Through Rate
- ----- ------------ ------------ ------------ -----------------
Class A7 4.8820% 9.00% 1.00% COFI + 1.00%
Class A8 10.7068% 20.80% 0.00% 20.80% - (2.60 x COFI)
3 The Class S Certificates accrue interest at a variable rate per annum
equal to the excess of (x) the weighted average (by Scheduled Principal
Balance) carried to six decimal places, rounded down, of the Net
Mortgage Rates of the Outstanding Mortgage Loans as of the Due Date in
the preceding calendar month (or the Cut-off Date, in the case of the
first Distribution Date) over (y) 6.50%.
<TABLE>
<S> <C>
Mortgage Loans..................... Conventional, fixed rate, one- to four-family, fully-amortizing,
first Mortgage Loans with terms to maturity of approximately
20-30 years from the date of origination or modification. The
Mortgage Loans are secured by mortgages, deeds of trust or other
security instruments.
Priority of Distributions on
the Certificates................... On each Pooled Certificate Distribution Date, the Available
Funds will be distributed in the following order of priority
among the Certificates:
FIRST, to the Class A1 through Class A15, Class S and Class R Certificates
(collectively, the "Senior Certificates"), the Accrued Certificate Interest on
each such Class for such Pooled Certificate Distribution Date as reduced by any
Unavailable Interest Amounts for each such Class for such Pooled Certificate
Distribution Date; provided, that, on each Pooled Certificate Distribution Date
through the Cross-Over Date, such net amounts with respect to the Class A14 and
Class A15 Certificates, respectively, will not be distributed on such
Certificates hereunder but will instead be added to the principal thereof and
distributed in accordance with priority THIRD below (in the case of such net
amounts with respect to the Class A15 Certificates) and the first paragraph
following priority FIFTH below (in the case of such net amounts with respect to
the Class A14 Certificates);
SECOND, to the Classes of Senior Certificates, any Unavailable Interest Amount
remaining undistributed (or not added to principal in the case of the Class A14
and Class A15 Certificates) from previous Pooled Certificate Distribution
Dates; provided, that, on each Pooled Certificate Distribution Date through the
Cross-Over Date, any such amount with respect to the Class A14 and Class A15
Certificates, respectively, will not be distributed on such Certificates
hereunder but will instead be added to the principal thereof and distributed in
accordance with priority THIRD below (in the case of such amounts with respect
to the Class A15 Certificates) and the first paragraph following priority FIFTH
below
1(b)-2
<PAGE>
(in the case of such amounts with respect to the Class A14 Certificates); and
provided, further, that any shortfall in available amounts will be allocated
among the Classes of Senior Certificates in proportion to the Unavailable
Interest Amount remaining undistributed (or not added to principal in the case
of the Class A14 and Class A15 Certificates) for each such Class for such
Pooled Certificate Distribution Date;
THIRD, to the Classes of Senior Certificates other than the Class S
Certificates, an amount equal to the sum of the Senior Optimal Principal Amount
and the Class A15 Accrual Amount (the "Aggregate Senior Principal Amount") for
such Pooled Certificate Distribution Date, in reduction of the Class
Certificate Principal Balances thereof, in the following order of priority:
(1) to the Class R Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(2) pro rata, to the Class A1 Certificates and the Class A11A
PAC Component, up to the amount necessary to reduce the Class
Certificate Principal Balance of such Class and the Component Principal
Balance of such Component to their respective PAC Balances for such
Pooled Certificate Distribution Date;
(3) to the Class A3 Certificates, up to the amount necessary to
reduce the Class Certificate Principal Balance thereof to its PAC
Balance for such Pooled Certificate Distribution Date;
(4) pro rata, to the Class A2 and Class A4 Certificates, up to
the amount necessary to reduce the Class Certificate Principal Balances
thereof to their respective PAC Balances for such Pooled Certificate
Distribution Date;
(5) to the Class A5 Certificates, up to the amount necessary to
reduce the Class Certificate Principal Balance thereof to its PAC
Balance for such Pooled Certificate Distribution Date;
(6) pro rata, to the Class A6 Certificates and the Class A11B
PAC Component, up to the amount necessary to reduce the Class
Certificate Principal Balance of such Class and the Component Principal
Balance of such Component to their respective PAC Balances for such
Pooled Certificate Distribution Date;
(7) pro rata, to the Class A7, Class A8 and Class A9
Certificates and the Class A12A TAC Component, up to the amount
necessary to reduce the Class Certificate Principal Balances of such
Classes and the Component Principal Balance of such Component to their
respective
1(b)-3
<PAGE>
TAC Balances for such Pooled Certificate Distribution Date;
(8) pro rata, to the Class A10 Certificates and the Class A11C
TAC Component, up to the amount necessary to reduce the Class
Certificate Principal Balance of such Class and the Component Principal
Balance of such Component to their respective TAC Balances for such
Pooled Certificate Distribution Date;
(9) pro rata, to the Class A13 Certificates and the Class A12B
TAC Component, up to the amount necessary to reduce the Class
Certificate Principal Balance of such Class and the Component Principal
Balance of such Component to their respective TAC Balances for such
Pooled Certificate Distribution Date, after giving effect to any
distributions to such Class and in respect of such Component on such
Pooled Certificate Distribution Date pursuant to the first paragraph
following priority FIFTH below;
(10) to the Class A14 Certificates, until the
Class Certificate Principal Balance thereof has been
reduced to zero;
(11) pro rata, to the Class A13 Certificates and the Class A12B
TAC Component, without regard to their respective TAC Balances, until
the Class Certificate Principal Balance of such Class and the Component
Principal Balance of such Component have each been reduced to zero;
(12) pro rata, to the Class A10 Certificates and the Class A11C
TAC Component, without regard to their respective TAC Balances, until
the Class Certificate Principal Balance of such Class and the Component
Principal Balance of such Component have each been reduced to zero;
(13) pro rata, to the Class A7, Class A8 and Class A9
Certificates and the Class A12A TAC Component, without regard to their
respective TAC Balances, until the Class Certificate Principal Balances
of such Classes and the Component Principal Balance of such Component
have each been reduced to zero;
(14) to the Class A15 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(15) to the Class A3 Certificates, without regard to its PAC
Balance, until the Class Certificate Principal Balance thereof has been
reduced to zero;
1(b)-4
<PAGE>
(16) pro rata, to the Class A2 and Class A4 Certificates,
without regard to their respective PAC Balances, until the Class
Certificate Principal Balances thereof have each been reduced to zero;
(17) to the Class A5 Certificates, without regard to its PAC
Balance, until the Class Certificate Principal Balance thereof has been
reduced to zero;
(18) pro rata, to the Class A6 Certificates and the Class A11B
PAC Component, without regard to their respective PAC Balances, until
the Class Certificate Principal Balance of such Class and the Component
Principal Balance of such Component have each been reduced to zero; and
(19) pro rata, to the Class A1 Certificates and the Class A11A
PAC Component, without regard to their respective PAC Balances, until
the Class Certificate Principal Balance of such Class and the Component
Principal Balance of such Component have each been reduced to zero;
FOURTH, to the Class M Certificates, to the extent of the remaining Available
Funds, in the following order: (a) the Accrued Certificate Interest thereon for
such Pooled Certificate Distribution Date, (b) any Accrued Certificate Interest
thereon remaining undistributed from previous Pooled Certificate Distribution
Dates and (c) each such Class's Allocable Share of the Junior Optimal Principal
Amount for such Pooled Certificate Distribution Date; and
FIFTH, to the Classes of Class B Certificates, to the extent of the remaining
Available Funds: (a) the Accrued Certificate Interest thereon for such Pooled
Certificate Distribution Date, (b) any Accrued Certificate Interest thereon
remaining undistributed from previous Pooled Certificate Distribution Dates and
(c) each such Class's Allocable Share of the Junior Optimal Principal Amount
for such Pooled Certificate Distribution Date.
On each Pooled Certificate Distribution Date through the Pooled Certificate
Distribution Date on which the respective Class Certificate Principal Balances
of the Class M and Class B Certificates (collectively, the "Junior
Certificates") are reduced to zero (the "Cross-Over Date"), an amount equal to
the Class A14 Accrual Amount will be distributed in the following order of
priority: (i) after distribution of the Aggregate Senior Principal Amount
pursuant to each of clauses (1) - (6) of priority THIRD above, to the extent
any such distribution is insufficient to reduce the Class Certificate Principal
Balance of any PAC Certificates or the Component Principal Balance of any PAC
Component to their respective PAC Balances for such Pooled Certificate
Distribution Date, to such PAC Certificates or PAC Components in accordance
with the proportions, amounts and priorities described in such
1(b)-5
<PAGE>
clauses, up to the amount necessary to cause such reductions; (ii) if no
distributions are made pursuant to clause (i) of this sentence on such Pooled
Certificate Distribution Date, then, before distribution of the Aggregate
Senior Principal Amount pursuant to clause (7) of priority THIRD above, pro
rata, to the Class A13 Certificates and the Class A12B TAC Component, without
regard to their respective TAC Balances for such Pooled Certificate
Distribution Date; and (iii) after any distributions pursuant to clause (i) or
clause (ii) of this sentence, concurrently with distribution of the Aggregate
Senior Principal Amount pursuant to clauses (7)-(19) of priority THIRD above,
to the Classes and Components and in accordance with the proportions, amounts
and priorities described in clauses (7)-(19) of priority THIRD above.
On each Pooled Certificate Distribution Date after the Cross-Over Date,
distributions of principal of the outstanding Senior Certificates (other than
the Class S 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 and the preceding paragraph, based upon the
then-current Certificate Principal Balances of such Certificates.
Solely for purposes of determining distributions of principal, the Class A11
and Class A12 Certificates will each consist of a number of components (each, a
"Component"), each with a specified principal balance (a "Component Principal
Balance"). The Class A11 Certificates will consist of three Components
(respectively, the "Class A11A PAC Component," the "Class A11B PAC Component"
and the "Class A11C TAC Component"). The Class A12 Certificates will consist of
two Components (respectively, the Class A12A TAC Component" and the "Class A12B
TAC Component"). The holder of a Class A11 or Class A12 Certificate will not
have a severable interest in any Component but will have an undivided interest
in the entire Class. The amounts distributable in respect of any Component will
be distributed pro rata to the holders of the related Class of Certificates.
The "Senior Optimal Principal Amount" with respect to each Pooled Certificate
Distribution Date will be an amount equal to the sum of (i) the Senior
Percentage of all scheduled payments of principal due on each Mortgage Loan on
the first day of the month in which the Pooled Certificate 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 Scheduled Principal
Balance of each Mortgage Loan which was the subject of a prepayment in full
received during the month preceding the month of such Pooled Certificate
Distribution Date (the "Prepayment Period"), (iii) the Senior Prepayment
Percentage of all partial prepayments of principal received during such
Prepayment Period, (iv) the lesser of (a) the Senior Prepayment Percentage
1(b)-6
<PAGE>
of all partial pre-payments of principal received during such Prepayment Period,
(iv) the lessor of (a) the Senior Prepayment Percentage of the sum of (w) the
net liquidation proceeds 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 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 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 Loan 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 principal portion of Excess Losses
(other than Debt Service Reductions) during the related Prepayment Period and
(v) the Senior Prepayment Percentage of the sum of (a) the Scheduled Principal
Balance of each Mortgage Loan which was repurchased by the Company in
connection with such Pooled Certificate Distribution Date and (b) the difference,
if any, between the Scheduled Principal Balance of a Mortgage Loan that has been
replaced by the Company with a substitute Mortgage Loan pursuant to the Agreement
in connection with such Pooled Certificate Distribution Date and the Scheduled
Principal Balance of such substitute Mortgage Loan.
The "Senior Percentage" on any Pooled Certificate Distribution Date will equal
the lesser of (i) 100% and (ii) the percentage (carried to six places rounded
up) obtained by dividing the aggregate Certificate Principal Balances of all
the Senior Certificates immediately preceding such Pooled Certificate
Distribution Date by the aggregate Certificate Principal Balances of all the
Certificates immediately preceding such Pooled Certificate Distribution Date.
The "Senior Prepayment Percentage" is equal to 100% during the five years
beginning in April 1994 and, subject to certain loss and delinquency tests,
gradually reduces over a five year period thereafter to equal the Senior
Percentage except reverting to 100% if on any applicable measuring date, the
Senior Percentage exceeds the initial Senior Percentage.
The definition of the "Junior Optimal Principal Amount" with respect to each
Pooled Certificate Distribution Date is the same as the definition of the
Senior Optimal Principal Amount described above, except that (i) the Junior
Percentage and the Junior Prepayment Percentage will be substituted for each
reference in such definition (other than those in clause (iv) thereof) to the
Senior Percentage and the Senior Prepayment Percentage, respectively, (ii) on
the Pooled Certificate Distribution Date on which the respective Class
Certificate Principal Balances of the Senior Certificates are reduced to zero,
the Junior Optimal Principal Amount will include 100% of any Senior Optimal
1(b)-7
<PAGE>
Principal Amount remaining undistributed on such date and (iii) the amount
described in clause (iv) of the definition of Junior Optimal
Principal Amount shall be the excess, if any, of the sum of (a) net liquidation
proceeds received during the related Prepayment Period in respect of each
Liquidated Mortgage Loan (other than a Mortgage Loan 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 amount
distributable to Senior Certificateholders pursuant to clause (iv) of the
definition of "Senior Optimal Principal Amount" on such Pooled Certificate
Distribution Date.
The "Junior Percentage" on any Pooled Certificate Distribution Date will equal
100% minus the Senior Percentage. The "Junior Prepayment Percentage" will equal
100% minus the Senior Prepayment Percentage, except that on any Pooled
Certificate Distribution Date after the respective Class Certificate Principal
Balances of the Senior Certificates have each been reduced to zero, the Junior
Prepayment Percentage will equal 100%.
Allocation of Scheduled
Principal payments on
Mortgage Loans to
Pooled Certificates................ For any Pooled Certificate Distribution Date, the Senior
Certificates (other than the Class S Certificates) will be
entitled to receive an amount up to the Senior Percentage of
scheduled payments of principal on the Mortgage Loans will be
entitled to receive an amount up to the Senior Percentage, as
described in the "Senior Optimal Principal Amount" definition in
"Priority of Distributions on the Certificates" above.
Allocation of Non-Scheduled
Principal payments on
Mortgage Loans to
Pooled Certificates................ For any Pooled Certificate Distribution Date, the Senior
Certificates (other than the Class S Certificates) will be
entitled to receive an amount up to the Senior Prepayment
Percentage of non-scheduled principal payments on the Mortgage
Loans as described in the "Senior Optimal Principal Amount"
definition in "Priority of Distributions on the Certificates"
above.
External First-Loss
Coverage.......................... None
Allocation of Losses and
Shortfalls....................... The principal portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy
Losses) on the Mortgage Loans for any Pooled Certificate
Distribution Date will not be allocated to the Senior
Certificates until the Cross-Over Date. Prior to the Cross-Over
Date (and on such date under certain circumstances), such
Realized Losses will be allocated among the Junior Certificates
in
1(b)-8
<PAGE>
reduction of the Class Certificate Principal Balances thereof. The principal
portion of any Excess Special Hazard Losses, Excess Fraud Losses and Excess
Bankruptcy Losses (other than Debt Service Reductions) on the Mortgage Loans
for any Pooled Certificate Distribution Date will be allocated pro rata among
all outstanding Classes of Certificates based on their Class Certificate
Principal Balances. Commencing on the Cross-Over Date, the principal portion of
all Realized Losses will be allocated among the outstanding Classes of Senior
Certificates (other than the Class S Certificates) pro rata based upon their
Class Certificates Principal Balances.
Notwithstanding the foregoing, no reduction of the Class Certificate Balance of
any Class shall be made on any Pooled Certificate Distribution Date on account
of Realized Losses to the extent that such reduction would have the effect of
reducing the aggregate Certificate Principal Balance of all of the Certificates
as of such Pooled Certificate Distribution Date to an amount less than the Pool
Scheduled Principal Balance as of the first day of the month of such Pooled
Certificate Distribution Date.
Prior to the Bankruptcy Coverage Termination Date, the principal portion of
Debt Service Reductions will not be allocated among any Certificates, but may
reduce the amount of Available Funds otherwise available for distribution on
the related Pooled Certificate Distribution Date. As a result of the
subordination of the Junior Certificates in right of distribution, such losses
will be borne first by the Junior Certificates (to the extent then
outstanding).
All allocations of Realized Losses will be accomplished on a Pooled Certificate
Distribution Date by reducing the applicable Class Certificate Principal
Balance by the appropriate pro rata share of any such losses occurring during
the month preceding the month of such Pooled Certificate Distribution Date and,
accordingly, will be taken into account in determining the distributions of
principal and interest on the Certificates commencing on the following Pooled
Certificate Distribution Date.
The interest portion of any Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses and, after the Cross-Over Date, the interest
portion of any Realized Losses and Debt Service Reductions will, on each Pooled
Certificate Distribution Date, be allocated among all the Certificates in
proportion to the amount of Accrued Certificate Interest that, in the absence
of such shortfalls and losses, would have been allocated thereto in respect of
the Mortgage Loans experiencing such shortfalls or losses.
The interest portion of any Realized Losses (other than Excess Special Hazard
Losses, Excess Fraud Losses and Excess Bankruptcy Losses) occurring prior to
the Cross-Over Date will not be allocated among any Certificates, but will
reduce the amount of Available Funds on the related Pooled Certificate
1(b)-9
<PAGE>
Distribution Date. As a result of the subordination of the Junior Certificates
in right of distribution, such losses will be borne first by the Junior
Certificates (to the extent then outstanding).
If, on any Pooled Certificate Distribution Date, the Available Funds are less
than the aggregate Accrued Certificate Interest on the Senior Certificates, the
amount of any such shortfall will be allocated among the Classes of Senior
Certificates in proportion to the amounts of Accrued Certificate Interest that
would otherwise be distributed thereon or, in the case of the Class A14 or
Class A15 Certificates through the Cross-Over Date, added to the principal
thereof (each amount so allocated, an "Unavailable Interest Amount"). The
amount of any Unavailable Interest Amount will be added to the amounts to be
distributed or added to principal on subsequent Pooled Certificate Distribution
Dates in accordance with priority SECOND under "Priority of Distributions on
Certificates" above. No interest will accrue on any Unavailable Interest
Amount.
Early Termination
Provisions......................... The Servicer may, at its option, repurchase all of the Mortgage
Loans underlying the Certificates and thereby effect the early
retirement of the Certificates and cause the termination of the
Trust Fund and the REMIC constituted by the Trust Fund, on any
Pooled Certificate Distribution Date after the aggregate
Scheduled Principal Balance of the Mortgage Loans is less than
10% of the aggregate Scheduled Principal Balance thereof as of
the Cut-Off Date, provided that the Trustee has received an
opinion of counsel that the exercise of such option will not
subject the Trust Fund to a tax on prohibited transactions or
result in the failure of the Trust Fund to qualify as a REMIC.
Any such repurchase by the Servicer of the assets included in
the Trust Fund will be at a price equal to the sum of (a) 100%
of the unpaid principal balance of each Mortgage Loan in the
Trust Fund (other than a Mortgage Loan described in clause (b))
as of such date, plus accrued and unpaid interest thereon at the
related Net Mortgage Rate (less any amounts representing
previously unreimbursed advances), and (b) the appraised value
of any property acquired in respect of a related Mortgage Loan
(less any amounts representing previously unreimbursed advances
in respect thereof and a good faith estimate of liquidation
expenses).
Advance Obligations................ The Servicer will be obligated to advance delinquent
installments of principal and interest (net of the related
Servicing Fees) on the Mortgage Loans included in the Mortgage
Pool except if the Servicer believes they will not be
recoverable out of liquidation proceeds or otherwise.
</TABLE>
1(b)-10
<PAGE>
ANNEX 1(C)
PAYMENT TERMS OF THE PHMSC 1993-29 CERTIFICATES
SERIES INFORMATION
Series Information.................................................PHMSC 1993-29
Pooled Certificates........................Class A-14, Class A-15 and Class A-16
Pooled Certificates
Ratings at Date of Issuance......"AAA" by Standard & Poor's and "AAA" by Fitch
Issue Date.........................................................July 28, 1993
Cut-off Date........................................................July 1, 1993
Pooled Certificate Trustee......................First Trust National Association
Remaining Subordination Coverage as of
Pooled Certificate Information Date for:
Special Hazard Losses............................................$2,251,108.00
Fraud Losses.....................................................$3,144,566.26
Bankruptcy Losses................................................$ 151,804.48
DESCRIPTION OF CERTIFICATES
Principal Balance
Approximate as of Pooled
Certificate Initial Certificate Certificate
Class Designations Pass-Through Rate Principal Balance Information Date
- ------------------ ----------------- ---------------- -----------------
Class A-1 6.75% $ 54,001,000.00 $ 0.00
Class A-2 6.75% $ 18,000,000.00 $ 0.00
Class A-3 6.10% $ 10,600,000.00 $10,567,617.48
Class A-4 0.65% (1) (1)
Class A-5 6.75% $ 35,043,000.00 $34,935,945.23
Class A-6 6.75% $101,156,000.00 $61,079,535.52
Class A-7 6.75% $ 12,000,000.00 $12,000,000.00
Class A-8(2) 6.75% $ 37,500,000.00 $34,701,420.47
Class A-9 6.75% $ 33,700,000.00 $33,700,000.00
Class A-10 6.75% $ 24,000,000.00 $24,000,000.00
Class A-11 6.75% $ 10,000,000.00 $10,000,000.00
Class A-12 Floating Rate(3) $ 13,926,316.00 $13,926,316.00
Class A-13 Inverse Floating Rate(3) $ 5,673,684.00 $ 5,673,684.00
Class A-14 Floating Rate(3) $ 36,045,000.00 $23,740,359.95
Class A-15 Inverse Floating Rate(3) $ 9,945,750.00 $ 6,550,580.80
Class A-16 Inverse Floating Rate(3) $ 7,409,250.00 $ 4,879,962.88
Class A-17 6.75% $ 20,958,000.00 $ 0.00
Class A-18 (4) $ 1,000.00 $ 1,000.00
Class A-R 6.75% $ 1,000.00 $ 1,000.00
Class A-LR 6.75%(5) $ 1,000.00 $ 1,000.00
Class M 6.75% $ 7,879,000.00 $ 6,643,846.37
Class B 6.75% $ 12,381,692.28 $10,440,672.84
- --------------------
1 The Class A-4 Certificates are interest-only certificates, have no
principal balance and will bear interest on a notional amount
(initially, approximately $10,600,000).
1(c)-1
<PAGE>
2 Composed of two Components
Component Principal Balance
Initial Component as of Pooled Certificate
Principal Balance Information Date
PAC Component $18,900,000.00 $18,900,000.00
Scheduled Component $18,600,000.00 $15,801,420.47
3 Each Class listed below accrued interest during the applicable Floating
Rate Interest Accrual Period at the respective initial Pass-Through
Rates set forth below, and accrued and will accrue interest during each
subsequent such period at the respective rates determined as set forth
below:
<TABLE>
<CAPTION>
Interest
Initial Pass- Maximum Pass- Minimum Pass- Formula for Calculation Accrual
Class Through Rate Through Rate Through Rate of Pass-Through Rate Period
<S> <C> <C> <C> <C>
Class A-12 4.125% 9.50% 1.00% LIBOR + 1.00% LIBOR-Based(a)
Class A-13 13.19318210% 20.8636371% 0.00% 20.8636371% - Regular (b)
(2.4545456 x LIBOR)
Class A-14 5.253% 10.00% 1.15% COFI + 1.15% Regular (b)
Class A-15 10.49919465% 25.36912752% 0.00% 25.36912752% - Regular (b)
(3.62416107 x COFI)
Class A-16 9.000% 9.00%(c) 0.00% 43.05405405% - Regular (b)
(4.86486486 x COFI)
</TABLE>
(a) Each one-month period commencing on the 25th day of the month
preceding the month in which the Pooled Certificate
Distribution Date occurs and ending on the 24th day of the
month in which the Pooled Certificate Distribution Date
occurs.
(b) Each one-month period ending on the last day of the month
preceding the month in which the Pooled Certificate
Distribution Date occurs.
(c) If COFI is less than or equal to 7.00% the Pass-Through Rate
for the Class A-16 Certificates will remain at the maximum
rate of 9.00%.
4 Interest will accrue on the Class A-18 Certificates during each
applicable Interest Accrual Period in an amount equal to the product of
(i) 1/12 of the difference between (a) the weighted average of the "Net
Mortgage Interest Rates" (i.e., the rate stated in the related mortgage
note minus the servicing fee rate of .20% per annum) of the related
Underlying Mortgage Loans as of the first day of such month and (b)
6.75% and (ii) the Class A-18 Notional Amount (on the Pooled
Certificate Information Date, the Pass-Through Rate was 0.37276%). The
Class A-18 Notional Amount is equal to the aggregate scheduled
principal balances of the Mortgage Loans (as of the Pooled Certificate
Information Date, $292,842,941.53).
5 The Class A-LR Certificates bear interest on the Class A-LR Notional
Amount, which is equal to the sum of the outstanding principal balances
of the Class A-LR Certificates and the Class A-18 Certificates,
originally $2,000.
<TABLE>
<S> <C>
Mortgage Loans..................... Conventional, fixed rate, one- to four-family, fully-amortizing, level
monthly payment, first Mortgage Loans with terms to maturity of
approximately 15 years from the date of origination, which may include loans
secured by shares issued by cooperative housing corporations.
Priority of Distributions on
the Certificates................... The aggregate amount available for distribution is allocated among the Class
A Certificates (i) first, pro rata based upon the respective amounts of
interest accrued thereon during the related interest accrual period in an
amount up to the sum of the interest so accrued; (ii) second, pro rata based
upon the
1(c)-2
<PAGE>
respective amounts thereof, any unpaid interest (without interest thereon) from
prior Pooled Certificate Distribution Dates, and (iii) third, to the principal
amounts due such Class A Certificates, in an aggregate amount up to the Class A
Optimal Principal Amount. The Class A-4 Certificates are interest only
certificates and are not entitled to principal distributions. On each Pooled
Certificate Distribution Date prior to the date on which the principal amounts
of the Class M and Class B Certificates have been reduced to zero (the
"Cross-Over Date"), the amount of funds available to be distributed as
principal to the Class A Certificates pursuant to (iii) in the preceding
paragraph, will be allocated among and distributed in reduction of the
principal balances of the other Class A Certificates as follows:
FIRST, concurrently, 64.28690476% to the Class A-1 Certificates and
35.71309524% to the Class A-6 Certificates up to their respective PAC Principal
Amounts with respect to such Pooled Certificate Distribution Date;
SECOND, concurrently, 64.28571429% to the Class A-2 Certificates and
35.71428571% to the Class A-6 Certificates up to their respective PAC Principal
Amounts with respect to such Pooled Certificate Distribution Date;
THIRD, concurrently, (i) 64.28591549% to the Class A-3 and Class A-5
Certificates, pro rata, and (ii) 35.71408451% to the Class A-6 Certificates up
to their respective PAC Principal Amounts with respect to such Pooled
Certificate Distribution Date;
FOURTH, concurrently, (i) 35.80% to the Class A-6 Certificates, (ii) 2.30% to
the PAC Component of the Class A-8 Certificates and (iii) 61.90% to the Class
A-7 and Class A-9 Certificates, sequentially, up to their respective PAC
Principal Amounts with respect to such Pooled Certificate Distribution Date,
until the principal balance of the Class A-9 Certificates has been reduced to
18.94698855% of its initial principal balance.
FIFTH, concurrently, 35.80% to the Class A-6 Certificates, 2.30% to the PAC
Component of the Class A-8 Certificates, 17.50% to the Class A-9 Certificates
and 44.40% to the Class A-10 Certificates up to their respective PAC Principal
Amounts with respect to such Pooled Certificate Distribution Date;
SIXTH, concurrently, 56.66666667% to the PAC Component of the Class A-8
Certificates and 43.33333333% to the Class A-10 Certificates up to their
respective PAC Principal Amounts with respect to such Pooled Certificate
Distribution Date;
SEVENTH, concurrently, (i) 27.77777778% to the Class A-11 Certificates, (ii)
22.77777778% to the Class A-12 and Class A-13 Certificates, pro rata, and (iii)
49.44444444% to the PAC Component of the Class A-8 Certificates up to their
respective PAC Principal Amounts with respect to such Pooled Certificate
Distribution Date;
EIGHTH, concurrently, (i) 27.77777778% to the Class A-11 Certificates and (ii)
72.22222222% to the Class A-12 and Class A-13 Certificates, pro rata, up to
their respective PAC Principal Amounts with respect to such Pooled Certificate
Distribution Date;
1(c)-3
<PAGE>
NINTH, concurrently, to the Class A-14, Class A-15 and Class A-16 Certificates
pro rata, up to their respective Reduction Amounts with respect to such Pooled
Certificate Distribution Date, until the principal balance of each such Class
has been reduced to 77.52808989% of its initial principal balance.
TENTH, concurrently, (i) 31.00% to the Scheduled Component of the Class A-8
Certificates and (ii) 69.00% to the Class A-14, Class A-15 and Class A-16
Certificates, pro rata, up to their respective Reduction Amounts with respect
to such Pooled Certificate Distribution Date;
ELEVENTH, to the Class A-17 Certificates, until the principal balance
thereof has been reduced to zero;
TWELFTH, concurrently, to the Class A-14, Class A-15 and Class A-16
Certificates, pro rata, without regard to their respective Reduction Amounts
and until the principal balance of each such class has been reduced to
77.52808989% of its initial principal balance;
THIRTEENTH, concurrently, (i) 31.00% to the Scheduled Component of the Class
A-8 Certificates and (ii) 69.00% to the Class A-14, Class A-15 and Class A-16
Certificates, pro rata, without regard to their respective Reduction Amounts
and until the principal balances and the Component Principal Balance thereof
have been reduced to zero;
FOURTEENTH, concurrently, 64.28690476% to the Class A-1 Certificates and
35.71309524% to the Class A-6 Certificates, without regard to their respective
PAC Principal Amounts and until the principal balance of the Class A-1
Certificates has been reduced to zero;
FIFTEENTH, concurrently, 64.28571429% to the Class A-2 Certificates and
35.71428571% to the Class A-6 Certificates, without regard to their respective
PAC Principal Amounts and until the principal balance of the Class A-2
Certificates has been reduced to zero;
SIXTEENTH, concurrently, (i) 64.28591549% to the Class A-3 and Class A-5
Certificates, pro rata, and (ii) 35.71408451% to the Class A-6 Certificates,
without regard to their respective PAC Principal Amounts and until the
principal balances of the Class A-3 and Class A-5 Certificates have been
reduced to zero;
SEVENTEENTH, concurrently, (i) 35.80% to the Class A-6 Certificates, (ii) 2.30%
to the PAC Component of the Class A-8 Certificates and (iii) 61.90% to the
Class A-7 and Class A-9 Certificates, sequentially, without regard to their
respective PAC Principal Amounts and until the principal balance of the Class
A-9 Certificates has been reduced to 18.94698855% of its initial principal
balance;
EIGHTEENTH, concurrently, 35.80% to the Class A-6 Certificates, 2.30% to the
PAC Component of the Class A-8 Certificates, 17.50% to the Class A-9
Certificates and 44.40% to the Class A-10 Certificates, without regard to their
respective PAC Principal Amounts and until the principal balances of the Class
A-6 and Class A-9 Certificates have been reduced to zero;
1(c)-4
<PAGE>
NINETEENTH, concurrently, 56.66666667% to the PAC Component of the Class A-8
Certificates and 43.33333333% to the Class A-10 Certificates, without regard to
their PAC Principal Amounts and until the principal balance of the Class A-10
Certificates has been reduced to zero;
TWENTIETH, concurrently, (i) 27.77777778% to the Class A-11 Certificates, (ii)
22.77777778% to the Class A-12 and Class A-13 Certificates, pro rata, and (iii)
49.44444444% to the PAC Component of the Class A-8 Certificates without regard
to their respective PAC Principal Amounts and until the Component Principal
Balance of the PAC Component has been reduced to zero;
TWENTY-FIRST, concurrently, (i) 27.77777778% to the Class A-11 Certificates and
(ii) 72.22222222% to the Class A-12 and Class A-13 Certificates, pro rata,
without regard to their respective PAC Principal Amounts and until the
principal balances thereof have been reduced to zero; and
TWENTY-SECOND, concurrently, to the Class A-18, Class A-R and Class A-LR
Certificates, pro rata, until the principal balances thereof have been reduced
to zero.
The "PAC Principal Amount" or the "Reduction Amount" means the respective
amounts which would reduce the principal balance of the applicable class or
component to the principal balance or percent of the initial principal balance
for such Pooled Certificate Distribution Date set forth in a schedule to the
Pooling and Servicing Agreement.
On each Pooled Certificate Distribution Date occurring on or after the
Cross-Over Date, the amounts distributable to the Class A Certificates will be
distributed among the Class A Certificates pro rata in accordance with their
respective principal balances without regard to the foregoing priorities.
The rights of the Class M and Class B Certificates to receive distributions of
both interest and principal are subordinated to the rights of the Class A
Certificates to receive distributions of both interest and principal.
Allocation of Scheduled
Principal Payments on Mortgage
Loans to Pooled Certificates....... For any Pooled Certificate Distribution Date, the Class A Certificates will
be allocated the percentage (the "Class A Percentage") of scheduled payments
of principal on the Mortgage Loans for such Pooled Certificate Distribution
Date, less, if the Bankruptcy Loss Amount is zero, the principal portion of
any reduction in the amount of monthly payments due to certain bankruptcy
proceedings, other than any permanent forgiveness of principal ("Debt
Service Reductions"). For any Pooled Certificate Distribution Date
occurring prior to the Cross-Over Date, the Class A Percentage is derived
generally by dividing the principal balance of the Class A Certificates by
the aggregate scheduled principal balances of all Mortgage Loans. For any
Pooled Certificate Distribution Date occurring on or after the Cross-Over
Date, the Class A Percentage is 100%.
1(c)-5
<PAGE>
Allocation of Non-Scheduled
Principal Payments on
Mortgage Loans to Pooled
Certificates....................... On each Pooled Certificate Distribution Date, with respect to non-scheduled
principal payments, the Class A Certificates will be allocated the sum of,
(A) the Class A Prepayment Percentage (equal to 100% during the five years
beginning in August 1993 and, subject to certain loss and delinquency tests,
gradually reducing over a five year period thereafter to equal the Class A
Percentage except reverting to 100% if on any applicable measuring date, the
Class A Percentage exceeds the original Class A Percentage) of (i) the
scheduled principal balance of repurchased Mortgage Loans, (ii) the
aggregate net liquidation proceeds on all Mortgage Loans that became
liquidated during the preceding month (excluding the portion thereof, if
any, constituting net foreclosure profits), less certain amounts allocable
to principal of unreimbursed advances and the portion of net liquidation
proceeds allocable to interest, (iii) the principal portion of Realized
Losses (other than Bankruptcy Losses due to Debt Service Reductions)
incurred in the preceding month, other than Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses, (iv) the scheduled
principal balance of each Mortgage Loan prepaid in full during the preceding
month and (v) all partial principal prepayments received on or after the
Determination Date in the prior month and prior to the Determination Date in
the month in which the Pooled Certificate Distribution Date occurs, and (B)
the Class A Percentage of the difference between the unpaid principal
balance of any Mortgage Loan substituted for a defective Mortgage Loan
during the preceding month and the unpaid principal balance of such
defective Mortgage Loan, less amounts allocable to principal of unreimbursed
advances with respect to such defective Mortgage Loan.
In addition, if there is any recovery of an amount in respect of principal
which had previously been allocated as a Realized Loss to the Class A
Certificates, the Class A Certificates then outstanding will be entitled to
their pro rata share of such recovery in an amount up to the amount by which
their principal balances were reduced as a result of such Realized Loss.
External First-Loss
Coverage......................... None
Allocation of Losses and
Shortfalls....................... Subject to the limitations set forth below, Realized Losses (other than
Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy
Losses) on the Mortgage Loans will be allocated first, to the Class B
Certificates until the principal balance thereof is reduced to zero, and
then to the Class M Certificates until the principal balance thereof is
reduced to zero. Thereafter, the principal portion of any Realized Loss
will be allocated among the outstanding Class A Certificates pro rata in
accordance with their outstanding Class A principal balances and the
interest portion of Realized Losses will be allocated among the outstanding
Class A Certificates pro rata in accordance with the amount of interest
accrued by each. The aggregate amounts of Realized Losses which may be
allocated by means of subordination to the Class B and Class M Certificates
to cover Special Hazard Losses, Fraud Losses and Bankruptcy Losses as of the
Pooled Certificate Information Date is set forth above and is subject to
periodic reduction. Any Excess Special
1(c)-6
<PAGE>
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses (i.e., those
losses in excess of the respective amounts of subordinated certificate coverage
therefor) will be allocated on a pro rata basis among the Class A, Class M and
Class B Certificates, and any such losses allocated to the Class A Certificates
will be allocated among the outstanding Class A Certificates (i) with respect
to the principal portion of such losses, pro rata in accordance with their
outstanding principal balances and (ii) with respect to the interest portion of
such losses, the amount of interest accrued by each.
Prepayment Interest Shortfalls resulting from principal prepayments in full of
Mortgage Loans will be offset to the extent of the aggregate Servicing Fees
relating to mortgagor payments or other recoveries distributed on the related
Pooled Certificate Distribution Date. Any Prepayment Interest Shortfalls in
excess of such offsets will be allocated pro rata among the Class A, Class M
and Class B Certificates based upon their then-outstanding respective principal
balances, and any such losses allocated to the Class A Certificates will be
allocated among the outstanding Class A Certificates pro rata on the basis of
the amount of interest accrued by each for such Pooled Certificate Distribution
Date. Interest shortfalls resulting from the timing of the receipt of partial
principal prepayments will not be offset by Servicing Fees and will, on each
Pooled Certificate Distribution Date occurring prior to the Cross-Over Date, be
allocated first to the Class B Certificates and then to the Class M
Certificates before being borne by the Class A Certificates. Thereafter, such
interest shortfalls resulting from the timing of receipt of partial principal
prepayments will be allocated among the Class A Certificates as described
above.
Early Termination
Provisions....................... At its option, on any Pooled Certificate Distribution Date when the
aggregate scheduled principal balance of the Mortgage Loans is less than 10%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, the Servicer may purchase from the Trust Estate all remaining Mortgage
Loans and other assets thereof, and thereby effect early retirement of the
Series 1993-29 Certificates. The purchase price will, generally, be equal
to the greater of (i) the unpaid principal balance of each Mortgage Loan
plus the fair market value of other property in the Trust Estate and (ii)
the fair market value of the Trust Estate's assets plus, in each case,
accrued interest.
Advance Obligations................ The Servicer is obligated to make advances in respect of delinquent payments
of principal and interest on the Mortgage Loans to the extent that such
advances are deemed recoverable.
1(c)-7
<PAGE>
Annex 1(d)
PAYMENT TERMS OF THE PHMSC 1994-7 CERTIFICATES
Series Information
Series Information.................................................PHMSC 1994-7
Pooled Certificates.....................................Class A-7 and Class A-8
Pooled Certificates
Ratings at Date of Issuance..............."Aaa" by Moody's and "AAA" by Fitch
Issue Date....................................................February 24, 1994
Cut-off Date...................................................February 1, 1994
Pooled Certificate Trustee.....................First Trust National Association
Remaining Subordination Coverage as of
Pooled Certificate Information Date for:
Special Hazard Losses...........................................$1,848,555.79
Fraud Losses....................................................$1,711,920.32
Bankruptcy Losses.............................................$ 52,100.00
Description of Certificates
Principal Balance
Approximate as of Pooled
Certificate Pass-Through Initial Certificate Certificate
Class Designations Rate Principal Balance Information Date
Class A-1 6.50% $30,000,000.00 $23,008,703.78
Class A-2 6.50% $60,269,000.00 $36,232,251.46
Class A-3 5.55% $25,000,000.00 $15,029,389.68
Class A-4 6.50% (1) $ (1)
Class A-5 6.50% $ 7,338,000.00 $ 7,338,000.00
Class A-6(2) 6.50% $28,848,000.00 $25,413,903.28
Class A-7 Floating Rate(3) $12,896,000.00 $12,746,330.60
Class A-8 Inverse Floating Rate(3) $ 3,968,000.00 $ 3,921,947.88
Class A-9 Floating Rate(3) $16,744,000.00 $16,744,000.00
Class A-10 Inverse Floating Rate(3) $ 6,440,000.00 $ 6,440,000.00
Class A-11 Variable Rate (4) (4) $ (4)
Class A-R 6.50% $ $ 766.96
1,000.00
Class A-LR 6.50% $ $ 766.96
1,000.00
Class M 6.50% $ 1,488,000.00 $ 1,291,515.64
Class B 6.50% $ 5,457,960.80 $ 4,737,259.22
1 The Class A-4 Certificates are interest-only certificates, have no
principal balance and will bear interest on a notional amount
(initially, $3,653,846 and, as of the Pooled Certificate Information
Date, $2,196,603.01).
2 Composed of two Components, as follows:
Component Principal
Balance as of Pooled
Initial Component Certificate
Principal Balance Information Date
Class A-6 PAC I $ 6,492,000.00 $ 3,902,831.91
Class A-6 PAC II $22,356,000.00 $21,511,071.37
1(d)-1
<PAGE>
3 Each Class listed below will accrue interest during the Floating Rate
Interest Accrual Period (as defined below) at the respective initial
Pass-Through Rates set forth below, and will accrue interest during
each subsequent such period at the respective rates determined as set
forth below:
</TABLE>
<TABLE>
<CAPTION>
Initial Pass- Maximum Pass- Minimum Pass- Formula for Calculation
Class Through Rate Through Rate Through Rate of Pass-Through Rate
<S> <C> <C> <C> <C>
Class A-7 5.322% 8.50% 1.50% COFI + 1.50%
Class A-8 10.3285% 22.75% 0.00% 22.75% - (3.25% x COFI)
Class A-9 4.125% 9.00% 1.00% LIBOR + 1.00%
Class A-10 12.675% 20.80% 0.00% 20.80% - (2.60 x LIBOR)
</TABLE>
The "Floating Rate Interest Accrual Period" for the Class A-7, Class
A-8, Class A-9 and Class A-10 Certificates will be each one-month
period commencing on the 25th day of the month preceding the month in
which the Pooled Certificate Distribution Date occurs and ending on the
24th day of the month in which the Pooled Certificate Distribution Date
occurs.
4 Interest will accrue on the Class A-11 Certificates during each
applicable Regular Interest Accrual Period (as defined below) in an
amount equal to the product of (i) 1/12 of the difference between (a)
the weighted average of the "Net Mortgage Interest Rates" (i.e., the
rate stated in the related mortgage note minus the servicing fee rate
of .20% per annum) of the related Underlying Mortgage Loans as of the
first day of such month and (b) 6.50% and (ii) the Class A-11 Notional
Amount (on the Pooled Certificate Information Date, the Pass-Through
Rate was 0.28802%). The Class A-11 Notional Amount is equal to the
aggregate scheduled principal balances of the Mortgage Loans
(initially, $198,375,869.20 and, as of the Pooled Certificate
Information Date, $152,904,835.45). "Regular Interest Accrual Period"
means the calendar month preceding the month in which a Pooled
Certificate Distribution Date occurs.
<TABLE>
<S> <C>
Mortgage Loans..................... Conventional, fixed rate, one- to four-family, fully-amortizing,
conventional, monthly payment, first Mortgage Loans with terms to maturity
of approximately 15 years from the date of origination, which may include
loans secured by shares issued by cooperative housing corporations.
Priority of Distributions on
the Certificates................... The aggregate amount available for distribution is allocated among the Class
A Certificates (i) first, pro rata based upon the respective amounts of
interest accrued thereon during the related interest accrual period in an
amount up to the sum of the interest so accrued; (ii) second, pro rata based
upon the respective amounts thereof, any unpaid interest (without interest
thereon) from prior Pooled Certificate Distribution Dates, and (iii) third,
to the principal amounts due such Class A Certificates, in an aggregate
amount up to the Class A Optimal Principal Amount. The Class A-4 and Class
A-11 Certificates are interest only certificates and are not entitled to
principal distributions. On each Pooled Certificate Distribution Date prior
to the date on which the principal amounts of the Class M and Class B
Certificates have been reduced to zero (the "Cross-Over Date"), the amount
of funds available to be distributed as principal to the Class A
Certificates pursuant to (iii) in the preceding paragraph, will be allocated
among and distributed in reduction of the principal balances of the other
Class A Certificates as follows:
first, concurrently, to the Class A-2 and Class A-3 Certificates and the
Class A-6 PAC I Component, pro rata, up to their respective PAC Principal
Amounts with respect to such Distribution Date;
1(d)-2
<PAGE>
second, to the Class A-5 Certificates up to their PAC Principal Amount with
respect to such Distribution Date;
third, to the Class A-6 PAC II Component up to its PAC Principal Amount
with respect to such Distribution Date;
fourth, concurrently, to the Class A-7 and Class A-8 Certificates, pro
rata, up to their respective TAC Principal Amounts with respect to such
Distribution Date;
fifth, concurrently, to the Class A-9 and Class A-10 Certificates, pro
rata, until their respective Class A Subclass Principal Balances have been
reduced to zero;
sixth, concurrently, to the Class A-7 and Class A-8 Certificates, pro rata,
without regard to their respective TAC Principal Amounts, until the Class A
Subclass Principal Balances thereof have been reduced to zero;
seventh, to the Class A-6 PAC II Component, without regard to its PAC
Principal Amount, until the Component Principal Balance thereof has been
reduced to zero;
eighth, concurrently, to the Class A-2 and Class A-3 Certificates and the
Class A-6 PAC I Component, pro rata, without regard to their respective PAC
Principal Amounts, until the Class A Subclass Principal Balances and the
Component Principal Balance thereof have been reduced to zero; and;
ninth, to the Class A-5 Certificates, without regard to their PAC Principal
Amount, until the Class A Subclass Principal Balance thereof has been
reduced to zero.
As used above, the "PAC Principal Amount" for any Distribution Date and for
any Subclass of PAC I Certificates or any PAC Component means the amount, if
any, that would reduce the Class A Subclass Principal Balance of such
Subclass or the Component Principal Balance of such PAC Component to the
percentage of its initial Class A Subclass Principal Balance or initial
Component Principal Balance shown in tables to the Pooling and Servicing
Agreement with respect to such Distribution Date.
As used above, the "TAC Principal Amount" for any Distribution Date and for
each Subclass of TAC Certificates means the amount, if any, that would
reduce the Class A Subclass Principal Balance of such Subclass to the
percentage of its initial Class A Subclass Principal Balance shown in tables
to the Pooling and Servicing Agreement with respect to such Distribution
Date.
On each Distribution Date occurring on or after the Cross-Over Date, the
Class A Principal Distribution Amount will be distributed among the
Subclasses of Class A Certificates pro rata in accordance with their
respective outstanding Class A Subclass Principal Balances without regard to
the priorities set forth above.
The rights of the Class M and Class B Certificates to receive distributions of
1(d)-3
<PAGE>
both interest and principal are subordinated to the rights of the Class A
Certificates to receive distributions of both interest and principal.
Allocation of Scheduled
Principal Payments on Mortgage
Loans to Pooled Certificates....... For any Pooled Certificate Distribution Date, the Class A Certificates will
be allocated the percentage (the "Class A Percentage") of scheduled payments
of principal on the Mortgage Loans for such Pooled Certificate Distribution
Date, less, if the Bankruptcy Loss Amount is zero, the principal portion of
any reduction in the amount of monthly payments due to certain bankruptcy
proceedings, other than any permanent forgiveness of principal ("Debt
Service Reductions"). For any Pooled Certificate Distribution Date
occurring prior to the Cross-Over Date, the Class A Percentage is derived
generally by dividing the principal balance of the Class A Certificates by
the aggregate scheduled principal balances of all Mortgage Loans. For any
Pooled Certificate Distribution Date occurring on or after the Cross-Over
Date, the Class A Percentage is 100%.
Allocation of Non-Scheduled
Principal Payments on
Mortgage Loans to Pooled
Certificates....................... On each Pooled Certificate Distribution Date, with respect to non-scheduled
principal payments, the Class A Certificates will be allocated the sum of,
(A) the Class A Prepayment Percentage (equal to 100% during the five years
beginning in March 1994 and, subject to certain loss and delinquency tests,
gradually reducing over a five year period thereafter to equal the Class A
Percentage except reverting to 100% if on any applicable measuring date, the
Class A Percentage exceeds the original Class A Percentage) of (i) the
scheduled principal balance of repurchased Mortgage Loans, (ii) the
aggregate net liquidation proceeds (other than net partial liquidation
proceeds) on all Mortgage Loans that became liquidated during the preceding
month (excluding the portion thereof, if any, constituting net foreclosure
profits), less certain amounts allocable to principal of unreimbursed
advances and the portion of net liquidation proceeds allocable to interest,
(iii) the aggregate net partial liquidation proceeds on all Mortgage Loans
that became liquidated during the preceding month, less certain amounts
allocable to principal and the portion of the net partial liquidation
proceeds allocable to interest, (iv) the principal portion of Realized
Losses (other than Bankruptcy Losses due to Debt Service Reductions)
incurred in the preceding month, other than Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses, (v) the scheduled
principal balance of each Mortgage Loan prepaid in full during the preceding
month and (vi) all partial principal prepayments received on or after the
Determination Date in the prior month and prior to the Determination Date in
the month in which the Pooled Certificate Distribution Date occurs, and (B)
the Class A Percentage of the difference between the unpaid principal
balance of any Mortgage Loan substituted for a defective Mortgage Loan
during the preceding month and the unpaid principal balance of such
defective Mortgage Loan, less amounts allocable to principal of unreimbursed
advances with respect to such defective Mortgage Loan.
In addition, if there is any recovery of an amount in respect of principal
which had previously been allocated as a Realized Loss to the Class A
Certificates, the Class A Certificates then outstanding will be entitled to
their pro rata share
1(d)-4
<PAGE>
of such recovery in an amount up to the amount by which their principal
balances were reduced as a result of such Realized Loss.
External First-Loss
Coverage......................... None
Allocation of Losses and
Shortfalls....................... Subject to the limitations set forth below, Realized Losses (other than
Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy
Losses) on the Mortgage Loans will be allocated first, to the Class B
Certificates until the principal balance thereof is reduced to zero, and
then to the Class M Certificates until the principal balance thereof is
reduced to zero. Thereafter, the principal portion of any Realized Loss
will be allocated among the outstanding Class A Certificates pro rata in
accordance with their outstanding Class A principal balances and the
interest portion of Realized Losses will be allocated among the outstanding
Class A Certificates pro rata in accordance with the amount of interest
accrued by each. The aggregate amounts of Realized Losses which may be
allocated by means of subordination to the Class B and Class M Certificates
to cover Special Hazard Losses, Fraud Losses and Bankruptcy Losses as of the
Pooled Certificate Information Date is set forth above and is subject to
periodic reduction. Any Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses (i.e., those losses in excess of the respective
amounts of subordinated certificate coverage therefor) will be allocated on
a pro rata basis among the Class A, Class M and Class B Certificates, and
any such losses allocated to the Class A Certificates will be allocated
among the outstanding Class A Certificates (i) with respect to the principal
portion of such losses, pro rata in accordance with their outstanding
principal balances and (ii) with respect to the interest portion of such
losses, the amount of interest accrued by each.
Prepayment Interest Shortfalls resulting from principal prepayments in full
of Mortgage Loans will be offset to the extent of the aggregate Servicing
Fees relating to mortgagor payments or other recoveries distributed on the
related Pooled Certificate Distribution Date. Any Prepayment Interest
Shortfalls in excess of such offsets will be allocated pro rata among the
Class A, Class M and Class B Certificates based upon their then-outstanding
respective principal balances, and any such losses allocated to the Class A
Certificates will be allocated among the outstanding Class A Certificates
pro rata on the basis of the amount of interest accrued by each for such
Pooled Certificate Distribution Date. Interest shortfalls resulting from
the timing of the receipt of partial principal prepayments and partial
liquidation proceeds will not be offset by Servicing Fees and will, on each
Pooled Certificate Distribution Date occurring prior to the Cross-Over Date,
be allocated first to the Class B Certificates and then to the Class M
Certificates before being borne by the Class A Certificates. Thereafter,
such interest shortfalls resulting from the timing of receipt of partial
principal prepayments will be allocated among the Class A Certificates as
described above.
1(d)-5
<PAGE>
Early Termination
Provisions....................... At its option, on any Pooled Certificate Distribution Date when the
aggregate scheduled principal balance of the Mortgage Loans is less than 10%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, the Servicer may purchase from the Trust Estate all remaining Mortgage
Loans and other assets thereof, and thereby effect early retirement of the
Series 1994-7 Certificates. The purchase price will, generally, be equal to
the greater of (i) the unpaid principal balance of each Mortgage Loan plus
the fair market value of other property in the Trust Estate and (ii) the
fair market value of the Trust Estate's assets plus, in each case, accrued
interest.
Advance Obligations................ The Servicer is obligated to make advances in respect of delinquent payments
of principal and interest on the Mortgage Loans to the extent that such
advances are deemed recoverable.
1(d)-6
<PAGE>
ANNEX 1 (E)
PAYMENT TERMS OF THE PNC 1993-12 CERTIFICATES
SERIES INFORMATION
Series Information .................................................PNC 1993-12
Pooled Certificates....................................Class F-1 and Class S-1
Pooled Certificates
Ratings at Date of Issuance..............."Aaa" by Moody's and "AAA" by Fitch
Issue Date....................................................December 29, 1993
Cut-off Date...................................................December 1, 1993
Assumed Final
Pooled Certificate Distribution Date........................December 25, 2023
Pooled Certificate Trustee......................First Bank National Association
Remaining Subordination Coverage as of
Pooled Certificate Information Date for:
Special Hazard Losses...........................................$1,892,969.86
Fraud Losses....................................................$1,412,599.14
Bankruptcy Losses..................................................$50,000.00
DESCRIPTION OF CERTIFICATES
Principal Balances
Certificate as of Pooled
Class Desig- Pass-Through Initial Certificate Certificate
nations Rate(1) Principal Balance Information Date
- ------------ ---- ----------------- ----------------
Class T-1 6.875% $29,125,000.00 $ 9,870,340.04
Class T-2 6.875% $24,150,000.00 $24,150,000.00
Class T-3 6.875% $48,919,000.00 $48,919,000.00
Class T-4 6.875% $ 1,027,000.00 $ 1,027,000.00
Class W Variable Rate(2) $ 3,966,898.83(2) $ 3,392,860.27(2)
Class F-1 Floating Rate(3) $13,351,000.00(4) $11,887,235.37(4)
Class F-2 Floating Rate(3) $11,275,000.00 $11,275,000.00
Class S-1 Inverse Floating Rate(3) $ 5,098,000.00(4) $ 4,539,070.47(4)
Class S-2 Inverse Floating Rate(3) $ 3,433,750.00 $ 3,433,750.00
Class S-3 Inverse Floating Rate(3) $ 1,691,250.00 $ 1,691,250.00
Class B-1 6.875% $ 4,177,629.00 $ 3,857,478.25
Class B-2 6.875% $ 2,658,445.00 $ 2,658,445.00
Class B-3 6.875% $ 1,519,111.00 $ 1,519,111.00
Class B-4 6.875% $ 531,689.00 $ 531,689.00
Class B-5 6.875% $ 303,822.00 $ 303,822.00
Class B-6 6.875% $ 683,602.59 $ 622,543.85
Class R(5) 0.00% $ 0.00 $ 0.00
- -----------------------
1 The Certificates accrue interest during the preceding calendar month,
except for the Class F-1 and Class S-1 Certificates (the "COFI
Certificates") and the Class F-2, Class S-2 and Class S-3 Certificates
(the "LIBOR Certificates"), which accrue interest during the period
from the 25th of each month to the 24th of the succeeding month. The
Class T-1, Class T-2, Class T-3, Class T-4 and Class W Certificates,
together with the COFI Certificates and the LIBOR Certificates, are
hereinafter referred to collectively as the "Senior Certificates". The
Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates are hereinafter referred to collectively as the
"Subordinate Certificates".
1(e)-1
<PAGE>
2 The Pass-Through Rate for the Class W Certificates will equal the
weighted average of the excess of the "Net Mortgage Interest Rates"
(i.e., the rates stated in the related mortgage notes minus the sum of
the Servicing Fee and the Master Servicing Fee) on the Mortgage Loans
over 6.875%. On the Pooled Certificate Information Date, the
Pass-Through Rate was 0.11172121%. The Class W Certificates accrue
interest on the Class W Notional Amount, not the Class W Principal
Balance. The Class W Notional Amount is equal to the aggregate
principal balance of the Mortgage Loans as of the second preceding Due
Date after giving effect to scheduled payments due on or prior to such
Due Date.
3 Each Class listed below accrued interest during the applicable interest
accrual period at the respective initial Pass-Through Rates set forth
below, and accrued and will accrue interest during each subsequent such
period at the respective rates determined as set forth below:
</TABLE>
<TABLE>
<CAPTION>
Formula for
Initial Pass- Maximum Pass- Minimum Pass- Calculation of
Class Through Rate Through Rate Through Rate Pass-Through Rate
<S> <C> <C> <C> <C>
F-1 5.131% 9.50% 1.25% COFI plus 1.25%
F-2 4.1875% 10.00% 1.00% LIBOR plus 1.00%
S-1 11.44230% 21.60614% 0.00% 21.60614% - (COFI x 2.61887)
S-2 14.16045% 24.62687% 0.00% 24.62687% - (LIBOR x 3.2835821)
S-3 10.00% 10.00% 0.00% 60.000% - (LIBOR x 6.66667)
</TABLE>
4 The COFI Certificates will each be comprised of two components with
separate principal balances, the "PAC-1 Component" and the "PAC-2
Component" (collectively, the "PAC Components"), which will be
allocated principal according to the Planned Component Principal
Balances set forth in a table in the Pooling and Servicing Agreement.
5 Represents the residual interest and has no principal balance and bears
no interest.
<TABLE>
<S> <C>
Mortgage Loans...............The Mortgage Loans will be conventional, fixed rate, mortgage
loans, which are secured by first liens on one- to four-family residential real
properties and which have terms to maturity from the date of origination or
modification of not more than 30 years.
Priority of Distributions
on the Certificates..........On Each Pooled Certificate Distribution Date, principal will
be allocated first to the Class W Certificates prior to any distributions of interest
or principal to the other Certificates. The Class W Certificates will receive a portion
of the Available Distribution Amount (as defined below) attributable to principal on
any Mortgage Loan with a Net Mortgage Interest Rate of less than 6.875% (a "Class W
Mortgage Loan"), equal to the amount of such principal multiplied by a fraction, the
numerator of which is 6.875% minus the Net Mortgage Interest Rate on such Class W
Mortgage Loan and the denominator of which is 6.875% (the "Class W Fraction"); so long
as the Class B Certificates are outstanding, the Class W Certificates will also be
allocated principal in an amount generally equal to the Class W Fraction of any loss,
other than a Special Hazard Loss, Fraud Loss or Bankruptcy Loss in excess of the
Special Hazard coverage, Fraud coverage or Bankruptcy coverage, on a Class W Mortgage
Loan prior to distributions on the other Certificates. The "Available Distribution
Amount" for each Pooled Certificate Distribution Date generally includes scheduled
principal and interest payments due on the related Due Date, curtailments received in
the previous calendar month, certain payoffs received in the applicable period and
amounts received with respect to the liquidation of Mortgage Loans in the previous
calendar month.
1(e)-2
<PAGE>
On each Pooled Certificate Distribution Date, after payment of the interest
distribution amounts for the Senior Certificates remaining unpaid from previous Pooled
Certificate Distribution Dates and, for the current Pooled Certificate Distribution
Date, Certificateholders will be entitled to receive principal distributions from the
Available Distribution Amount. The Senior Certificates (other than the Class W
Certificates) will be entitled to receive an amount (the "Senior Principal Distribution
Amount") equal to the lesser of (X) the Available Distribution Amount reduced by
principal distributed to the Class W Certificates and interest distributed to the
Senior Certificates and (Y) the sum of (a) the Senior Percentage (as defined below) of
the Principal Payment Amount (as defined below) exclusive of the portion thereof
attributable to principal distributions to the Class W Certificates and (b) the Senior
Prepayment Percentage (as defined below) of the Principal Prepayment Amount (as defined
below) exclusive of the portion thereof attributable to principal distributions to the
Class W Certificates. The "Principal Payment Amount" is the sum of (i) scheduled
principal payments on the Mortgage Loans due on the related Due Date, (ii) the
principal portion of liquidation proceeds or repurchase proceeds received with respect
to any Mortgage Loan which became a liquidated Mortgage Loan or which was repurchased
as permitted or required by the Pooling and Servicing Agreement (up to the principal
balance thereof) during the calendar month preceding the month of the Pooled
Certificate Distribution Date and (iii) any other unscheduled payments of principal
which were received during the preceding calendar month, other than payoffs or
curtailments. For any Pooled Certificate Distribution Date, the "Principal Prepayment
Amount" is the sum of (i) curtailments which were received during the preceding
calendar month and (ii) payoffs received from the 15th day of the preceding calendar
month through the 14th day of the month in which such Pooled Certificate Distribution
Date occurs.
On each Pooled Certificate Distribution Date prior to the Credit Support Depletion Date
(as defined below), the Senior Principal Distribution Amount will be distributed to the
Senior Certificates other than the Class W Certificates, as follows:
(1) first, to the Class T-1 Certificates, to the extent necessary to reduce the
Class T-1 Principal Balance to its planned percentage of its Class Principal
Balance as of the Cut-Off Date for such Pooled Certificate Distribution Date as
set forth in a table to the Pooling and Servicing Agreement (its "Planned Class
Balance");
(2) second, the Class T-2 Certificates, to the extent necessary to reduce the
Class T-2 Principal Balance to its Planned Class Balance;
(3) third, concurrently, to the COFI Certificates, to the extent necessary, in each
case, to reduce their respective PAC-1 Component Balances to the percentages of
their PAC-1 Component Balances as of the Cut-Off Date for such Pooled
Certificate Distribution Date as set forth in a table to the Pooling and
Servicing Agreement pro rata according to their respective PAC-1 Component
Balances;
(4) fourth, to the Class T-3 Certificates, to the extent necessary to reduce the
Class T-3 Principal Balance to its Planned Class Balance;
(5) fifth, to the Class T-4 Certificates, to the extent necessary to reduce the
Class T-4 Principal Balance to its Planned Class Balance;
(6) sixth, concurrently, to the COFI Certificates, to the extent necessary, in each
case, to reduce their respective PAC-2 Component Balances to the percentages
1(e)-3
<PAGE>
of their PAC-2 Component Balances as of the Cut-Off Date for such Pooled
Certificate Distribution Date as set forth in a table to the Pooling and
Servicing Agreement, pro rata according to their respective PAC-2 Component
Balances;
(7) seventh, concurrently to the LIBOR Certificates, pro rata according to their
respective Class Principal Balances, until the aggregate Class Principal
Balance of the LIBOR Certificates has been reduced to zero;
(8) eighth, concurrently, to the COFI Certificates, to the extent necessary, in
each case, to reduce their respective PAC-2 Component Balances to zero, pro
rata according to their respective PAC-2 Component Balances;
(9) ninth, concurrently, to the COFI Certificates, to the extent necessary, in each
case, to reduce their respective PAC-1 Component Balances to zero, pro rata
according to their respective PAC-1 Component Balances;
(10) tenth, to the Class T-3 Certificates, until the Class T-3 Principal Balance
has been reduced to zero;
(11) eleventh, to the Class T-4 Certificates, until the Class T-4 Principal
Balance has been reduced to zero;
(12) twelfth, to the Class T-1 Certificates, until the Class T-1 Principal
Balance has been reduced to zero; and
(13) thirteenth, to the Class T-2 Certificates, until the Class T-2 Principal
Balance has been reduced to zero.
The "Credit Support Depletion Date" is the Pooled Certificate Distribution Date on
which the aggregate Class Principal Balance of the Class B Certificates has been
reduced to zero. On each Pooled Certificate Distribution Date on or after the Credit
Support Depletion Date, the Senior Principal Distribution Amount will be distributed to
the Senior Certificates other than the Class W Certificates, pro rata according to
their respective Class Principal Balances.
The "Senior Percentage" for any Pooled Certificate Distribution Date will equal the sum
of the Class Principal Balances of the Senior Certificates (other than the Class W
Certificates), divided by the aggregate Class Principal Balance of all Classes of
Certificates (other than the Class W Certificates), in each case immediately prior to
such Pooled Certificate Distribution Date. The "Senior Prepayment Percentage" for any
Pooled Certificate Distribution Date occurring during the five years beginning on the
first Pooled Certificate Distribution Date will equal 100%. The Senior Prepayment
Percentage will generally be subject to reduction on each of the Pooled Certificate
Distribution Dates in the months of the fifth through ninth anniversaries of the first
Pooled Certificate Distribution Date, subject to certain conditions concerning
delinquencies and losses on the Mortgage Loans. However, if the Subordinate Percentage
(as defined below) on such Pooled Certificate Distribution Date is not at least equal
to the Subordinate Percentage as of the Cut-Off Date, the Senior Prepayment Percentage
will equal 100%, which will have the effect of allocating all curtailments and payoffs
with respect to the Mortgage Loans to the Senior Certificates. On any Pooled
Certificate Distribution Date, the "Subordinate Percentage" will equal the excess of
100% over the Senior Percentage. The Senior Percentage and
1(e)-4
<PAGE>
Subordinate Percentage as of the Cut-Off Date were approximately 93.3% and 6.7%,
respectively.
On each Pooled Certificate Distribution Date, the Class B Certificates will be entitled
to receive principal distributions to the extent of the Available Distribution Amount
remaining after distributions of interest and principal to the Senior Certificates and
distributions of interest to the Class B Certificates.
Allocation of Scheduled
Principal Payments on
Mortgage Loans to
Pooled Certificates..........For any Pooled Certificate Distribution Date, the Senior
Certificates (other than the Class W Certificates) will be entitled to receive an
amount up to the Senior Percentage of the Principal Payment Amount exclusive of the
portion thereof attributable to principal distributions to the Class W Certificates, as
described in "Priority of Distributions on the Certificates" above.
Allocation of Non-Scheduled
Principal payments on
Mortgage Loans to
Pooled Certificates..........For any Pooled Certificate Distribution Date, the Senior
Certificates (other than the Class W Certificates) will be entitled to receive an
amount up to the Senior Prepayment Percentage of the Principal Prepayment Amount
exclusive of any portion thereof attributable to principal distributions to the Class W
Certificates, as described in "Priority of Distributions on the Certificates" above.
External First-Loss
Coverage..................None
Allocation of Losses
and Shortfalls............Any loss realized with respect to a Mortgage Loan, except for
certain Special Hazard Losses, Fraud Losses and Bankruptcy Losses (as discussed below)
will be allocated among the Certificates (i) for losses attributable to principal (a)
first, to the Subordinate Certificates, until their Class Principal Balances have been
reduced to zero, and (b) second, to the Senior Certificates as follows: first, to the
Class W Certificates, the Class W Fraction of each such loss on a Class W Mortgage
Loan, and second, to the outstanding Classes of Senior Certificates, other than the
Class W Certificates, pro rata according to their respective Class Principal Balances,
the remaining portion of such loss; and (ii) for losses allocable to interest, (a)
first, to the Subordinate Certificates in each case in reduction of accrued but unpaid
interest thereon and then in reduction of the Class Principal Balance thereof, and (b)
second, to the Senior Certificates other than the Class W Certificates, in reduction of
accrued but unpaid interest thereon and then in reduction of their respective Class
Principal Balances.
Special Hazard Losses, Fraud Losses and Bankruptcy Losses up to designated amounts of
Special Hazard coverage, Fraud coverage and Bankruptcy coverage, will be allocated (i)
first, to the Subordinate Certificates until the aggregate Class Principal Balance
thereof has been reduced to zero, and (ii) second, to the outstanding Classes of Senior
Certificates as follows: for the principal portion of such losses, the Class W Fraction
of any such loss will be allocated to the Class W Certificates if the Mortgage Loan is
a Class W Mortgage Loan, and for all other Classes, to the extent of the remainder of
such loss pro rata according to their respective Class Principal Balances, and for the
interest portion of such losses, pro rata according to the amount of interest accrued
on each Class in reduction thereof and then in reduction (except in the case of
1(e)-5
<PAGE>
the Class W Certificates) of the applicable Class Principal Balance. The allocation of
the principal portion of losses to the Class W Certificates (if the loss relates to a
Class W Mortgage Loan) to the extent of the Class W Fraction of any such loss and then
the remainder of such loss to all other outstanding Classes of Certificates pro rata
according to their respective Class Principal Balances, and the interest portion of
losses pro rata according to the amount of interest accrued on each such Class in
reduction thereof and then in reduction (except in the case of the Class W
Certificates) of the applicable Class Principal Balance, is hereinafter referred to as
"Pro Rata Allocation". Special Hazard Losses, Fraud Losses and Bankruptcy Losses in
excess of the applicable coverage will be allocated to the outstanding Classes of
Certificates by Pro Rata Allocation.
On each Pooled Certificate Distribution Date, any prepayment interest shortfalls will
be offset to the extent of the monthly Master Servicing Fee, any reinvestment income
realized by the Master Servicer with respect to such payoffs and certain interest
payments on payoffs.
Early Termination
Provisions.................On any Pooled Certificate Distribution Date after the first date on which the aggregate
outstanding principal balance of the Mortgage Loans is less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-Off Date, PNC Mortgage Securities
Corp. may repurchase the Mortgage Loans and all property acquired in respect of any
Mortgage Loan remaining in the Trust, and thereby effect the termination of the Trust
and, as a result, the retirement of the Certificates. The repurchase price will equal,
after deductions of related advances by the Master Servicer, the sum of (1) 100% of the
aggregate outstanding principal balance of such Mortgage Loans, plus accrued interest
thereon at the applicable Net Mortgage Interest Rates through the last day of the month
of such repurchase and (2) the fair market value of all other property remaining in the
Trust. The proceeds of such repurchase will be treated as a prepayment of the Mortgage
Loans for purposes of distributions to Pooled Certificateholders. Accordingly, an
optional termination of the Trust will cause the outstanding principal balance of the
Certificates to be paid in full, and upon such payment in full the Trust will be
terminated. In no event will the Trust continue beyond the expiration of 21 years from
the death of the survivor of certain persons identified in the Pooling and Servicing
Agreement.
Advance Obligations..........If, in the good faith judgment of the Master Servicer made prior
to each Pooled Certificate Distribution Date, Advances made by it will be recoverable
from insurance proceeds, liquidation proceeds or otherwise, the Master Servicer will
make Advances to cover any shortfall between (i) payments scheduled to be received with
respect to the Mortgage Loans and (ii) the amounts actually deposited in the
Certificate Account on account of such payments. Advances are reimbursable to the
Master Servicer from cash in the Certificate Account if the Master Servicer determines
that such Advances previously made are not recoverable from insurance proceeds,
liquidation proceeds or otherwise.
1(e)-6
<PAGE>
ANNEX 2
COLLATERAL INFORMATION
The table in this Annex 2 sets forth information for each of
the Pooled Certificates concerning such Pooled Certificates and the related
Mortgage Loans. The table and the descriptions of the Pooled Certificates herein
are subject to and qualified by reference to the information with respect to the
Pooled Certificates set forth on Annex 1 and to the provisions of the Underlying
Agreements and the prospectuses and prospectus supplements related to the Pooled
Certificates, as well as any subsequent information related thereto filed on a
Current Report on Form 8-K with the Securities and Exchange Commission following
the closing of the related Underlying Series. The information set forth in the
table and elsewhere herein that is peculiarly within the knowledge of the
various Underlying Trustees, paying agents and servicers for the Underlying
Trusts has been derived from data provided by them, including regular periodic
reports provided to holders of Pooled Certificates and loan-by-loan information
provided in tape form from the related servicers or underlying issuers or
depositors, but such information has not been independently represented to the
Depositor or the Underwriter as being accurate or complete nor has it been
independently verified by the Depositor or the Underwriter. This information
comprises all material information on the subject that the Depositor and the
Underwriter possess or can acquire without unreasonable expense or effort.
All of the information provided herein as to the Pooled
Certificates (and any related securities issued as part of the same Underlying
Series) is provided as of the Pooled Certificate Information Date. Generally,
all of the information provided herein as to the Mortgage Loans is provided as
of the Mortgage Loan Information Date. Unless otherwise noted, "weighted
average" numbers are calculated based on the loan balances as of the Mortgage
Loan Information Date.
A key to the abbreviations used for each underlying Series and
Class designation for the Pooled Certificates is contained under "Description of
the Pooled Certificates - General".
The following is a description of each item reported in the
following table. The table should be read in conjunction with these descriptions
and with certain additional information contained in Annex 1.
1. Shelf, Series, and Des. These first three columns
indicate, collectively, the "shelf" name and series
designation of each Underlying Series and the
designation of the Pooled Certificate for such
Underlying Series. For the full name of each Pooled
Certificate, see "Description of the Pooled
Certificates -- General".
2. Certificate Type. This column indicates whether the
Pooled Certificate is a Floating Rate Pooled
Certificate in which case the code "FLT" is inserted,
or is an Inverse Floating Rate Pooled Certificate, in
which case the code "INV" is inserted and whether it
is a Planned Amortization Class ("PAC") Targeted
Amortization Class ("TAC"), Scheduled Amortization
Class ("SCH") or Companion or Support Class ("SUP").
3. Current Coupon. This column indicates the
Pass-Through Rate on each Pooled Certificate as of
the Pooled Certificate Information Date. Each Pooled
Certificate bears interest according to the formula
presented for such Pooled Certificate in Annex 1
hereto.
4. Class Original Balance in Trust. This column lists
the original principal balance for the Pooled
Certificate isas of the related Issue Date as set
forth in Annex 1.
5. Class % in Trust. This column shows, for each Pooled
Certificate, the percent of the entire Class of the
Underlying Series represented by such Pooled
Certificate.
2-1
<PAGE>
6. Class Current Balance. This column shows the
outstanding balance of the Pooled Certificate as of
the Pooled Certificate Information Date.
7. Original Mortgage Loan Balance. This is the aggregate
Scheduled Principal Balance of the Mortgage Loans
underlying each Pooled Certificate as of the
respective Underlying Series Cut-Off Date as set
forth in Annex 1.
8. Current Mortgage Loan Balance. This is the aggregate
Scheduled Principal Balance of the Mortgage Loans
underlying each Pooled Certificate as of the Mortgage
Loan Information Date.
9. Original Senior %. Under this heading is the
percentage of certificates of each Underlying Series,
of which the Pooled Certificate is a part, that were
issued as Senior Certificates as of the date of
issuance.
10. Current Senior %. Under this heading is the
percentage of certificates of each Underlying Series,
of which the Pooled Certificates is a part, that are
Senior Certificates as of the Pooled Certificate
Information Date.
11. CGWAC. Under this heading is the current weighted
average of the note rates on the Mortgage Loans
underlying each Pooled Certificate.
12. CNWAC. Under this heading is the current weighted
average of the net rates (that is, note rate less any
servicing fee and any other administrative fees) on
the Mortgage Loans underlying each Pooled
Certificate.
13. WAM. Under this heading is the current weighted
average of the remaining terms to maturity of the
Mortgage Loans underlying each Pooled Certificate (in
months).
14. AGE. Under this heading is the weighted average
months since origination for the Mortgage Loans
underlying each Pooled Certificate.
2-2
<PAGE>
COLLATERAL INFORMATION
</TABLE>
<TABLE>
<CAPTION>
Class Class Original Current
Certificate Current Original Class % Current Mortgage Loan Mortgage Loan
Shelf Series Des Type(1) Coupon(2) Balance In Trust Balance(2) Balance Balance(3)
In Trust
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHASE 1994-F A-15 SUP FLT 6.1920 11,595,000.00 100.00% 11,457,057.22 243,886,664.00 216,384,798.34
CHASE 1994-F A-16 SUP INV 7.0168 3,566,000.00 100.00% 3,523,576.20 243,886,664.00 216,384,798.34
CHASE 1994-F A-17 SUP INV 11.5114 1,159,000.00 100.00% 1,145,211.67 243,886,664.00 216,384,798.34
GECAP 1994-11 A7 TAC FLT(4) 5.8350 12,493,722.00 100.00% 12,010,494.99 530,525,542.00 456,541,460.80
GECAP 1994-11 A8 TAC INV(4) 8.2290 4,805,278.00 100.00% 4,619,421.45 530,525,542.00 456,541,460.80
PHMSC 1993-29 A-14 SCH FLT(5) 5.9850 18,120,806.00 50.27% 11,934,927.29 450,221,692.00 292,842,941.53
PHMSC 1993-29 A-15 SCH INV(5) 7.8463 5,000,000.00 50.27% 3,293,155.75 450,221,692.00 292,842,941.53
PHMSC 1993-29 A-16 SCH INV(5) 9.0000 3,724,833.00 50.27% 2,453,291.04 450,221,692.00 292,842,941.53
PHMSC 1994-7 A-7 TAC FLT(4) 6.3350 12,896,000.00 100.00% 12,746,330.57 198,450,961.00 152,904,835.45
PHMSC 1994-7 A-8 TAC INV(4) 7.0363 3,968,000.00 100.00% 3,921,947.87 198,450,961.00 152,904,835.45
PNC 1993-12 F-1 PAC FLT COM(6) 6.0850 12,351,000.00 92.51% 10,996,872.42 151,911,197.00 129,678,595.25
PNC 1993-12 S-1 PAC FLT COM(6) 8.9439 4,716,158.00 92.51% 4,199,092.49 151,911,197.00 129,678,595.25
</TABLE>
<TABLE>
<CAPTION>
Original Current
Senior Senior
% %(2) CGWAC(3) CNWAC(#) WAM(3) Age(3)
<C> <C> <C> <C> <C> <C>
95.0% 94.5% 7.274 7.026 313 36
95.0% 94.5% 7.274 7.026 313 36
95.0% 94.5% 7.274 7.026 313 36
94.0% 93.3% 7.293 7.080 313 37
94.0% 93.3% 7.293 7.080 313 37
95.5% 94.2% 7.322 7.122 132 44
95.5% 94.2% 7.322 7.122 132 44
95.5% 94.2% 7.322 7.122 132 44
96.5% 96.1% 6.987 6.787 138 38
96.5% 96.1% 6.987 6.787 138 38
93.5% 92.7% 7.075 6.807 313 39
93.5% 92.7% 7.075 6.807 313 39
</TABLE>
(1) The abbreviations contained under the heading "Certificate Type" have the
following meanings as more fully described under "Description of the
Pooled Certificates---General" herein:
PAC = Planned Amortization Class
TAC = Targeted Amortization Class
SCH = Scheduled Class
SUP = Support Class
FLT = Floating Rate Certificate
INV = Inverse Floating Rate Certificate
COM = Component Class
(2) As of the Pooled Certificate Information Date (March 24, 1997, after giving
effect to distributions on Pooled Certificates on or prior to such date).
(3) As of the Mortgage Loan Information Date (February 1, 1997, after giving
effect to payments made or scheduled to be made on such date).
(4) No longer adheres to any specific prepayment rate; however, some supporting
classes remain outstanding as of the Pool Certificate Information Date.
(5) No longer adheres to any specific prepayment rate. No supporting classes
remain outstanding as of the Pooled Certificate Information Date.
(6) No longer adheres to any specific prepayment rate or range. Some supporting
classes remain outstanding as of the Pooled Certificate Information Date.
2-3
<PAGE>
This Page Left Blank Intentionally
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS MORTGAGE SECURITIES INC.
SELLER
-----------------
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), which may be sold from time to time in one or more Series on
terms determined at the time of sale and described in the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of
one or more trust funds (each a "Trust Fund"). As specified in the related
Prospectus Supplement, a Trust Fund for a Series of Certificates will include
certain mortgage-related assets (the "Mortgage Assets") consisting of (i) first
lien mortgage loans or 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-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") or other government agencies or government-sponsored agencies or (vi)
privately issued mortgage-backed securities ("Private Mortgage-Backed
Securities"). If specified in the related Prospectus Supplement, certain
Certificates will evidence the entire beneficial ownership interest in a Trust
Fund which will contain a beneficial ownership interest in another Trust Fund
which will contain the Mortgage Assets. The Mortgage Assets will be acquired by
Bear Stearns Mortgage Securities Inc. (the "Seller") from one or more
institutions which may be affiliates of the Seller (each, a "Lender") and
conveyed by the Seller to the related Trust Fund. A Trust Fund also may include
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other assets to the extent
described in the related Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Certificates
of such Series. One or more classes of Certificates of a Series may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other classes of Certificates of such Series or after the
occurrence of specified events or may be required to absorb one or more types of
losses prior to one or more other classes of Certificates, in each case as
specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Certificates of a Series will be made only from the assets of the related Trust
Fund.
The Certificates will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality or by any other person. Unless otherwise
specified in the related Prospectus Supplement, the only obligations of the
Seller with respect to a Series of Certificates will be to obtain certain
representations and warranties from the Lenders or other third parties and to
assign to the trustee (the "Trustee") for the related Series of Certificates the
Seller's rights with respect to such representations and warranties. The
principal obligations of one or more master servicers (each, a "Master
Servicer") named in the Prospectus Supplement with respect to the related Series
of Certificates will be limited to its or their contractual servicing
obligations, including any obligation to advance delinquent payments on the
Mortgage Assets in the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by
the rate of payment of principal (including prepayments) on the Mortgage Assets
in the related Trust Fund and the timing of receipt of such payments as
described herein and in the related Prospectus Supplement. A Trust Fund may be
subject to early termination under the circumstances described herein and in the
related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be
made to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences."
------------------
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.
------------------
Prior to issuance there will have been no market for the Certificates
of any Series and there can be no assurance that a secondary market for any
Certificates will develop. This Prospectus may not be used to consummate sales
of a Series of Certificates unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement.
All Certificates will be distributed by, or sold by underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is October 10, 1996.
<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 one or
more REMIC elections will be made and designation of the regular interests and
residual interests; (xi) information as to the Trustee; and (xii) information as
to the Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of Certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street - Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center - 13th Floor, New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, with respect to
a series of Certificates subsequent to the date of this Prospectus and the
related Prospectus Supplement and prior to the termination of the offering of
such series of Certificates shall be deemed to be incorporated by reference in
this Prospectus as supplemented by the related Prospectus Supplement. If so
specified in any such documents, such document shall also be deemed to be
incorporated by reference in the Registration Statement of which this Prospectus
forms a part.
Any statement contained herein or in a Prospectus Supplement for a
series of Certificates or in a document
-2-
<PAGE>
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.
<TABLE>
<S> <C>
Title of Securities........................... Mortgage Pass-Through Certificates (Issuable in Series).
Seller........................................ Bear Stearns Mortgage Securities Inc., a Delaware corporation
and a wholly-owned subsidiary of Bear Stearns Mortgage Capital
Corporation. See "The Seller."
Trustee....................................... The Trustee for each Series of Certificates will be specified
in the related Prospectus Supplement.
Master Servicer............................... One or more entities named as a Master Servicer in the related
Prospectus Supplement, which may be an affiliate of the Seller.
See "The Pooling and Servicing Agreement -Certain Matters
Regarding the Master Servicer and the Seller."
Trust Fund Assets............................. A Trust Fund for a Series of Certificates will include the
Mortgage Assets consisting of (i) a pool (a "Mortgage Pool") of
Single Family Loans, Multifamily Loans, Cooperative Loans or
Contracts (collectively, the "Mortgage Loans"), (ii) Agency
Securities or (iii) Private Mortgage-Backed Securities,
together with payments in respect of such Mortgage Assets and
certain other accounts, obligations or agreements, in each case
as specified in the related Prospectus Supplement.
A. Single Family, Cooperative
and Multi-family Loans................... Unless otherwise specified in the related Prospectus
Supplement, Single Family Loans will be secured by first
mortgage liens on one- to four-family residential properties.
Unless otherwise specified in the related Prospectus
Supplement, Cooperative Loans will be secured by security
interests in shares issued by private, nonprofit, cooperative
housing corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in such Cooperatives'
buildings. Single Family Loans and Cooperative Loans may be
conventional loans (I.E., loans that are not insured or
guaranteed by any governmental agency), insured by the Federal
Housing Authority ("FHA") or partially guaranteed by the
Veterans Administration ("VA") as specified in the related
Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, Single Family Loans and
Cooperative Loans will all have individual principal balances
at origination of not less than $25,000 and not more than
$1,000,000, and original terms to stated maturity of 15 to 40
years.
Multifamily Loans will be secured by first mortgage liens on
rental apartment buildings or projects containing five or more
residential units, including apartment buildings owned by
Cooperatives. Such
-4-
<PAGE>
loans may be conventional loans or insured by the FHA, as
specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, Multifamily Loans
will all have individual principal balances at origination of not
less than $25,000 and original terms to stated maturity of not
more than 40 years.
The payment terms of the Mortgage Loans to be included in a Trust
Fund will be described in the related Prospectus Supplement and
may include any of the following features or combinations thereof
or other features described in the related Prospectus Supplement:
(a) Interest may be payable 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 supplied by the
seller of the Mortgaged Property or another source
("Buydown Loans") or may be treated as accrued interest
and added to the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis
to fully amortize the Mortgage Loan over its term, may
be calculated on the basis of an assumed amortization
schedule that is significantly longer than the
original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage
Loan or may not be amortized during all or a portion
of the original term. Payment of all or a substantial
portion of the principal may be due on maturity
("balloon" payments). Principal may include interest
that has been deferred and added to the principal
balance 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 maximum or minimum amounts of monthly payments.
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(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the
Mortgage Loan or may decline over time, and may be
prohibited for the life of the Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage
Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment
of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The
Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire
Mortgage Loan in connection with the sale or certain
transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the
then applicable underwriting standards of the Lender.
Certain Mortgage Loans may be originated or acquired in connection
with employee relocation programs. The real property constituting
security for repayment of a Mortgage Loan may be located in any
one of the fifty states or the District of Columbia. Unless
otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will be covered by standard hazard insurance
policies insuring against losses due to fire and various other
causes. The Mortgage Loans will be covered by primary mortgage
insurance policies to the extent provided in the related
Prospectus Supplement. All Mortgage Loans will have been purchased
by the Seller, either directly or through an affiliate, from
Lenders.
B. Contracts................................ Contracts will consist of conditional sales and installment
sales or loan agreements secured by new or used Manufactured
Homes (as defined herein). Contracts may be conventional loans,
insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, each
Contract will be fully amortizing and will bear interest at a
fixed accrual percentage rate ("APR"). Unless otherwise
specified in the related Prospectus Supplement, Contracts will
all have individual principal balances at origination of not
less than $10,000 and not more than $1,000,000 and original
terms to stated maturity of 5 to 30 years.
C. Agency Securities........................ The Agency Securities will consist of (i) fully modified
pass-through mortgage-backed certificates guaranteed as to
timely payment of principal and interest by the Government
National Mortgage Association ("GNMA Certificates"), (ii)
Guaranteed Mortgage Pass-Through Certificates issued and
guaranteed as to timely payment of principal and interest by
the Federal National Mortgage Association ("FNMA
Certificates"), (iii) Mortgage Participation Certificates issued
and guaranteed as to timely payment of interest and, unless
otherwise specified in the related Prospectus Supplement,
ultimate payment of principal by the
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Federal Home Loan Mortgage Corporation ("FHLMC Certificates"),
(iv) stripped mortgage-backed securities representing an undivided
interest in all or a part of either the principal distributions
(but not the interest distributions) or the interest distributions
(but not the principal distributions) or in some specified portion
of the principal and interest distributions (but not all of such
distributions) on certain GNMA, FNMA, FHLMC or other government
agency or government-sponsored agency Certificates and, unless
otherwise specified in the Prospectus Supplement, guaranteed to
the same extent as the underlying securities, (v) another type of
guaranteed pass-through certificate issued or guaranteed by GNMA,
FNMA, FHLMC or another government agency or government-sponsored
agency and described in the related Prospectus Supplement, or (vi)
a combination of such Agency Securities. All GNMA Certificates
will be backed by the full faith and credit of the United States.
No FNMA or FHLMC Certificates will be backed, directly or
indirectly, by the full faith and credit of the United States. The
Agency Securities may consist of pass-through securities issued
under the GNMA I Program, the GNMA II Program, FHLMC's Cash or
Guarantor Program or another program specified in the Prospectus
Supplement. The payment characteristics of the Mortgage Loans
underlying the Agency Securities will be described in the related
Prospectus Supplement.
D. Private Mortgage-Backed
Securities............................... Private Mortgage-Backed Securities may include (i) mortgage
participations or pass-through certificates representing
beneficial interests in certain Mortgage Loans or (ii)
Collateralized Mortgage Obligations ("CMOs") secured by such
Mortgage Loans. Private Mortgage-Backed Securities may include
stripped mortgage-backed securities representing an undivided
interest in all or a part of any of the principal distributions
(but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions
(but not all of such distributions) on certain mortgage loans.
Although individual Mortgage Loans underlying a Private
Mortgage-Backed Security may be insured or guaranteed by the
United States or an agency or instrumentality thereof, they
need not be, and the Private Mortgage-Backed Securities
themselves will not be so insured or guaranteed. See "The Trust
Fund-Private Mortgage-Backed Securities." Unless otherwise
specified in the Prospectus Supplement relating to a Series of
Certificates, payments on the Private Mortgage-Backed
Securities will be distributed directly to the Trustee as
registered owner of such Private Mortgage-Backed Securities.
See "The Trust Fund-Private Mortgage-Backed Securities."
The related Prospectus Supplement for a Series will specify (i)
the aggregate approximate principal amount and type of any Private
Mortgage-Backed Securities to be included in the Trust Fund for
such Series; (ii) certain characteristics of the Mortgage Loans
which comprise the underlying assets for the Private
Mortgage-Backed
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Securities including to the extent available (A) the payment
features of such Mortgage Loans, (B) the approximate aggregate
principal amount, if known, of the underlying Mortgage Loans which
are insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the
Mortgage Loans, and (D) the minimum and maximum stated maturities
of the Mortgage Loans at origination; (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities;
(iv) the weighted average term-to-stated maturity of the Private
Mortgage-Backed Securities; (v) the pass-through or certificate
rate or ranges thereof for the Private Mortgage-Backed Securities;
(vi) the weighted average pass-through or certificate rate of the
Private Mortgage-Backed Securities; (vii) the issuer of the
Private Mortgage-Backed Securities (the "PMBS Issuer"), the
servicer of the Private Mortgage-Backed Securities (the "PMBS
Servicer") and the trustee of the Private Mortgage-Backed
Securities (the "PMBS Trustee"); (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies,
letters of credit, financial guaranty insurance policies or third
party guarantees, relating to the Mortgage Loans underlying the
Private Mortgage-Backed Securities, or to such Private
Mortgage-Backed Securities themselves; (ix) the terms on which
underlying Mortgage Loans for such Private Mortgage-Backed
Securities may, or are required to, be repurchased prior to stated
maturity; and (x) the terms on which substitute Mortgage Loans may
be delivered to replace those initially deposited with the PMBS
Trustee. See "The Trust Fund."
E. Pre-Funding and
Capitalized Interest
Accounts................................. If specified in the related Prospectus Supplement, a Trust Fund
will include one or more segregated trust accounts (each, a
"Pre-Funding Account") established and maintained with the
Trustee for the related Series. If so specified, on the closing
date for such Series, a portion of the proceeds of the sale of
the Certificates of such Series (such amount, the "Pre-Funded
Amount") will be deposited in the Pre-Funding Account and may
be used to purchase additional Primary Assets during the period
of time, not to exceed six months, specified in the related
Prospectus Supplement (the "Pre-Funding Period"). The Primary
Assets to be so purchased will be required to have certain
characteristics specified in the related Prospectus Supplement.
If any Pre-Funded Amount remains on deposit in the Pre-Funding
Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus
Supplement to prepay the Certificates of the applicable Series.
The amount initially deposited in a pre-funding account for a
Series of Certificates will not exceed fifty percent of the
aggregate principal amount of such Series of Certificates.
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If a Pre-Funding Account is established, one or more segregated
trust accounts (each, a "Capitalized Interest Account") may be
established and maintained with the Trustee for the related
Series. On the closing date for such Series, a portion of the
proceeds of the sale of the Certificates of such Series will be
deposited in the Capitalized Interest Account and used to fund the
excess, if any, of (x) the sum of (i) the amount of interest
accrued on the Certificates of such Series and (ii) if specified
in the related Prospectus Supplement, certain fees or expenses
during the Pre-Funding Period such as trustee fees and credit
enhancement fees, over (y) the amount of interest available
therefor from the Primary Assets in the Trust Fund. Any amounts on
deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will
be distributed to the person specified in the related Prospectus
Supplement.
Description of the
Certificates............................. Each Certificate will represent a beneficial ownership interest
in a Trust Fund created by the Seller pursuant to a Pooling and
Servicing Agreement (each, an "Agreement") among the Seller,
the Master Servicer(s) and the Trustee for the related Series.
The Certificates of any Series may be issued in one or more
classes as specified in the related Prospectus Supplement. A
Series of Certificates may include one or more classes of
senior Certificates (collectively, the "Senior Certificates")
which receive certain preferential treatment specified in the
related Prospectus Supplement with respect to one or more
classes of subordinate Certificates (collectively, the
"Subordinated Certificates"). Certain Series or classes of
Certificates may be covered by insurance policies, cash
accounts, letters of credit, financial guaranty insurance
policies, third party guarantees or other forms of credit
enhancement as described herein and in the related Prospectus
Supplement.
One or more classes of Certificates of each Series (i) may be
entitled to receive distributions allocable only to principal,
only to interest or to any combination thereof; (ii) may be
entitled to receive distributions only of prepayments of principal
throughout the lives of the Certificates or during specified
periods; (iii) may be subordinated in the right to receive
distributions of scheduled payments of principal, prepayments of
principal, interest or any combination thereof to one or more
other classes of Certificates of such Series throughout the lives
of the Certificates or during specified periods or may be
subordinated with respect to certain losses or delinquencies; (iv)
may be entitled to receive such distributions only after the
occurrence of events specified in the Prospectus Supplement; (v)
may be entitled to receive distributions in accordance with a
schedule or formula or on the basis of collections from designated
portions of the assets in the related Trust Fund; (vi) as to
Certificates entitled to distributions allocable to interest, may
be entitled to receive interest at a fixed rate or a rate that is
subject to change from time to time; and (vii) as to Certificates
entitled to distributions allocable to interest, may be
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entitled to distributions allocable to interest only after the
occurrence of events specified in the Prospectus Supplement and
may accrue interest until such events occur, in each case as
specified in the Prospectus Supplement. The timing and amounts of
such distributions may vary among classes, over time, or otherwise
as specified in the related Prospectus Supplement.
Distributions on the
Certificates............................. Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals
and on such other Distribution Dates specified in the
Prospectus Supplement solely out of the payments received in
respect of the assets of the related Trust Fund or other assets
pledged for the benefit of the Certificates as specified in the
related Prospectus Supplement. The amount allocable to payments
of principal and interest on any Distribution Date will be
determined as specified in the Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, all
distributions will be made pro rata to Certificateholders of
the class entitled thereto, and the aggregate original
principal balance of the Certificates will equal the aggregate
distributions allocable to principal that such Certificates
will be entitled to receive. If specified in the Prospectus
Supplement, the Certificates will have an aggregate original
principal balance equal to the aggregate unpaid principal
balance of the Mortgage Assets as of a date specified in the
related Prospectus Supplement related to the creation of the
Trust Fund (the "Cut-off Date") and will bear interest in the
aggregate at a rate equal to the interest rate borne by the
underlying Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities, net of the aggregate servicing fees
and any other amounts specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, the aggregate
original principal balance of the Certificates and interest
rates on the classes of Certificates will be determined based
on the cash flow on the Mortgage Assets. The Pass-Through Rate
at which interest will be passed through to holders of
Certificates entitled thereto may be a fixed rate or a rate
that is subject to change from time to time from the time and
for the periods, in each case as specified in the Prospectus
Supplement. Any such rate may be calculated on a loan-by-loan,
weighted average or other basis, in each case as described in
the Prospectus Supplement.
Credit Enhancement ...................... The assets in a Trust Fund or the Certificates of one or more
classes in the related Series may have the benefit of one or
more types of credit enhancement described in the related
Prospectus Supplement. The protection against losses afforded
by any such credit support will be limited. Such credit
enhancement may include one or more of the following types:
A. Subordination............................ The rights of the holders of the Subordinated Certificates of a
Series to receive distributions with respect to the assets in
the related Trust Fund will be subordinated to such rights of
the holders of the Senior Certificates of the same Series to
the extent described in the related Prospectus Supplement. This
subordination is intended to enhance
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the likelihood of regular receipt by holders of Senior
Certificates of the full amount of payments which such holders
would be entitled to receive if there had been no losses or
delinquencies. The protection afforded to the holders of Senior
Certificates of a Series by means of the subordination feature may
be accomplished by (i) the preferential right of such holders to
receive, prior to any distribution being made in respect of the
related Subordinated Certificates, the amounts of principal and
interest due them on each Distribution Date out of the funds
available for distribution on such date in the related Certificate
Account and, to the extent described in the related Prospectus
Supplement, by the right of such holders to receive future
distributions on the assets in the related Trust Fund that would
otherwise have been payable to the Subordinated
Certificateholders; (ii) reducing the ownership interest of the
related subordinated Certificates; (iii) a combination of clauses
(i) and (ii) above; or (iv) as otherwise described in the related
Prospectus Supplement. The protection afforded to the holders of
Senior Certificates of a Series by means of the subordination
feature also may be accomplished by allocating certain types of
losses or delinquencies to the Subordinated Certificates to the
extent described in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the same
class of Certificates may be Senior Certificates with respect to
certain types of payments or certain types of losses or
delinquencies and Subordinated Certificates with respect to other
types of payments or types of losses or delinquencies. If so
specified in the related Prospectus Supplement, subordination may
apply only in the event of certain types of losses not covered by
other forms of credit support, such as hazard losses not covered
by standard hazard insurance policies or losses due to the
bankruptcy of the borrower. If specified in the Prospectus
Supplement, a reserve fund may be established and maintained by
the deposit therein of distributions allocable to the holders of
Subordinated Certificates until a specified level is reached. The
related Prospectus Supplement will set forth information
concerning the amount of subordination of a class or classes of
Subordinated Certificates in a Series, the circumstances in which
such subordination will be applicable, the manner, if any, in
which the amount of subordination will decrease over time, the
manner of funding the related reserve fund, if any, and the
conditions under which amounts in any such reserve fund will be
used to make distributions to holders of Senior Certificates or
released from the related Trust Fund.
B. Reserve Accounts......................... One or more Reserve Accounts may be established and maintained
for each Series. The related Prospectus Supplement will specify
whether or not any such Reserve Account will be included in the
corpus of the Trust Fund for such Series and will also specify
the manner of funding the related Reserve Account and the
conditions under which the amounts in any such Reserve Account
will be used to make distributions to holders of Certificates
of a particular class or released from the related Trust Fund.
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C. Pool Insurance Policy.................... A mortgage pool insurance policy or policies (the "Pool
Insurance Policy") may be obtained and maintained for each
Series pertaining to Single Family Loans, Cooperative Loans or
Contracts, limited in scope, covering defaults on the related
Single Family Loans, Cooperative Loans or Contracts in an
initial amount equal to a specified percentage of the aggregate
principal balance of all Single Family Loans, Cooperative Loans
or Contracts included in the Mortgage Pool as of the Cut-off
Date or such other date as is specified in the related
Prospectus Supplement.
D. Special Hazard Insurance
Policy................................... In the case of Single Family Loans, Cooperative Loans or
Contracts, certain physical risks that are not otherwise
insured against by standard hazard insurance policies may be
covered by a special hazard insurance policy or policies (the
"Special Hazard Insurance Policy"). Unless otherwise specified
in the related Prospectus Supplement, each Special Hazard
Insurance Policy will be limited in scope and will cover losses
in an initial amount equal to the greatest of (i) a specified
percentage of the aggregate principal balance of the Single
Family Loans, Cooperative Loans or Contracts as of the related
Cut-off Date, (ii) twice the unpaid principal balance as of the
related Cut-off Date of the largest Single Family Loan,
Cooperative Loan or Contract in the related Mortgage Pool, or
(iii) the aggregate principal balance of Single Family Loans,
Cooperative Loans or Contracts as of the Cut-off Date secured
by property in any single zip code concentration.
E. Bankruptcy Bond.......................... A bankruptcy bond or bonds (the "Bankruptcy Bond") may be
obtained covering certain losses resulting from action which
may be taken by a bankruptcy court in connection with a Single
Family Loan, Cooperative Loan or Contract. The level of
coverage of each Bankruptcy Bond will be specified in the
related Prospectus Supplement.
F. FHA Insurance and VA
Guarantee................................ All or a portion of the Mortgage Loans in a Mortgage Pool may
be insured by FHA insurance and all or a portion of the Single
Family Loans or Contracts in a Mortgage Pool may be partially
guaranteed by the VA.
G. Other Arrangements....................... Other arrangements as described in the related Prospectus
Supplement including, but not limited to, one or more letters
of credit, financial guaranty insurance policies or third party
guarantees, interest rate or other swap agreements, caps,
collars or floors, may be used to provide coverage for certain
risks of defaults or losses. These arrangements may be in
addition to or in substitution for any forms of credit support
described in the Prospectus. Any such arrangement must be
acceptable to each nationally recognized rating agency that
rates the related Series of Certificates (the "Rating Agency").
H. Cross Support............................ If specified in the Prospectus Supplement, the beneficial
ownership of separate groups of assets or separate Trust Funds
may be
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evidenced by separate classes of the related Series of
Certificates. In such case, credit support may be provided by a
cross-support feature which requires that distributions be made
with respect to certain Certificates evidencing beneficial
ownership of one or more asset groups or Trust Funds prior to
distributions to other Certificates evidencing a beneficial
ownership interest in other asset groups or Trust Funds. If
specified in the Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two
or more separate Trust Funds, without priority among such Trust
Funds, until the credit support is exhausted. If applicable, the
Prospectus Supplement will identify the asset groups or Trust
Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the
application of such coverage to the identified asset groups or
Trust Funds.
Advances................................. Unless otherwise specified in the related Prospectus
Supplement, each Master Servicer and, if applicable, each
mortgage servicing institution that services a Mortgage Loan in
a Mortgage Pool on behalf of a Master Servicer (a
"Sub-Servicer") will be obligated to advance amounts
corresponding to delinquent principal and interest payments on
such Mortgage Loan until the date on which the related
Mortgaged Property is sold at a foreclosure sale or the related
Mortgage Loan is otherwise liquidated. Any such obligation to
make advances may be limited to amounts due holders of Senior
Certificates of the related Series, to amounts deemed to be
recoverable from late payments or liquidation proceeds, for
specified periods or any combination thereof, or as otherwise
specified in the related Prospectus Supplement. See
"Description of the Certificates-Advances." Advances will be
reimbursable to the extent described herein and in the related
Prospectus Supplement.
Optional Termination..................... The Master Servicer, the holders of the residual interests in a
REMIC, or any other entity specified in the related Prospectus
Supplement may have the option to effect early retirement of a
Series of Certificates through the purchase of the Mortgage
Assets and other assets in the related Trust Fund under the
circumstances and in the manner described in "The Pooling and
Servicing Agreement-Termination; Optional Termination."
Legal Investment......................... Unless otherwise specified in the related Prospectus
Supplement, each class of Certificates offered hereby and by
the related Prospectus Supplement will constitute
"mortgage-related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") and, as such,
will be legal investments for certain types of institutional
investors to the extent provided in SMMEA, subject, in any
case, to any other regulations which may govern investments by
such institutional investors. See "Legal Investment."
Institutions whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory
authorities may be subject to restrictions on investment in the
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Certificates. Any such institution should consult its own legal
advisors in determining whether and to what extent there may be
restrictions on its ability to invest in the Certificates. See
"Legal Investment" herein.
Certain Federal Income Tax
Consequences............................. The federal income tax consequences of the purchase, ownership
and disposition of the Certificates of each series will depend
on whether an election is made to treat the corresponding Trust
Fund (or certain assets of the Trust Fund) as a REMIC under the
Internal Revenue Code of 1986, as amended (the "Code").
REMIC. If an election is to be made to treat the Trust Fund for a
series of Certificates as a REMIC for federal income tax purposes,
the related Prospectus Supplement will specify which class or
classes thereof will be designated as regular interests in the
REMIC ("REMIC Regular Certificates") and which class of
Certificates will be designated as the residual interest in the
REMIC ("REMIC Residual Certificates").
For federal income tax purposes, REMIC Regular Certificates
generally will be treated as debt obligations of the Trust Fund
with payment terms equivalent to the terms of such Certificates.
Holders of REMIC Regular Certificates will be required to report
income with respect to such Certificates under an accrual method,
regardless of their normal tax accounting method. Original issue
discount, if any, on REMIC Regular Certificates will be includible
in the income of the Holders thereof as it accrues, in advance of
receipt of the cash attributable thereto, which rate of accrual
will be determined based on a reasonable assumed prepayment rate.
The REMIC Residual Certificates generally will not be treated as
evidences of indebtedness for federal income tax purposes, but
instead, as representing rights to the taxable income or net loss
of the REMIC.
Each holder of a REMIC Residual Certificate will be required to
take into account separately its pro rata 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 deductions, and in
the case of a tax-exempt holder of a REMIC Residual Certificate
will be treated as "unrelated business taxable income". In certain
situations, particularly in the early years of a REMIC, holders of
a REMIC Residual Certificate may have taxable income, and possibly
tax liabilities with respect to such income, in excess of cash
distributed to them. "DISQUALIFIED ORGANIZATIONS," AS DEFINED IN
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES-REMIC RESIDUAL
CERTIFICATES-TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES;
RESTRICTION ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES," ARE
PROHIBITED FROM ACQUIRING OR HOLDING ANY BENEFICIAL INTEREST IN
THE REMIC RESIDUAL CERTIFICATES. In certain cases, a transfer of a
REMIC Residual Certificate will not be effective for Federal
income tax purposes. See "Certain Federal
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Income Tax Consequences-Transfers of REMIC Residual Certificates"
and "-Foreign Investors" herein.
Grantor Trust. If no election is to be made to treat the Trust
Fund for a series of Certificates ("Non-REMIC Certificates") as a
REMIC, the Trust Fund will be classified as a grantor trust for
federal income tax purposes and not as an association taxable as a
corporation. Holders of Non-REMIC Certificates will be treated for
such purposes, subject to the possible application of the stripped
bond rules, as owners of undivided interests in the related
Mortgage Loans and generally will be required to report as income
their pro rata share of the entire gross income (including amounts
paid as reasonable servicing compensation) from the Mortgage Loan
and will be entitled, subject to certain limitations, to deduct
their pro rata share of expenses of the Trust Fund.
Investors are advised to consult their tax advisors and to review
"Certain Federal Income Tax Consequences" herein and, if
applicable, in the related Prospectus Supplement.
ERISA Considerations.......................... A fiduciary of any employee benefit plan or other retirement
plan or arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code should carefully review with its legal advisors
whether the purchase, holding or disposition of Certificates
could give rise to a prohibited transaction under ERISA or the
Code or subject the assets of the Trust Fund to the fiduciary
investment standards of ERISA. See "ERISA Considerations."
</TABLE>
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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 Seller. If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire beneficial
ownership interest in a Trust Fund which will contain a beneficial ownership
interest in another Trust Fund which will contain the Mortgage Assets. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Assets of
any Trust Fund will consist of Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities but not a combination thereof.
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from the Lenders and conveyed by the Seller to the related
Trust Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program-Underwriting Standards."
The following is a brief description of the Mortgage Assets expected to
be included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series will be attached to the Agreement
delivered to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS-GENERAL
The real property and Manufactured Homes, as the case may be, which
secure repayment of the Mortgage Loans (the "Mortgaged Properties") may be
located in any one of the fifty states or the District of Columbia, Guam, Puerto
Rico or any other territory of the United States. Certain Mortgage Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the Prospectus Supplement and described below. Mortgage Loans with
certain Loan-to-Value Ratios (as defined herein) and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly. Unless otherwise specified in the related Prospectus
Supplement, all of the monthly-pay Mortgage Loans in a Mortgage Pool will have
payments due on the first day of each month. The payment terms of the Mortgage
Loans to be included in a Trust Fund will be described in the related Prospectus
Supplement and may include any of the following features or combination thereof
or other features described in the related Prospectus Supplement:
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* 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 borne by the
Certificates of one specific Series and the term "Trust Fund" will refer to
one specific Trust Fund.
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(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for period of
time or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate. Changes to an adjustable rate may be subject
to periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be specified
in the related Prospectus Supplement. Mortgage Loans may provide for the payment
of interest at a rate lower than the Mortgage Rate for a period of time or for
the life of the Mortgage Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged Property or
another source or may be treated as accrued interest added to the principal of
the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments. Certain Mortgage Loans sometimes called graduated payment
mortgage loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of a portion of the interest due monthly during such period,
and recoup the deferred interest through negative amortization whereby
the difference between the scheduled payment of interest and the amount
of interest actually accrued is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
growing equity mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal. Other Mortgage Loans sometimes
referred to as reverse mortgages may provide for monthly payments to
the borrowers with interest and principal payable when the borrowers
move or die. Reverse mortgages typically are made to older persons who
have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers
of the related Mortgaged Property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards
of the Lender.
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then specifically known to the
Seller, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (E.G., one- to
four-family houses, vacation and second homes, Manufactured Homes, multifamily
apartments or other real property), (iii) the original terms to maturity of the
Mortgage Loans, (iv) the largest original principal balance and the smallest
original principal balance of any of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of any of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the Mortgage Rates or APR's or range of
Mortgage Rates or APR's borne by the Mortgage Loans,
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and (viii) the geographical distribution of the Mortgage Loans on a
state-by-state basis. If specific information respecting the Mortgage Loans is
not known to the Seller at the time the related Certificates are initially
offered, more general information of the nature described above will be provided
in the Prospectus Supplement and specific information will be set forth in the
Detailed Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, the "Collateral
Value" of a Mortgaged Property, other than with respect to Contracts and certain
Mortgage Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "Refinance Loan"), is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
Mortgage Loan and (b) the sales price for such property. Unless otherwise
specified in the related Prospectus Supplement, in the case of Refinance Loans,
the Collateral Value of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Collateral Value is no greater than the sum of a fixed percentage of
the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. Unless otherwise
specified in the related Prospectus Supplement, the Collateral Value of a used
Manufactured Home is the least of the sales price, appraised value, and National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building resulting
in an oversupply of rental housing stock or a decrease in employment reducing
the demand for rental units in an area; federal, state or local regulations and
controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness to tenants of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the holders of the Certificates of the related Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Pooling and Servicing Agreement." With respect to Mortgage Loans
serviced by a Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Seller with respect to a Series of Certificates will be
to obtain certain representations and warranties from the Lenders or other third
parties and to assign to the Trustee for such Series of Certificates the
Seller's rights with respect to such representations and warranties. See "The
Pooling and Servicing Agreement-Assignment of Mortgage Assets." The obligations
of each Master Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Agreement
(including its obligation to enforce the obligations of the Sub-Servicers,
Lenders or other
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third parties as more fully described herein under "Mortgage Loan Program -
Representations by Lenders; Repurchases" and "The Pooling and Servicing
Agreement-Sub-Servicing by Lenders," "-Assignment of Mortgage Assets") and its
obligation to make certain cash advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans in the amounts described
herein under "Description of the Certificates-Advances." The obligations of a
Master Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, the Single Family Loans may include
loans or participations therein secured by mortgages or deeds of trust on
condominium units in condominium buildings together with such condominium unit's
appurtenant interest in the common elements of the condominium building. Unless
otherwise specified, the Cooperative Loans will be secured by security interests
in or similar liens on stock, shares or membership certificates issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. Single Family Loans and Cooperative Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, Single Family Loans and Cooperative Loans
will all have individual principal balances at origination of not less than
$25,000 and not more than $1,000,000, and original terms to stated maturity of
15 to 40 years.
The Mortgaged Properties relating to Single Family Loans will consist
of detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. Such loans may be conventional loans or FHA-insured loans, as specified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Multifamily Loans will all have original terms to stated
maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multifamily Loans may
be secured by apartment buildings owned by Cooperatives. The Cooperative owns
all the apartment units in the building and all common areas. The Cooperative is
owned by tenant-stockholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific apartments
or units. Generally, a 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 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.
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CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR. Unless
otherwise specified in the related Prospectus Supplement, Contracts will all
have individual principal balances at origination of not less than $10,000 and
not more than $1,000,000 and original terms to stated maturity of 5 to 40 years.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust Fund, among other things, the date of origination
of the Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios;
the minimum and maximum outstanding principal balances as of the Cut-off Date
and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the related Trust Fund; and the original
maturities of the Contracts and the last maturity date of any Contract.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned
corporate instrumentality of the United States with the United States Department
of Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by FHA under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which
may be issued under either the GNMA I Program or the GNMA II Program) will be a
"fully modified pass-through" mortgaged-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA
Loans. The mortgage loans underlying the GNMA Certificates will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
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The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties or manufactured homes and will provide for the payment by
or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly to
the registered holder of such GNMA Certificate. In the event no payment is made
by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make
such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or Buydown Loans. No statistics comparable
to the FHA's prepayment experience on level payment, non-buydown loans
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are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be
backed by multifamily mortgage loans having the characteristics specified in
such Prospectus Supplement.
The GNMA Certificates included in a Trust fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA CERTIFICATES. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than in its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the 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
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distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than FNMA Certificates backed by pools
containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each FNMA Certificate will be made by FNMA on the 25th
day of each month to the persons in whose name the FNMA Certificate is entered
in the books of the Federal Reserve Banks (or registered on the FNMA Certificate
register in the case of fully registered FNMA Certificates) as of the close of
business on the last day of the preceding month. With respect to FNMA
Certificates issued in book-entry form, distributions thereon will be made by
wire, and with respect to fully registered FNMA Certificates, distributions
thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 30 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group. Under the Guarantor Program, any
such FHLMC Certificate group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a Series of Certificates, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor, published
in the month preceding the month of distribution and the pool factor published
in such month of distribution. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days
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following the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding the
collection of principal after default on the mortgage loans underlying FHLMC
Certificates, including the timing of demand for acceleration, FHLMC reserves
the right to exercise its judgment with respect to the mortgage loans in the
same manner as for mortgage loans which it has purchased but not sold. The
length of time necessary for FHLMC to determine that a mortgage loan should be
accelerated varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be made within any
specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans
underlying a FHLMC Certificate may exceed the pass-through rate on the FHLMC
Certificate by 50 to 100 basis points. Under such program, FHLMC purchases
groups of whole mortgage loans from sellers at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which when
applied to the interest rate of the mortgage loans and participations purchased,
results in the yield (expressed as a percentage) required by FHLMC. The required
yield, which includes a minimum servicing fee retained by the servicer, is
calculated using the outstanding principal balance. The range of interest rates
on the mortgage loans and participations in a FHLMC Certificate group under the
Cash Program will vary since mortgage loans and participations are purchased and
assigned to a FHLMC Certificate group based upon their yield to FHLMC rather
than on the interest rate on the underlying mortgage loans. Under FHLMC's
Guarantor Program, the pass-through rate on a FHLMC Certificate is established
based upon the lowest interest rate on the underlying mortgage loans, minus a
minimum servicing fee and the amount of FHLMC's management and guaranty income
as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as
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trustee, or by another trustee named in the related Prospectus Supplement.
FHLMC, FNMA, GNMA or another government agency or government-sponsored agency
will guarantee each stripped Agency Security to the same extent as such entity
guarantees the underlying securities backing such stripped Agency Security,
unless otherwise specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of Mortgage
Loans, or (b) collateralized mortgage obligations secured by Mortgage Loans.
Private Mortgage-Backed Securities will have been issued pursuant to a PMBS
agreement (the "PMBS Agreement"). The seller/servicer of the underlying Mortgage
Loans will have entered into the PMBS Agreement with the PMBS Trustee under the
PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
Mortgage Loans underlying such Private Mortgage-Backed Security. Mortgage Loans
underlying a Private Mortgage-Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub-servicers who may be subject to the
supervision of the PMBS Servicer. Unless otherwise described in the Prospectus
Supplement, the PMBS Servicer will be a FNMA or FHLMC approved servicer and, if
FHA Loans underlie the Private Mortgage-Backed Securities, approved by the
Department of Housing and Urban Development ("HUD") as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Seller. The obligations of the PMBS Issuer will generally be limited to
certain representations and warranties with respect to the assets conveyed by it
to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the Mortgage Loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property, multifamily
property, Manufactured Homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and the
related shares issued by such Cooperative. Except as otherwise specified in the
related Prospectus Supplement, (i) no Mortgage Loan will have had a
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
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than once in the past 12 months and will not be delinquent as of the Cut-off
Date as to the payment of principal or interest will have been eligible for
inclusion in the assets under the related PMBS Agreement, (v) each Mortgage Loan
(other than a Cooperative Loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each Mortgage
Loan (other than a Cooperative Loan or a Contract secured by a Manufactured
Home) will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Mortgage-Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans which comprise the underlying assets for
the Private Mortgage-Backed Securities including to the extent available (A) the
payment features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, and (D) the minimum and maximum stated maturities
of the underlying Mortgage Loans at origination, (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities, (iv) the
weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Mortgage Loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying Mortgage Loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which Mortgage Loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee to
be incomplete. The period during which such substitution will be permitted
generally will be indicated in the related Prospectus Supplement. The related
Prospectus Supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the Trust
Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the sale
of the Certificates of each Series to repay short-term loans incurred to finance
the purchase of the Mortgage Assets related to such Certificates, to acquire
certain of the Mortgage Assets to be deposited in the related trust Fund, and/or
to pay other expenses connected with pooling Mortgage Assets and issuing
Certificates. Any amounts remaining after such payments may be used for general
corporate purposes. The Seller expects to sell Certificates in Series from time
to time.
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THE SELLER
Bear Stearns Mortgage Securities Inc., the Seller, is a Delaware
corporation organized on October 17, 1991 for the purpose of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller maintains
its principal office at 245 Park Avenue, New York, New York 10167. Its telephone
number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Seller, either
directly or through affiliates, from Lenders. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Loans so acquired by the Seller will
have been originated in accordance with the underwriting criteria specified
below under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Seller or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders or
manufactured home lenders generally during the period of origination. As to any
Mortgage Loan insured by the FHA or partially guaranteed by the VA, the Lender
will represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. In general, a prospective
borrower applying for a Single Family Loan or a Cooperative Loan or for
financing secured by a Manufactured Home is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer) which verification reports the length of employment with
that organization, the current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related Prospectus
Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to Cooperative Loans, the appraisal is based
on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a comparable
Manufactured Home. With respect to a Multifamily Loan, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis, was
used. An appraisal employing the income approach to value analyzes a multifamily
project's cashflow, expenses, capitalization and other operational information
in determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing
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the building less any accrued depreciation. In any case, the value of the
property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts,
once all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a
leasehold interest in a real property, the title to which is held by a third
party lessor, the Lender will represent and warrant, among other things, that
the remaining term of the lease and any sublease is at least five years longer
than the remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase.
QUALIFICATIONS OF LENDERS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will be required to satisfy the qualifications set forth herein. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Unless otherwise
specified in the Prospectus Supplement, each Lender must be a seller/servicer
approved by either FNMA or FHLMC, and each Lender must be a mortgagee approved
by the HUD or an institution the deposit accounts in which are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or
Agreement, each Lender will have made representations and warranties in respect
of the Mortgage Loans sold by such Lender and evidenced by a Series of
Certificates. Such representations and warranties generally include, among other
things: (i) that title insurance (or in the case of Mortgaged Properties located
in areas where such policies are generally not available, an attorney's
certificate of title) in the case of Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first lien on, or a perfected security interest with respect
to, the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Mortgaged Property was free from damage and was in good
repair; (iv) that there were no delinquent tax or assessment liens against the
Mortgaged Property, (v) that no required payment on a Mortgage Loan
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was more than thirty days delinquent; and (vi) that each Mortgage Loan was made
in compliance with, and is enforceable under, all applicable state and federal
laws and regulations in all material respects.
Unless otherwise specified in the related Prospectus Supplement, all of
the representations and warranties of a Lender in respect of a Mortgage Loan
will have been made as of the date on which such Lender sold the Mortgage Loan
to the Seller or one of its affiliates. A substantial period of time may have
elapsed between such date and the date of initial issuance of the Series of
Certificates evidencing an interest in such Mortgage Loan. Since the
representations and warranties of a Lender do not address events that may occur
following the sale of a Mortgage Loan by such Lender, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Mortgage Loan occurs after
the date of sale of such Mortgage Loan by such Lender to the Seller or its
affiliates. If the Master Servicer is also a Lender with respect to a particular
Series, such representations will be in addition to the representations and
warranties, if any, made by the Master Servicer in its capacity as a Master
Servicer.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or the Trustee, if the Master Servicer is the Lender, will
promptly notify the relevant Lender of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Lender cannot
cure such breach within 60 days after notice from the Master Servicer or the
Trustee, as the case may be, then such Lender will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the "Purchase Price") equal
to the unpaid principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month of
repurchase at the Mortgage Rate (less any amount payable as related servicing
compensation if the Lender is the Master Servicer) or such other price as may be
described in the related Prospectus Supplement. Except in those cases in which
the Master Servicer is the Lender, the Master Servicer will be required under
the applicable Agreement to enforce this obligation for the benefit of the
Trustee and the holders of the Certificates, following the practices it would
employ in its good faith business judgment were it the owner of such Mortgage
Loan. This repurchase obligation will constitute the sole remedy available to
holders of Certificates or the Trustee for a breach of representation by a
Lender. Certain rights of substitution for defective Mortgage Loans may be
provided with respect to a Series in the related Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer
is the Lender) will be obligated to purchase a Mortgage Loan if a Lender
defaults on its obligation to do so, and no assurance can be given that Lenders
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under "The Pooling and Servicing Agreement-Assignment of Mortgage Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Certificateholders. In such cases, the third party will
be obligated to purchase a Mortgage Loan upon a breach of such representations
and warranties, and the Lender will not be obligated to purchase a Mortgage Loan
if the third party defaults on its obligation to do so.
The Lender and any third party which conveyed the Mortgage Loans to the
Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the Mortgage
Loans. Any arrangements for the assignment of representations and the repurchase
of Mortgage Loans must be acceptable to the Rating Agency rating the related
Certificates.
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OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer
may, at its option, purchase from the Trust Fund any Mortgage Loan which is
delinquent in payment by 91 days or more. Any such purchase shall be at such
price as may be described in the related Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement,
dated as of the related Cut-off Date, among the Seller, one or more Master
Servicers and the Trustee for the benefit of the holders of the Certificates of
such Series. The provisions of each Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. A form of an Agreement is an exhibit to the Registration Statement
of which this Prospectus is a part. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Certificates will describe any provision of the Agreement relating to
such Series that materially differs from the description thereof contained in
this Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Seller will provide a copy of the Agreement (without exhibits)
relating to any Series without charge upon written request of a holder of a
Certificate of such Series addressed to Bear Stearns Mortgage Securities Inc.,
245 Park Avenue, New York, New York 10167.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the
Certificates of each Series will be issued in fully registered form only, in the
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the Mortgage Assets included in any other Trust Fund established by the Seller.
The Certificates will not represent obligations of the Seller or any affiliate
of the Seller. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the Prospectus
Supplement ("Retained Interest")), (ii) such assets as from time to time are
required to be deposited in the related Protected Account, Certificate Account
or any other accounts established pursuant to the Agreement (collectively, the
"Accounts"); (iii) property which secured a Mortgage Loan and which is acquired
on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure and (iv) any Primary Insurance Policies, FHA insurance (the "FHA
Insurance"), VA guarantees (the "VA Guarantees"), other insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may include one or more of the following: reinvestment income on payments
received on the Mortgage Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a financial guaranty insurance policy, third party guarantees
or similar instruments or other agreements. If provided in the related
Agreement, a certificate administrator may be obligated to perform certain
duties in connection with the administration of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that receive certain preferential
treatment with respect to one or more other classes of Certificates of such
Series. Certain Series or classes of Certificates may he covered by insurance
policies or other forms of credit enhancement, in each case as described herein
and in the related Prospectus Supplement. Distributions on one or more classes
of a Series of Certificates may be made prior to one or more other classes,
after the occurrence of specified events, in accordance with a schedule or
formula, on the basis of collections from designated portions of the Mortgage
Assets in the related Trust Fund or on a different basis, in each
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case, as specified in the related Prospectus Supplement. The timing and amounts
of such distributions may vary among classes or over time as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (I.E, monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the Prospectus
Supplement (each, a "Record Date"). Distributions will be made by check or money
order mailed to the persons entitled thereto at the address appearing in the
register maintained for holders of Certificates (the "Certificate Register") or,
if specified in the related Prospectus Supplement, in the case of Certificates
that are of a certain minimum denomination, upon written request by the
Certificateholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee or other person specified in
the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
DISTRIBUTIONS ON CERTIFICATES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Certificates will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any Reserve
Account and funds received as a result of credit enhancement. As between
Certificates of different classes and as between distributions of interest and
principal and, if applicable, between distributions of prepayments of principal
and scheduled payments of principal, distributions made on any Distribution Date
will be applied as specified in the Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement, distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class.
AVAILABLE FUNDS. All distributions on the Certificates of each Series
on each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust
Fund received by the Master Servicer after the Cut-off Date and on or
prior to the day of the month of the related Distribution Date
specified in the Prospectus Supplement (the "Determination Date")
except:
(a) all payments which were due on or before the
Cut-off Date;
(b) all Liquidation Proceeds, all Insurance Proceeds,
all Principal Prepayments (each defined herein) and all
proceeds of any Mortgage Loan purchased by a Lender or any
other entity pursuant to the Agreement that were received
after the prepayment period specified in the Prospectus
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Supplement and all related payments of interest representing
interest for any period after such prepayment period;
(c) all scheduled payments of principal and interest
due on a date or dates subsequent to the first day of the
month of distribution;
(d) amounts received on particular Mortgage Loans as
late payments of principal or interest or other amounts
required to be paid by the mortgagors (the "Mortgagors"), but
only to the extent of any unreimbursed advance in respect
thereof made by the Master Servicer (including the related
Sub-Servicers);
(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under "Advances"
below, for advances made by the Master Servicer and advances
made by Sub-Servicers that were deposited into the Certificate
Account, and amounts representing reimbursement for certain
other losses and expenses incurred by the Master Servicer or
the Seller and described below or in the related Agreement;
and
(f) that portion of each collection of interest on a
particular Mortgage Loan in such Trust Fund which represents
servicing compensation payable to the Master Servicer or
Retained Interest which is to be retained from such collection
or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans
purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master
Servicer (including Sub-Servicers) as described under "Advances" below
and deposited by it in the Certificate Account; and
(iii) if applicable, amounts withdrawn from a Reserve Account
or received in connection with other credit support.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Current Principal Amount
(defined herein) (or, in the case of Certificates entitled only to distributions
allocable to interest, the aggregate notional principal balance) of each class
of Certificates entitled to interest from the date, at the 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 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
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of interest that accrued on such class of Accrual Certificates during the
preceding interest accrual period but that was not required to be distributed to
such class on such Distribution Date. Any such class of Accrual Certificates
will thereafter accrue interest on its outstanding Current Principal Amount as
so adjusted.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the
Prospectus Supplement, the aggregate "Current Principal Amount" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Current Principal Amount of such class of Certificates specified in the
Prospectus Supplement, reduced by all distributions and losses reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates. The Prospectus Supplement will specify the method by which the
amount of principal to be distributed on the Certificates on each Distribution
Date will be calculated and the manner in which such amount will be allocated
among the classes of Certificates entitled to distributions of principal.
If so provided in the Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in the Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Certificateholders will have the effect
of accelerating the amortization of such Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the Trust Fund.
Increasing the interests of the Subordinated Certificates relative to that of
the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See "Credit
Enhancement-Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the Prospectus Supplement,
the Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in the Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the Prospectus Supplement if, due to substantial payments of
principal (including Principal Prepayments) on the Mortgage Assets, low rates
then available for reinvestment of such payments or both, the Trustee or the
Master Servicer determines, based on the assumptions specified in the Agreement,
that the amount anticipated to be on deposit in the Certificate Account on the
next Distribution Date, together with, if applicable, any amounts available to
be withdrawn from any Reserve Account, may be insufficient to make required
distributions on the Certificates on such Distribution Date. Unless otherwise
specified in the Prospectus Supplement, the amount of any such unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
Certificates on the next Distribution Date. Unless otherwise specified in the
Prospectus Supplement, all unscheduled distributions will include interest at
the applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or funds held in any of the
Accounts for future distributions to the holders of such Certificates), an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
will be recoverable out of late payments by Mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise with respect to the specific Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the Mortgage
Loans.
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In making advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If advances are
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Account on
such Distribution Date would be less than the amount required to be available
for distributions to Certificateholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Mortgage Loans with respect to which such advances were made (E.G.,
late payments made by the related Mortgagor, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Mortgage Loan purchased by a Lender
under the circumstances described hereinabove). Advances by the Master Servicer
(and any advances by a Sub-Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer) from cash otherwise distributable to
Certificateholders (including the holders of Senior Certificates) at such time
as the Master Servicer determines that any such advances previously made are not
ultimately recoverable from the proceeds with respect to the specific Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a specific Mortgage Loan. The Master Servicer also will
be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the
Agreement. If specified in the related Prospectus Supplement, the obligations of
the Master Servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in such
Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
and except as otherwise set forth in an applicable Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Certificateholder of record of the related Series a statement setting forth, to
the extent applicable or material to such Series of Certificates, among other
things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus Supplement,
prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any advance by the Master Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Certificateholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the
amounts distributed to the Senior Certificateholders;
(v) the outstanding Current Principal Amount or notional
principal balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) if applicable, the percentage of principal payments on
the Mortgage Loans, if any, which such class will be entitled to
receive on the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate, the
Pass-Through Rate applicable to the distribution on the Distribution
Date;
(viii) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month and (b) two
or more months;
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(ix) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure, and if such real
estate secured a Multifamily Loan, such additional information as may
be specified in the related Prospectus Supplement; and
(x) if applicable, the amount remaining in any Reserve Account
or the amount remaining of any other credit support, after giving
effect to the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Certificate of the relevant class having a denomination
or interest specified in the related Prospectus Supplement or the report to
Certificateholders. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year and (b) such other customary information as may be deemed
necessary or desirable for Certificateholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates registered
in the name of Cede & Co. ("Cede"), the nominee for The Depository Trust Company
("DTC"). DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code ("UCC")
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Certificateholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the Certificates
from the Trustee through DTC and its Participants. Under a book-entry format,
Certificateholders will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede, as nominee for
DTC, on each such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Certificateholders. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Certificates and is
required to receive and transmit payments of principal of and interest of the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the
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DTC system, or otherwise take actions in respect of such Certificates may be
limited due to the lack of a physical certificate for such Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificateholder under an Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee
of DTC, will be issued in fully registered, certificated form to
Certificateholders or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the events specified in the related Agreement.
Such events may include the following: (i) the Seller advises the Trustee in
writing that DTC is no longer willing or able to properly discharge its
responsibilities as Depository with respect to the Certificates, and the Trustee
or the Seller is unable to locate a qualified successor, (ii) the Seller, at its
option, elects to terminate the book-entry system through DTC, or (iii) after
the occurrence of an Event of Default (defined herein), Certificateholders
representing not less than 50% of the aggregate Current Principal Amount of the
Certificates advise the Trustee and DTC through Participants in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in the best interest of the Certificateholders. Upon the occurrence of
any of the events specified in the related Agreement, DTC will be required to
notify all Participants of the availability through DTC of Definitive
Certificates. Upon surrender by DTC of the certificates representing the
Certificates and instruction for re-registration, the Trustee will issue the
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Certificates will be made by the Trustee directly to Certificateholders in
accordance with the procedures set forth herein and in the Agreement. The final
distribution of any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificates on the final Distribution Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Certificates or with respect to the Mortgage Assets in the
related Trust Fund. Credit enhancement may be in the form of (i) the
subordination of one or more classes of the Certificates of such Series, (ii)
the use of a Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy
Bond, FHA Insurance, VA Guarantees, Reserve Accounts, a letter of credit, a
limited financial guaranty insurance policy, other third party guarantees,
interest rate or other swap agreements, caps, collars or floors, another method
of credit enhancement described in the related Prospectus Supplement, or the use
of a cross-support feature, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, holders of one or more
classes of Certificates will bear their allocable share of deficiencies. If a
form of credit enhancement applies to several classes of Certificates, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Unless otherwise
specified in the Prospectus Supplement, coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Seller if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates.
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SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect
of scheduled principal, Principal Prepayments, interest or any combination
thereof that otherwise would have been payable to one or more classes of
Subordinated Certificates of a Series will instead be payable to holders of one
or more classes of Senior Certificates under the circumstances and to the extent
specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Loans and
losses on defaulted Mortgage Loans will be borne first by the various classes of
Subordinated Certificates and thereafter by the various classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans which must be borne by the Subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Loans or aggregate losses in respect of such Mortgage
Loans were to exceed the total amounts payable and available for distribution to
holders of Subordinated Certificates or, if applicable, were to exceed the
specified maximum amount, holders of Senior Certificates would experience losses
on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee. If so
specified in the Prospectus Supplement, such deposits may be made on each
Distribution Date, on each Distribution Date for specified periods or until the
balance in the Reserve Account has reached a specified amount and, following
payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the Prospectus Supplement, amounts on deposit in
the Reserve Account may be released to the holders of the class of Certificates
specified in the Prospectus Supplement at the times and under the circumstances
specified in the Prospectus Supplement.
If so specified in the Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool of
Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy will
be obtained for the Mortgage Pool and issued by the insurer (the "Pool Insurer")
named in such Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Single Family Loans or Cooperative Loans in the Mortgage Pool in an amount
specified in such Prospectus Supplement. As more fully described below, the
Master Servicer will present claims thereunder to the Pool Insurer on behalf of
itself, the Trustee and the holders of the Certificates. The Mortgage Pool
Insurance Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the Prospectus Supplement, a Pool Insurance Policy will
not cover losses due to a failure to pay or denial of a claim under a Primary
Insurance Policy.
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Unless otherwise specified in the related Prospectus Supplement, each
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Insurance Policy is in effect for the defaulted
Mortgage Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Mortgaged Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Mortgaged Property, it
has been restored to its physical condition (reasonable wear and tear excepted)
at the time of issuance of the policy; and (iv) the insured has acquired good
and merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the Mortgaged Property at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Mortgage Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Certificateholders, or (b) to pay
the amount by which the sum of the principal balance of the defaulted Mortgage
Loan plus accrued and unpaid interest at the Mortgage Rate to the date of
payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under the related Primary
Insurance Policy. If any Mortgaged Property securing a defaulted Mortgage Loan
is damaged and proceeds, if any, from the related hazard insurance policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged Mortgaged Property to a condition sufficient to permit recovery under
the Pool Insurance Policy, the Master Servicer will not be required to expend
its own funds to restore the damaged Mortgaged Property unless it determines
that (i) such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (ii) such expenses will be recoverable by it through proceeds
of the sale of the Mortgaged Property or proceeds of the related Pool Insurance
Policy or any related Primary Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the related Prospectus supplement, an endorsement to the Pool
Insurance Policy, a bond or other credit support may cover fraud in connection
with the origination of Mortgage Loans. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to an event specified
in clause (i) or (ii) above might result in a breach of the related Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan if
the breach cannot be cured by such Lender. No Pool Insurance Policy will cover
(and many Primary Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Certificates by the aggregate dollar amount of
claims paid less the aggregate of the net dollar amounts realized by the Pool
Insurer upon disposition of all foreclosed properties covered thereby. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any Pool
Insurance Policy reach the original policy limit, coverage under that Pool
Insurance Policy will be exhausted and any further losses will be borne by the
Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
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earthquakes and, to a limited extent, tidal waves and related water damage) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a flood
insurance policy if the Mortgaged Property is located in a federally designated
flood area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Pooling and Servicing
Agreement-Hazard Insurance". Each Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is located in
a federally designated flood area), chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by such amount. So long
as a Pool Insurance Policy remains in effect, the payment by the Special Hazard
Insurer of the cost of repair or of the unpaid principal balance of the related
Mortgage Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Certificateholders, but will affect the
relative amounts of coverage remaining under the related Special Hazard
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, since
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Pool Insurance Policy in circumstances in which such recoveries would
otherwise be unavailable because property has been damaged by a cause not
insured against by a standard hazard policy and thus would not be restored, each
Agreement will provide that, if the related Pool Insurance Policy shall have
been terminated or been exhausted through payment of claims, the Master Servicer
will be under no further obligation to maintain such Special Hazard Insurance
Policy.
To the extent specified in the Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account in lieu thereof relating to such
Certificates may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit
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or any other instrument acceptable to each nationally recognized rating agency
rating the Certificates of the related Series in the Trust Fund to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. See
"Certain Legal Aspects of the Mortgage Loans-Anti-Deficiency Legislation and
Other Limitations on Lenders."
To the extent specified in the Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. The
amount of any Bankruptcy Bond or of the deposit to the special trust account in
lieu thereof relating to such Certificates may be reduced so long as any such
reduction will not result in a downgrading of the rating of such Certificates by
any such rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will
be described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a Series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such loan.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted 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 circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor. Such
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or full
satisfaction of amounts due under the Mortgage Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from the
Master Servicer or any Sub-Servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the Mortgage Loan, and
HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When
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entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Master Servicer or Sub-Servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the
Mortgage Loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured Single Family Loan, bears interest
from a date 30 days after the mortgagor's first uncorrected failure to perform
any obligation to make any payment due under the Mortgage and, upon assignment,
from the date of assignment, to the date of payment of the claim, in each case
at the same interest rate as the applicable HUD debenture interest rate as
described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Single Family Loan guaranteed by the VA
will have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 3703(a), as
amended. As of January 1, 1993, the maximum guarantee that may be issued by the
VA under a VA-guaranteed mortgage loan of more than $144,000 is the lesser of
25% of the original principal amount of the mortgage loan and $46,000. The
liability on the guarantee is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guarantee exceed the amount of the original guarantee. The VA
may, at its option and without regard to the guarantee, make full payment to a
mortgage holder of unsatisfied indebtedness on a mortgage upon its assignment to
the VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the
Master Servicer or Sub-Servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such
a mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, a dollar amount per apartment unit established from time to time by
HUD or, at the discretion of the Secretary of HUD, 25% of the value of the
property. In general the loan term may
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not exceed 35 years and a loan to value ratio of no more than 85% is required
for the purchase of a project and 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of interest
from the date of the default.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the Prospectus Supplement will be deposited by the
Master Servicer or Seller on the date specified in the Prospectus Supplement in
one or more Reserve Accounts established with the Trustee. Such cash and the
principal and interest payments on such other instruments will be used to
enhance the likelihood of timely payment of principal of, and interest on, or,
if so specified in the Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust Fund, to pay the
expenses of the Trust Fund or for such other purposes specified in the
Prospectus Supplement. Whether or not the Master Servicer or Seller has any
obligation to make such a deposit, certain amounts to which the Subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Unless otherwise specified in the
Prospectus Supplement, any instrument deposited in the Reserve Account will name
the Trustee, in its capacity as trustee for the holders of the Certificates, as
beneficiary and will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto letters
of credit, financial guaranty insurance policies, third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, paying
administrative expenses, or accomplishing such other purpose as may be described
in the Prospectus Supplement. The Trust Fund may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. If any class of Certificates has
a floating interest rate, or if any of the Mortgage Assets has a floating
interest rate, the Trust Fund may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
CROSS SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund. The Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
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If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided hereby and of the application of such coverage
to the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the
amount and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given
Mortgage Pool will vary depending upon the type of Mortgage Loans included
therein. Each Prospectus Supplement will contain information with respect to the
type and maturities of the Mortgage Loans in the related Mortgage Pool. Unless
otherwise specified in the related Prospectus Supplement, Single Family Loans,
Cooperative Loans and Contracts may be prepaid without penalty in full or in
part at any time. Multifamily Loans may prohibit prepayment for a specified
period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment penalty upon prepayment in full or in part.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans, Cooperative Loans and Contracts will contain
due-on-sale provisions permitting the mortgagee or holder of the Contract to
accelerate the maturity of the Mortgage Loan or Contract upon sale or certain
transfers by the mortgagor or obligor of the underlying Mortgaged Property. As
described in the related Prospectus Supplement, conventional Multifamily Loans
may contain due-on-sale provisions, due-on-encumbrance provisions, or both.
Mortgage Loans insured by the FHA, and Single Family Loans and Contracts
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on such Mortgage Loans may
be lower than that of conventional Mortgage Loans bearing comparable interest
rates. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes that it is entitled to do so under applicable
law; provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Pooling and Servicing Agreement-Collection
Procedures" and "Certain Legal Aspects of the Mortgage Loans" for a description
of certain provisions of each Agreement and certain legal developments that may
affect the prepayment experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative
Loan, the Mortgagor is charged interest on the principal amount of the Mortgage
Loan so prepaid only for the number of days in the month actually elapsed up to
the date of the prepayment rather than for a full month. Similarly, upon
liquidation of a Mortgage Loan, interest accrues on the principal amount of the
Mortgage Loan only for the number of days in the month actually elapsed up to
the date of liquidation rather than for a full month. Unless otherwise specified
in the related Prospectus Supplement, the effect of prepayments in full and
liquidations will be to reduce the amount of interest passed through in the
following month to holders of Certificates because interest on the principal
amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment or liquidation. Interest shortfalls also could result from the
application of the Solders' and Sailors' Civil Relief Act of 1940, as amended,
as described under "Certain Legal Aspects of the Mortgage Loans- Soldiers' and
Sailors' Civil Relief Act" herein. Partial prepayments in a given month may be
applied to the outstanding principal balances of the Mortgage Loans so prepaid
on the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through in such month. Prepayment penalties collected with respect to
Multifamily Loans will be distributed to the holders of Certificates, or to
other persons entitled thereto, as described in the related Prospectus
Supplement.
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Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or another person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust Fund
thereby effecting earlier retirement of the related Series of Certificates. See
"The Pooling and Servicing Agreement-Termination; Optional Termination."
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayment on Single
Family Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the enforcement of due-on-sale clauses and other
servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage loans,
graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage loans.
The rate of prepayment on Multifamily Loans may be affected by other factors,
including Mortgage Loan terms (E.G., the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and the relative tax benefits
associated with the ownership of income-producing real property.
The timing of payments on the Mortgage Assets may significantly affect
an investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on each Mortgage Loan from the
first day of the month, the distribution of such interest will not be made
earlier than a specified date in the month following the month of accrual.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Certificates purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Certificate will yield
its Pass-Through Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Assets at any time or
over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such Certificates.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Certificates of a Series, the Seller will cause the Mortgage Loans comprising
the related Trust Fund to be sold and assigned to the Trustee, together with all
principal and interest received by or on behalf of the Seller on or with respect
to such Mortgage Loans after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date and other than any Retained Interest specified
in the Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Seller in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Agreement. Such schedule will include information as to
the outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate or APR, the current scheduled monthly payment of principal and interest,
the maturity of the loan, the Loan-to-Value Ratio at origination and certain
other information.
In addition, unless otherwise specified in the Prospectus Supplement,
the Seller will deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan, among other things,
(i) the mortgage note or Contract endorsed without recourse in blank or to the
order of the Trustee, (ii) in the case of Single Family Loans or Multifamily
Loans, the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office, in which case the Seller will deliver or cause
to be delivered a copy of such Mortgage together with a certificate that the
original of such Mortgage was or will be delivered to such recording office),
(iii) an assignment of the Mortgage or Contract to the Trustee, which assignment
will be in recordable form in the case of a Mortgage assignment, and (iv) such
other security documents as may be specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, (i)
in the case of Single Family Loans or Multifamily Loans, the Seller or Master
Servicer will promptly cause the assignments of the related Mortgage Loans to be
recorded in the appropriate public office for real property records, except in
the discretion of the Seller in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such loans against the claim of any subsequent transferee
or any successor to or creditor of the Seller or the originator of such loans,
and (ii) in the case of Contracts, the Seller or Master Servicer will promptly
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the
Seller will cause to be delivered to the Trustee (or to the custodian
hereinafter referred to), the related original cooperative note endorsed without
recourse in blank or to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Seller will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Seller, and the Master Servicer will
notify the related Lender. Unless otherwise specified in the related Prospectus
Supplement, if the Lender or an entity which sold the Mortgage Loan to the
Lender cannot cure the omission or defect within 60 days after receipt of such
notice, the Lender or such entity will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price. There can be no assurance
that a Lender or such entity will fulfill this purchase obligation. Although the
Master Servicer may be obligated to
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enforce such obligation to the extent described above under "Mortgage Loan
Program-Representations by Lenders; Repurchases," neither the Master Servicer
nor the Seller will be obligated to purchase such Mortgage Loan if the Lender or
such entity defaults on its purchase obligation, unless such breach also
constitutes a breach of the representations or warranties of the Master Servicer
or the Seller, as the case may be. Unless otherwise specified in the related
Prospectus Supplement, this purchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. Certain rights of substitution for
defective Mortgage Loans may be provided with respect to a Series in the related
Prospectus Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
ASSIGNMENT OF AGENCY SECURITIES. The Seller will cause Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the Certificates.
Each Agency Security will be identified in a schedule appearing as an exhibit to
the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Seller will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund-Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement or
provided in the Agreement, each Master Servicer and Sub-Servicer servicing the
Mortgage Loans will be required to establish and maintain for one or more Series
of Certificates a separate account or accounts for the collection of payments on
the related Mortgage Assets (the "Protected Account"), which must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of such holding company) are rated in one of
the two highest rating categories by each Rating Agency rating the Series of
Certificates, (ii) an account or accounts the deposits in which are fully
insured by the FDIC, (iii) an account or accounts the deposits in which are
insured by the FDIC (to the limits established by the FDIC), and the uninsured
deposits in which are invested in Permitted Investments held in the name of the
Trustee, or (iv) an account or accounts otherwise acceptable to each Rating
Agency. A Protected Account may be maintained as an interest bearing account or
the funds held therein may be invested pending each succeeding Distribution Date
in Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the related Master Servicer or 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;
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(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) to the extent specified in the related Agreement, all proceeds
(net of unreimbursed payments of property taxes, insurance premiums and similar
items ("Insured Expenses") incurred, and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) of the title insurance
policies, the hazard insurance policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation or
foreclosure ("Liquidation Expenses") and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received with
respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "Mortgage Loan Program-Representations by Lenders;
Repurchases" or "-Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described under
"-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or 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.
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SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing
entity may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant to which a Series of Certificates
is issued will provide that, if for any reason the Master Servicer for such
Series of Certificates is no longer the Master Servicer of the related Mortgage
Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but, unless otherwise
specified in the Prospectus Supplement, such Sub-Servicer will remain obligated
under the related Sub-Servicing Agreement. Each Sub-Servicer will be required to
perform the customary functions of a servicer of mortgage loans. Such functions
generally include collecting payments from mortgagors or obligors and remitting
such collections to the Master Servicer; maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of mortgagors or obligors for payment of taxes, insurance
and other items required to be paid by the mortgagor or obligor pursuant to the
related Mortgage Loan; processing assumptions or substitutions, although, unless
otherwise specified in the related Prospectus Supplement, the Master Servicer is
generally required to exercise due-on-sale clauses to the extent such exercise
is permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; maintaining
accounting records relating to the Mortgage Loans; and, to the extent specified
in the related Prospectus Supplement, maintaining additional insurance policies
or credit support instruments and filing and settling claims thereunder. A
Sub-Servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on Mortgage Loans, as described more
fully above under "-Payments on Mortgage Loans; Deposits to Accounts," and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the mortgage note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Mortgage Loans if
the Sub-Servicer elects to release the servicing of such Mortgage Loans to the
Master Servicer. See "-Servic-ing and Other Compensation and Payment of
Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
may terminate a Sub-Servicing Agreement without cause, upon written notice to
the Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter into
new Sub-Servicing Agreements with other sub-servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Lender or meet the standards for becoming a Lender or have such servicing
experience as to be otherwise satisfactory
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to the Master Servicer and the Seller. The Master Servicer will make reasonable
efforts to have the new Sub-Servicer assume liability for the representations
and warranties of the terminated Sub-Servicer, but no assurance can be given
that such an assumption will occur. In the event of such an assumption, the
Master Servicer may in the exercise of its business judgment release the
terminated Sub-Servicer from liability in respect of such representations and
warranties. Any amendments to a Sub-Servicing Agreement or new Sub-Servicing
Agreements may contain provisions different from those which are in effect in
the original Sub-Servicing Agreement. However, each Agreement will provide that
any such amendment or new agreement may not be inconsistent with or violate such
Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with each Agreement and any Pool Insurance
Policy, Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard
Insurance Policy, Bankruptcy Bond or alternative arrangements, follow such
collection procedures as are customary with respect to mortgage loans that are
comparable to the Mortgage Loans. Consistent with the above, the Master Servicer
may, in its discretion, (i) waive any assumption fee, late payment or other
charge in connection with a Mortgage Loan and (ii) to the extent not
inconsistent with the coverage of such Mortgage Loan by a Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, if applicable, arrange with
a Mortgagor a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment or such other
period as is specified in the Agreement. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will, to
the extent it has knowledge of such conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten to
impair any recovery under any related Primary Insurance Policy. If these
conditions are not met or if such Mortgage Loan is insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Mortgage Loan and, to the extent permitted
by applicable law, the mortgagor remains liable thereon; provided, however, that
the Master Servicer will not enter into such an agreement if it would jeopardize
the tax status of the Trust Fund. Any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by or
on behalf of the Master Servicer as additional servicing compensation. In the
case of Multifamily Loans, and unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will agree to exercise any right it
may have to accelerate the maturity of a Multifamily Loan to the extent it has
knowledge of any further encumbrance of the related Mortgaged Property effected
in violation of any due-on-encumbrance clause applicable thereto. See "Certain
Legal Aspects of the Mortgage Loans-Due-on-Sale Clauses." In connection with any
such assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans." This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in
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which such items are allowable as a deduction to the corporation, such Section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders (as defined in Code Section
216(b)(2)). By virtue of this requirement, the status of a corporation for
purposes of Code Section 216(b)(1) must be determined on a year-to-year basis.
Consequently, there can be no assurance that Cooperatives relating to the
Cooperative Loans will qualify under such Section for any particular year. In
the event that such a Cooperative fails to qualify for one or more years, the
value of the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each
Single Family Loan, Multifamily Loan or Contract to maintain a hazard insurance
policy providing for no less than the coverage of the standard form of fire
insurance policy with extended coverage customary for the type of Mortgaged
Property in the state in which such Mortgaged Property is located. Such coverage
will be in an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Mortgage Loans comprising part of a Trust Fund, it will conclusively be deemed
to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or Manufactured
Home securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm
and hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to the
Mortgage Loans may have been underwritten by different insurers under different
state laws in accordance with different applicable forms and therefore may not
contain identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the Mortgaged Property
securing a Mortgage Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss, without
deduction for depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements. Since
the amount of hazard insurance the Master Servicer may cause to be maintained on
the improvements securing the Mortgage Loans declines as the principal balances
owing thereon decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related Prospectus
Supplement, a special hazard insurance policy or an alternative form of credit
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enhancement will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement-Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY INSURANCE POLICIES. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master Servicer will be required not to cancel or
refuse to renew any such Primary Insurance Policy in effect at the time of the
initial issuance of a Series of Certificates that is required to be kept in
force under the applicable Agreement unless the replacement Primary Insurance
Policy for such canceled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. Primary Insurance Policies will not insure
against, and exclude from coverage, a loss sustained by reason of a default
arising from or involving certain matters, including (i) fraud or negligence in
origination or servicing of the Mortgage Loans, including misrepresentation by
the originator, borrower or other persons involved in the origination of the
Mortgage Loan; (ii) failure to construct the Mortgaged Property subject to the
Mortgage Loan in accordance with specified plans; (iii) physical damage to the
Mortgaged Property; and (d) the related Master Servicer not being approved as a
servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY INSURANCE POLICY. As conditions precedent to
the filing of or payment of a claim under a Primary Insurance Policy covering a
Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a
Sub-Servicer, the Sub-Servicer, on behalf of itself, the Trustee and
Certificateholders, will present claims to the Primary Insurer, and all
collections thereunder will
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be deposited in the Protected Account maintained by the Sub-Servicer. In all
other cases, the Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the Primary Insurer under each
Primary Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Insurance Policy and, when the Mortgaged
Property has not been restored, the hazard insurance policy, are to be deposited
in the Protected Account, subject to withdrawal as heretofore described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related hazard insurance policy are insufficient
to restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Insurance Policy, if any, the Master Servicer
is not required to expend its own funds to restore the damaged Mortgaged
Property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of such Mortgage Loan plus interest accrued thereon that is
payable to Certificateholders, the Trust Fund will realize a loss in the amount
of such difference plus the aggregate of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the Master Servicer, exceed the principal
balance of such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Protected Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Protected Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. See "Credit Enhancement."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a
Master Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
described in the Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Mortgage Loan, such amounts will decrease
as the Mortgage Loans amortize. In addition to primary compensation, the Master
Servicer or the Sub-Servicers will be entitled to retain all assumption fees and
late payment charges, to the extent collected from Mortgagors, and, unless
otherwise provided in the related Prospectus Supplement or Agreement, any
prepayment penalties and any interest or other income which may be earned on
funds held in any Accounts. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent
specified in the related Agreement, the Master Servicer will pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment in
certain cases of premiums for insurance policies, guarantees, sureties or other
forms of credit enhancement, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Certificateholders, and payment of certain
other expenses. The Master Servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances. In
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addition, as indicated in the preceding section, the Master Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
any defaulted Mortgage Loan as to which it has determined that all recoverable
Liquidation Proceeds and Insurance Proceeds have been received.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans, agency
securities or private mortgage-backed securities, under pooling and servicing
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Uniform
single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans,
agency securities or private mortgage-backed securities by 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 an
officer of each Master Servicer to the effect that such Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of each Master Servicer may be obtained by Certificateholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that a Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
in certain instances, the Seller nor any director, officer, employee, or agent
of the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer, the Seller nor any such person will be protected against any breach of
warranties or representations made in the Agreement or any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each Agreement will further
provide that the Master Servicer, in certain instances, the Seller and any
director, officer, employee or agent of the Master Servicer or the Seller will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer nor, in certain instances, the Seller will be under any obligation to
appear
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in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Seller may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Certificateholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Seller, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Certificateholders.
Any person into which the Master Servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer is a party, or any person succeeding to the business of the
Master Servicer, will be the successor of the Master Servicer under each
Agreement, provided that such person is qualified to sell mortgage loans to, and
service mortgage loans on behalf of, FNMA or FHLMC and further provided that
such merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of Certificates of such Series
that have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement or
Agreement, "Events of Default" under each Agreement will include (i) any failure
by the Master Servicer to cause to be deposited in the Certificate Account any
amount so required to be deposited pursuant to the Agreement, and such failure
continues unremedied for two business days or such other time period as is
specified in the Agreement; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for sixty days or such
other time period as is specified in the Agreement after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the holders of Certificates of any class evidencing
not less than 25% of the aggregate principal amount or interests ("Percentage
Interests") evidenced by such class; and (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar proceeding
and certain actions by or on behalf of the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the Prospectus Supplement, the Agreement will permit
the Trustee to sell the Mortgage Assets and the other assets of the Trust Fund
in the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only under
the circumstances and in the manner specified in the Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
Except as otherwise specified in the related Agreement, so long as an
Event of Default under an Agreement remains unremedied, the Trustee may, and at
the direction of holders of Certificates evidencing Percentage Interests
aggregating not less than 25% of the principal of the related Trust Fund and
under such circumstances as may be specified in such Agreement, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer under
the Agreement relating to such Trust Fund and in and to the Mortgage Loans,
whereupon, unless otherwise specified in the related Prospectus Supplement, the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement, including, if specified in the
Prospectus Supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, a Mortgage Loan servicing institution with a net worth
of at least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
Except as otherwise specified in the related Agreement, no
Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
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Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
AMENDMENT
Unless otherwise specified in the Prospectus Supplement, each Agreement
may be amended by the Seller, each Master Servicer and the Trustee, without the
consent of any of the Certificateholders, (i) to cure any ambiguity; (ii) to
correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Certificateholder. In addition, to the extent provided in the related Agreement,
an Agreement may be amended without the consent of any of the
Certificateholders, to change the manner in which the Certificate Account, the
Protected Account or any other Accounts are maintained, provided that any such
change does not adversely affect the then current rating on the class or classes
of Certificates of such Series that have been rated. In addition, if a REMIC
election is made with respect to a Trust Fund, the related Agreement may be
amended to modify, eliminate or add to any of its provisions to such extent as
may be necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such qualification.
Unless otherwise specified in the Prospectus Supplement, each Agreement may also
be amended by the Seller, each Master Servicer and the Trustee with consent of
holders of Certificates of such Series evidencing not less than 66% of the
aggregate Percentage Interests of each class affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Certificates; provided, however, that no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Mortgage Assets which are required to be distributed on any
Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any class of holders which
are required to consent to any such amendment without the consent of the holders
of all Certificates of such class covered by such Agreement then outstanding. If
a REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will not
cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in any
Accounts or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the later of (i) the final payment or other liquidation
of the last of the Mortgage Assets subject thereto or the disposition of all
property acquired upon foreclosure or deed in lieu of foreclosure of any such
Mortgage Assets remaining in the Trust Fund and (ii) the purchase by the Master
Servicer or other entity specified in the related Prospectus Supplement
including, if REMIC treatment has been elected, by the holder of the residual
interest in the REMIC (see "Certain Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Mortgage Assets and all
property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any
such purchase of Mortgage Assets and property acquired in respect of Mortgage
Assets evidenced by a Series of Certificates will be made at the option of the
Master Servicer or other entity at a price, and in accordance with the
procedures, specified in the Prospectus Supplement. The exercise of such right
will effect early retirement of the Certificates of that Series, but the right
of the Master Servicer or other entity to so purchase is subject to the
principal balance of the related Mortgage Assets being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Mortgage Assets at the Cut-off Date for the Series. The foregoing
is subject to the provision that if a REMIC election is made with respect to a
Trust Fund, any repurchase pursuant to clause (ii) above will be made only in
connection with a "qualified liquidation" of the REMIC within the meaning of
Section 860F(g)(4) of the Code.
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THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Seller, each Master Servicer and
any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Mortgage Loans. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans is situated. The summaries are
qualified in their entirety by reference to the appropriate laws of the states
in which Mortgage Loans may be originated.
GENERAL
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans.
The Cooperative (i) owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii) leases the land generally by a long-term ground
lease and owns the apartment building. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupants under proprietary leases or occupancy
agreements to which the Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding
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the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust Fund including Cooperative Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
CONTRACTS. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. The
Contracts generally are "chattel paper" as defined in the UCC in effect in the
states in which the Manufactured Homes initially were registered. Pursuant to
the UCC, the rules governing the sale of chattel paper are similar to those
governing the perfection of a security interest in chattel paper. Unless
otherwise specified in the Prospectus Supplement, under the Agreement, the
Seller will transfer or cause the transfer of physical possession of the
Contracts to the Trustee or its custodian. In addition the Seller will make or
cause to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be
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rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. In order to perfect a security
interest in a Manufactured Home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state where
the home is located. These filings must be made in the real estate records
office of the county where the home is located. Generally, Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Seller and transferred to
the Seller.
The Seller will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Seller, the Master Servicer nor the Trustee will amend the certificates of title
to identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Seller or the Lender will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title and the new secured party succeeds to the Seller's rights as the
secured party. However, in some states there exists a risk that, in the absence
of an amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Seller or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Seller and the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for value
of Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee, on behalf of the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
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Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE/REPOSSESSION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Foreclosure of a deed of
trust is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note
or deed of trust. In some states, the trustee must record a notice of default
and send a copy to the borrower-trustor, to any person who has recorded a
request for a copy of any notice of default and notice of sale, to any successor
in interest to the borrower-trustor, to the beneficiary of any junior deed of
trust and to certain other persons. Before such non-judicial sale takes place,
typically a notice of sale must be posted in a public place and published during
a specific period of time in one or more newspapers, posted on the property, and
sent to parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties. When
the mortgagee's right to foreclosure is contested, the legal proceedings
necessary to resolve the issue can be time-consuming. After the completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the Cooperative when the building was so converted.
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COOPERATIVE LOANS. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
CONTRACTS. The Master Servicer on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (I.E., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be
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entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan.
However, some states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
CONTRACTS. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the Master Servicer will not seek deficiency
judgments against defaulting mortgagors. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Certificates and
possible reductions in the aggregate amount of such payments. Some states also
have homestead exemption laws which would protect a principal residence from a
liquidation in bankruptcy.
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Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgagor
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.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's mortgage loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Unless otherwise provided in the applicable Prospectus Supplement, any shortfall
in interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into many
building materials utilized in manufactured and other housing. As a consequence,
lawsuits may arise from time to time asserting claims against manufacturers or
builders of the housing, suppliers of component parts, and related persons in
the distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured
by a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Lender, and the Certificateholders would
suffer a loss only to the extent that (i) the
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Lender breached its obligation to repurchase the Contract in the event an
obligor is successful in asserting such a claim, and (ii) the Lender, the Seller
or the Trustee were unsuccessful in asserting any claim of contribution or
subrogation on behalf of the Certificateholders against the manufacturer or
other persons who were directly liable to the plaintiff for the damages. Typical
products liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities arising from
formaldehyde and certain other chemicals in manufactured housing, with the
result that recoveries from such manufacturers, suppliers or other persons may
be limited to their corporate assets without the benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage
Loans may include installment sales contracts entered into with the builders of
the homes located on the Mortgaged Properties. The Mortgagors in some instances
may have claims and defenses against the builders which could be asserted
against the Trust Fund.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Mortgage Loan became the property of the Trust Fund in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
by statute impose a lien for any Cleanup Costs incurred by such state on the
property that is the subject of such Cleanup Costs (a "Superlien"). All
subsequent liens on such property are subordinated to such Superlien and, in
some states, even prior recorded liens are subordinated to such Superliens. In
the latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereby. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect (or,
in the case of certain regulations, proposed), all of which are subject to
change or possibly differing interpretations. Because tax consequences may vary
based upon the status or tax attributes of the owner of a Certificate,
prospective investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of Certificates. For purposes of this tax discussion
(except with respect to information reporting, or where the context indicates
otherwise), the terms "Certificateholder" and "holder" mean the beneficial owner
of a Certificate and the term "Mortgage Loan" includes Agency Securities and
Private Mortgage-Backed Securities.
REMIC ELECTIONS
Under the 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 REMIC. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election will be made with respect to
the related Trust Fund. To the extent provided in the Prospectus Supplement for
a series, Certificateholders may also have the benefit of a Reserve Account and
of certain agreements (each, a "Yield Supplement Agreement") under which payment
will be made from the Reserve Account in the event that interest accrued on the
Mortgage Loans at their Mortgage Rates is insufficient to pay interest on the
Certificates of such Series (a "Basis Risk Shortfall"). If a REMIC election is
to be made, the Prospectus Supplement will designate the Certificates of such
series or the interests composing such Certificates as "regular interests"
("REMIC Regular Certificates," which where the context so requires includes a
reference to each interest
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composing a Certificate where such interest has been designated as a regular
interest, in lieu of such Certificates) in the REMIC (within the meaning of
Section 860G(a)(l) of the Code) or as the REMIC Residual Certificates in the
REMIC (within the meaning of Section 860G(a)(2) of the Code). The terms "REMIC
Certificates" and "Non-REMIC Certificates" denote, respectively, Certificates
(or the interests composing Certificates) of a series with respect to which a
REMIC election will, or will not, be made. The discussion below is divided into
two parts, the first part applying only to REMIC Certificates and the second
part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will
agree in the Agreement to elect to treat the related Trust Fund or certain
assets of such Trust Fund as a REMIC. Qualification as a REMIC requires ongoing
compliance with certain conditions. Upon the issuance of each series of REMIC
Certificates, Stroock & Stroock & Lavan, counsel to the Seller, will deliver its
opinion generally to the effect that, with respect to each series of REMIC
Certificates for which a REMIC election is to be made, under then existing law,
and assuming a proper and timely REMIC election and ongoing compliance with the
provisions of the Agreement and applicable provisions of the Code and applicable
Treasury regulations, the related Trust Fund or certain assets of such Trust
Fund will be a REMIC and the REMIC Certificates will be considered to evidence
ownership of "regular interests" or "residual interests" within the meaning of
the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series,
holders of REMIC Regular Certificates who are entitled to payments from the
Reserve Account in the event of a Basis Risk Shortfall will be required to
allocate their purchase price between their beneficial ownership interests in
the related REMIC regular interests and Yield Supplement Agreements, and will be
required to report their income realized with respect to each, calculated taking
into account such allocation. In general, such allocation would be based on the
respective fair market values of the REMIC regular interests and the related
Yield Supplement Agreements on the date of purchase of the related REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. Holders of REMIC Regular
Certificates are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the Agreement, holders of
applicable REMIC Regular Certificates will agree that, for federal income tax
purposes, they will be treated as owners of the respective regular interests and
of the corresponding Yield Supplement Agreement.
STATUS OF REMIC CERTIFICATES AS REAL PROPERTY LOANS. The REMIC
Certificates will be "real estate assets" for purposes of Section 856(c)(5)(A)
of the Code and assets described in Section 7701(a)(19)(C) of the Code (assets
qualifying under one or both of those sections, applying each section
separately, "qualifying assets") to the extent that the REMIC's assets are
qualifying assets, but not to the extent that the REMIC's assets consist of
Yield Supplement Agreements. However, if at least 95 percent of the REMIC's
assets are qualifying assets, then 100 percent of the REMIC Certificates will be
qualifying assets. Similarly, income on the REMIC Certificates will be treated
as "interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the limitations of the
preceding two sentences. In addition to Mortgage Loans, the REMIC's assets will
include payments on Mortgage Loans held pending distribution to holders of REMIC
Certificates, amounts in Reserve Accounts (if any), other credit enhancements
(if any), and possibly buydown funds ("Buydown Funds"). The Mortgage Loans will
be qualifying assets under the foregoing sections of the Code except to the
extent provided in the Prospectus Supplement. The regulations under Sections
860A through 860G of the Code (the "REMIC Regulations") treat credit
enhancements as part of the mortgage or pool of mortgages to which they relate,
and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Mortgage Loans and held pending distribution to holders of REMIC
Certificates ("cash flow investments") will be treated as qualifying assets. It
is unclear whether amounts in a Reserve Account or Buydown Funds would also
constitute qualifying assets. The Prospectus Supplement for each series will
indicate (if applicable) that it has Buydown Funds. The REMIC Certificates will
not be "residential loans" for purposes of the residential loan requirement of
Section 593(g)(4)(B) of the Code.
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TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of Certificates, Stroock & Stroock & Lavan will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Agreement and applicable provisions of the Code and applicable Treasury
regulations and rulings, the Tiered REMICs will each qualify under then existing
law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and assets described in Section 7701(a)(19)(C) of the Code, and whether the
income on such Certificates is interest described in Section 856(c)(3)(B) of the
Code, the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
CURRENT INCOME ON REMIC REGULAR CERTIFICATES-GENERAL. Except as
otherwise indicated herein, the REMIC Regular Certificates will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Certificates and not as ownership interests in the
REMIC or the REMIC's assets. Holders of REMIC Regular Certificates who would
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Payments of interest on REMIC Regular Certificates may be based on a
fixed rate, a variable rate as permitted by the REMIC Regulations, or may
consist of a specified portion of the interest payments on qualified mortgages
where such portion does not vary during the period the REMIC Regular Certificate
is outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates-Original Issue
Discount-Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates-Original Issue Discount-Variable Rate REMIC Regular Certificates,"
below, for a discussion of the OID Regulations relating to caps, floors and
similar restrictions. A qualified floating rate, as defined above for purposes
of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies as a
variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate may also have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate
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during one or more payment or accrual periods and different fixed or otherwise
permissible variable rates during other payment or accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Certificates of certain series
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Holders of REMIC Regular Certificates issued with original
issue discount generally must include original issue discount in gross income
for federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust Fund will report original issue discount, if any, to the
holders of REMIC Regular Certificates based on the OID Regulations. OID
Regulations concerning contingent payment debt instruments do not apply to the
REMIC Regular Certificates.
The OID Regulations provide that, in the case of a debt instrument such
as a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations," and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any DE MINIMIS original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
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The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although not entirely free from doubt, such a holder may be entitled to
deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such holder is entitled. It is unclear
whether the Prepayment Assumption is taken into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued
with original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in gross
income, for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular
Certificate which qualifies as "qualified stated interest" for purposes of the
OID Regulations will not be includable in the stated redemption price at
maturity of the REMIC Regular Certificate. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Loans underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
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PAYMENT LAG REMIC REGULAR CERTIFICATES; INITIAL PERIOD CONSIDERATIONS.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the DE
MINIMIS rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is DE MINIMIS, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
VARIABLE RATE REMIC REGULAR CERTIFICATES. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable Rate
REMIC Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified DE MINIMIS
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate, but which is subject to one or more restrictions such
as a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC Regular Certificate that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a Variable
Rate REMIC Regular Certificate will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate REMIC Regular Certificate's term will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one
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year followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate REMIC Regular
Certificate's issue date is intended to approximate the fixed rate, then the
fixed rate and the variable rate together will constitute either a single
qualified floating rate or objective rate, as the case may be (a "Presumed
Single Variable Rate"). If the value of the variable rate and the initial fixed
rate are within 25 basis points of each other as determined on the Variable Rate
REMIC Regular Certificate's issue date, the variable rate will be conclusively
presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a
"variable rate debt instrument" under the OID Regulations and provide for
interest at either a single qualified floating rate, a single objective rate, a
Presumed Single Qualified Floating Rate or a Presumed Single Variable Rate
throughout the term (a "Single Variable Rate REMIC Regular Certificate"),
original issue discount is computed as described in "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates-Original Issue
Discount" based on the following: (i) stated interest on the Single Variable
Rate REMIC Regular Certificate which is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest; (ii) by assuming that the variable rate on
the Single Variable Rate REMIC Certificate is a fixed rate equal to: (a) in the
case of a Single Variable Rate REMIC Regular Certificate with a qualified
floating rate or a qualified inverse floating rate, the value, as of the issue
date, of the qualified floating rate or the qualified inverse floating rate or
(b) in the case of a Single Variable Rate REMIC Regular Certificate with an
objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Certificate; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
under the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC
Regular Certificate") that qualifies as a "variable rate debt instrument" will
be converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. (A Multiple Variable Rate REMIC Regular
Certificate may not bear more than one objective rate.) In the case of a
Multiple Variable Rate REMIC Regular Certificate that qualifies as a "variable
rate debt instrument" and provides for stated interest at a fixed rate in
addition to either one or more qualified floating rates or a qualified inverse
floating rate, the fixed rate is initially converted into a qualified floating
rate (or a qualified inverse floating rate, if the Multiple Variable Rate REMIC
Regular Certificate provides for a qualified inverse floating rate). Under such
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate REMIC Regular Certificate as of the Multiple Variable
Rate REMIC Regular Certificate's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate REMIC Regular Certificate is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amounts of original issue discount and qualified stated interest, if any,
are determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates-Original Issue Discount". A holder of the Multiple Variable
Rate REMIC Regular Certificate will account for such original issue discount and
qualified stated interest as if the holder held the "equivalent"
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fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. It is not clear under current law how a Variable Rate REMIC Regular
Certificate would be taxed if such REMIC Regular Certificate were treated as a
contingent payment debt obligation since the OID Regulations relating to
contingent payment debt obligations do not apply to REMIC regular interests.
INTEREST-ONLY REMIC REGULAR CERTIFICATES. The Trust Fund intends to
report income from interest-only REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
MARKET DISCOUNT. A holder that acquires a REMIC Regular Certificate at
a market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion
of the holder's interest expense on any debt incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Certificate that accrues during the taxable
year in which such interest would otherwise be deductible and, in general, would
be deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate in proportion to the amounts of such principal
distributions, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Holders of REMIC Regular Certificates
should consult their own tax advisors regarding the availability or advisability
of such an election.
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SINGLE-CLASS REMICS. In the case of "single-class REMICs," certain
expenses of the REMIC will be allocated to the holders of the REMIC Regular
Certificates. The deductibility of such expenses may be subject to certain
limitations. See "Deductibility of Trust Fund Expenses" below.
SALES OF REMIC REGULAR CERTIFICATES. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includable in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includable in income under the rules described above
under "Current Income on REMIC Regular Certificates-Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a REMIC Regular Certificate by a bank or other financial
institution to which such section applies would be ordinary income or loss.
TERMINATION. The REMIC will terminate, if not earlier, shortly
following the REMIC's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a REMIC Regular Certificate should
be treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
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The taxable income of the REMIC, for purposes of determining the
amounts taken into account by holders of REMIC Residual Certificates, is
determined in the same manner as in the case of an individual, with certain
exceptions. The accrual method of accounting must be used and the taxable year
of the REMIC must be the calendar year. The basis of property contributed to the
REMIC in exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair market
value of the contributed property by deeming it equal to the aggregate issue
prices of all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the
REMIC. Market discount on any of the Mortgage Loans held by the REMIC must be
included in the income of the REMIC as it accrues, rather than being included in
income only upon sale of the Mortgage Loans or as principal on the Mortgage
Loans is paid. The REMIC is not entitled to any personal exemptions or to
deductions for taxes paid to foreign countries and U.S. possessions, charitable
contributions or net operating losses, or to certain other deductions to which
individuals are generally entitled. Income or loss in connection with a
"prohibited transaction" is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. Although not entirely free from doubt, the related REMIC taxable
income may be recognized when the adjusted issue price of such REMIC Regular
Certificate would exceed the maximum amount of future payments with respect to
such REMIC Regular Certificate. It is unclear whether the Prepayment Assumption
is taken into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that
is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (I.E., the purchase
price of the REMIC Residual Certificate), and will be reduced (but not below
zero) by the holder's share of cash distributions and losses and increased by
its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
MISMATCHING OF INCOME AND DEDUCTIONS; EXCESS INCLUSIONS. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to qualified mortgages, on the one hand,
and the timing of deductions for interest (including original issue discount) on
the REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Loans may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Loans.
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In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Loans (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes of
the original issue discount provisions. Therefore, the Trust Fund will calculate
the taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate
will be subject to certain special rules. The excess inclusions with respect to
a REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset
by other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization
subject to the tax on unrelated business income imposed by Code Section 511, the
excess inclusions will be treated as unrelated business taxable income of such
holder for purposes of Code Section 511. In addition, the Code provides that
under Treasury regulations, if a real estate investment trust ("REIT") owns a
REMIC Residual Certificate, to the extent excess inclusions of the REIT exceed
its real estate investment trust taxable income (excluding net capital gains),
the excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income
it derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a qualified mortgage other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a qualified mortgage or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the qualified mortgages pending distribution on the
REMIC Certificates. In addition, a tax is imposed on the REMIC equal to 100
percent of the value of certain property contributed to the REMIC after its
"startup day." No REMIC in which interests are offered hereunder will accept
contributions that would cause it to be subject to such tax. This provision will
not affect a REMIC's ability in accordance with the Agreement to accept
substitute Mortgage Loans or to sell defective Mortgage Loans.
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A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed
on the Trust Fund initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificates, unless
otherwise specified in the Prospectus Supplement.
DEALERS' ABILITY TO MARK TO MARKET REMIC RESIDUAL CERTIFICATES.
Temporary regulations provide that "negative-value" REMIC Residual Certificates
are not securities and cannot be marked to market pursuant to Section 475 of the
Code (relating to the requirement that dealers in securities mark them to
market). A REMIC Residual Certificate is a negative-value REMIC Residual
Certificate if on the date the dealer acquires the REMIC Residual Certificate
the present value of the anticipated tax liabilities associated with holding the
REMIC Residual Certificate (net of the present value of the tax savings
resulting from losses associated with holding the REMIC Residual Certificate)
exceeds the present value of the expected future distributions on the REMIC
Residual Certificate. Proposed regulations would provide that all REMIC Residual
Certificates acquired on or after January 4, 1995 are not securities and cannot
be marked to market pursuant to Section 475 of the Code.
The anticipated and expected tax consequences and distributions are
determined by taking into account events that have occurred through the date of
acquisition, the Prepayment Assumption and reinvestment assumption adopted when
the residual was created, and by taking account of required liquidations and
required or permitted clean up calls.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although the tax treatment with respect to a REMIC Residual Certificate
that has unrecovered basis after all funds of the Trust Fund have been
distributed is unclear, the holder presumably would be entitled to claim a loss
in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations
(which have not yet been issued), if a holder sells a REMIC Residual Certificate
and acquires the same or other REMIC Residual Certificates, residual interests
in another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event, any
loss realized by the seller on the sale generally will not be currently
deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to
a "disqualified organization." The tax is imposed on the transferor, or, where
the transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions for periods after such transfer with respect to the interest
transferred multiplied by the highest corporate rate of tax. The transferor (or
agent, as the case may be) will be relieved
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of liability so long as the transferee furnishes an affidavit that it is not a
disqualified organization and the transferor or agent does not have actual
knowledge that the affidavit is false. Under the REMIC Regulations, an affidavit
will be sufficient if the transferee furnishes (A) a social security number, and
states under penalties of perjury that the social security number is that of the
transferee, or (B) a statement under penalties of perjury that it is not a
disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF A
REMIC RESIDUAL CERTIFICATE. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear. The preamble to the REMIC Regulations
indicates that the Internal Revenue Service is considering the tax treatment of
these types of residual interests. A transferee of such an interest should
consult its own tax advisors.
RESTRICTIONS ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES. An entity
or segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(I.E., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring the
REMIC Residual Certificate is a disqualified organization. In addition, as to
the requirement that reasonable arrangements be made to ensure that disqualified
organizations do not hold a residual interest in the REMIC, the REMIC
Regulations require that notice of the prohibition be provided either through a
legend on the certificate that evidences ownership, or through a conspicuous
statement in the prospectus or other offering document used to offer the
residual interest for sale. As to the requirement that sufficient information be
made available to calculate the tax on transfers to disqualified organizations
(or the tax, discussed below, on pass-through entities, interests in which are
held by disqualified organizations), the REMIC Regulations further require that
such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Fund Expenses" below. No prediction can be made
regarding whether such legislation or similar legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic
residual interest" will be disregarded for all federal income tax purposes
unless impeding the assessment or collection of tax was not a significant
purpose of the transfer. A residual interest will be treated as a "noneconomic
residual interest" unless, at the time of the transfer (1) the present value of
the expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate, and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions
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from the REMIC, at or after the time at which taxes on such excess inclusion
accrue, sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. Any transferee of a REMIC Residual Certificate must execute and
deliver to the transferor an affidavit containing the representations described
in (ii) above. A different formulation of this rule applies to transfers of
REMIC Residual Certificates by or to foreign transferees. See "Foreign
Investors" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Certificates that is an individual, estate or trust
will be subject to the limitation with respect to certain itemized deductions
described in Code Section 67, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the Master Servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trust Funds with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including REITs), the deductibility of such expenses will be subject to the
limitations described above. The reduction or disallowance of these deductions
may have a significant impact on the yield of REMIC Regular Certificates to such
a holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules.
FOREIGN INVESTORS
REMIC REGULAR CERTIFICATES. Except as discussed below, a holder of a
REMIC Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise
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subject to federal income tax as a result of any direct or indirect connection
to the United States other than through its ownership of a REMIC Regular
Certificate. For these purposes, the term "United States person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate whose income is includable in
gross income for United States federal income taxation regardless of its source,
and (iv) a trust for which one or more United States fiduciaries have the
authority to control all substantial decisions and for which a court of the
United States can exercise primary supervision over the trust's administration.
For years beginning before January 1, 1997, the term "United States person"
shall include a trust whose income is includible in gross income for United
States federal income taxation regardless of source, in lieu of trusts described
in (iv) above, unless the trust elects to have its United States status
determined under the criteria set forth in (iv) above for tax years ending after
August 20, 1996. Proposed Treasury regulations, which would be effective with
respect to payments made after December 31, 1997 if adopted in their current
form, would provide alternative certification requirements and means by which a
holder of REMIC Certificates could claim the exemption from federal income and
withholding tax.
REMIC RESIDUAL CERTIFICATES. The Conference Report to the Tax Reform
Act of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors-Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by a
Trust Fund will not qualify as portfolio interest, although interest on the
Private Mortgage-Backed Securities, other pass-through certificates, or REMIC
regular interests held by a Trust Fund may qualify. In any case, a holder of a
REMIC Residual Certificate will not be entitled to the portfolio interest
exception from the 30% withholding tax (or to any treaty exemption or rate
reduction) for that portion of a payment that constitutes excess inclusions.
Generally, the withholding tax will be imposed when REMIC gross income is paid
or distributed to the holder of a residual interest or there is a disposition of
the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Loans from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale
of REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
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REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and
Schedules Q thereto) must be filed as if the Trust Fund were a partnership for
federal income tax purposes. Information on Schedule Q must be provided to
holders of REMIC Residual Certificates with respect to every calendar quarter.
Each holder of a REMIC Residual Certificate will be required to treat items on
its federal income tax returns consistently with their treatment on the Trust
Fund's information returns unless the holder either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from an incorrect schedule received from the Trust Fund. The Trust Fund also
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination of any adjustments to,
among other things, items of REMIC taxable income by the Internal Revenue
Service. Holders of REMIC Residual Certificates will have certain rights and
obligations with respect to any administrative or judicial proceedings involving
the Internal Revenue Service. Under the Code and Regulations, a REMIC generally
is required to designate a tax matters person. Generally, subject to various
limitations, the tax matters person has authority to act on behalf of the REMIC
and the holders of the REMIC Residual Certificates in connection with
administrative determinations and judicial review respecting returns of taxable
income of the REMIC. Treasury regulations exempt from certain of these
procedural rules REMICs having no more than one residual interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the
extent allowable, the Seller or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the Seller or its
designee will act as the holder's fiduciary in the performance of any duties
required of the holder in the event that the holder is the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made.
TAX STATUS OF THE TRUST FUND. Upon the issuance of each series of
Non-REMIC Certificates, Stroock & Stroock & Lavan, counsel to the Seller, will
deliver its opinion to the effect that, under then current law, assuming
compliance with the Agreement, the related Trust Fund will be classified for
federal income tax purposes as a grantor trust and not as an association taxable
as a corporation or a taxable mortgage pool. Accordingly, each holder of a
Non-REMIC Certificate will be treated for federal income tax purposes as the
owner of an undivided interest in the Mortgage Loans included in the Trust Fund.
As further described below, each holder of a Non-REMIC Certificate therefore
must report on its federal income tax return the gross income from the portion
of the Mortgage Loans that is allocable to such Non-REMIC Certificate and may
deduct the portion of the expenses incurred by the Trust Fund that is allocable
to such Non-REMIC Certificate, at the same time and to the same extent as such
items would be reported by such holder if it had purchased and held directly
such interest in the Mortgage Loans and received directly its share of the
payments on the Mortgage Loans and incurred directly its share of expenses
incurred by the Trust Fund when those amounts are received or incurred by the
Trust Fund.
A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. A holder of a Non-REMIC Certificate
that is not a corporation cannot deduct such expenses for purposes of the
alternative minimum tax (if applicable). Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Loans. As
a result, individuals, estates, or trusts holding Non-REMIC Certificates may
have taxable income in excess of the cash received.
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STATUS OF THE NON-REMIC CERTIFICATES AS REAL PROPERTY LOANS. The
Non-REMIC Certificates generally will be "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code and "loans... secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code, and
interest income on the Non-REMIC Certificates generally will be "interest on
obligations secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. However, the Non-REMIC Certificates may not be
qualifying assets under the foregoing sections of the Code to the extent that
the Trust Fund's assets include Buydown Funds, amounts in a Reserve Account, or
payments on mortgages held pending distribution to Certificateholders. The
Non-REMIC Certificates should not be "residential loans made by the taxpayer"
for purposes of the residential loan requirement of Section 593(g)(4)(B) of the
Code.
TAXATION OF NON-REMIC CERTIFICATES UNDER STRIPPED BOND RULES. The
federal income tax treatment of the Non-REMIC Certificates will depend on
whether they are subject to the rules of section 1286 of the Code (the "stripped
bond rules"). The Non-REMIC Certificates will be subject to those rules if
stripped interest-only Certificates are issued. In addition, whether or not
stripped interest-only Certificates are issued, the Internal Revenue Service may
contend that the stripped bond rules apply on the ground that the Master
Servicer's servicing fee, or other amounts, if any, paid to (or retained by) the
Master Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Mortgage Loans. In Revenue Ruling 91-46, the Internal Revenue Service
concluded that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-REMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-REMIC Certificate will account for any discount on the
Non-REMIC Certificate (other than an interest treated as a "stripped coupon") as
market discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount DE MINIMIS rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates. See "REMIC Regular
Interests-Current Income on REMIC Regular Interests-Original Issue Discount" and
"-Market Discount" above.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Mortgage Loan underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate 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,
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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-REMIC CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY.
If the stripped bond rules do not apply to a Non-REMIC Certificate, then the
holder will be required to include in income its share of the interest payments
on the Mortgage Loans in accordance with its tax accounting method. In addition,
if the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below, as if it had purchased the Mortgage Loans directly. The
treatment of any discount will depend on whether the discount with respect to
the Mortgage Loans is original issue discount as defined in the Code and, in the
case of discount other than original issue discount, whether such other discount
exceeds a DE MINIMIS amount. In the case of original issue discount, the holder
(whether a cash or accrual method taxpayer) will be required to report as
additional interest income in each month the portion of such discount that
accrues in that month, calculated based on a constant yield method. In general
it is not anticipated that the amount of original issue discount to be accrued
in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Loans. However, original issue discount could arise
with respect to a Mortgage Loan ("ARM") that provides for interest at a rate
equal to the sum of an index of market interest rates and a fixed number. The
original issue discount for ARMs generally will be determined under the
principals discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates-Original Issue Discount-Variable Rate REMIC Regular
Certificates."
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
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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-REMIC CERTIFICATES. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a DE
MINIMIS amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
FOREIGN INVESTORS. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-REMIC Certificate to the extent attributable to Mortgage
Loans that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
Proposed Treasury regulations, which would be effective with respect to payments
made after December 31, 1997 if adopted in their current form, would provide
alternative certification requirements and means by which a holder of Non-REMIC
Certificates could claim the exemption from federal income and withholding tax.
Interest or original issue discount on a Non-REMIC Certificate attributable to
Mortgage Loans that were originated prior to July 19, 1984 will be subject to a
30% withholding tax (unless such tax is reduced or eliminated by an applicable
tax treaty). For these purposes, the term "United States person" means a citizen
or a resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, and a trust for
which one or more United States fiduciaries have the authority to control all
substantial decisions and for which a court of the United States can exercise
primary supervision over the trust's administration. For years beginning before
January 1, 1997, the term "United States person" shall include a trust whose
income is includible in gross income for United States federal income taxation
regardless of source, in lieu of trusts just described, unless the trust elects
to have its United States status determined under the criteria described in the
previous sentence for tax years ending after August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as
"taxable mortgage pools" are subject to corporate level tax on their net income.
A "taxable mortgage pool" is generally defined as an entity that meets the
following requirements: (i) the entity is not a REMIC, (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the
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entity holds as assets. With respect to requirement (iii), the Code authorizes
the Internal Revenue Service to provide by regulations that equity interests may
be treated as debt for purposes of determining whether there are two or more
maturities. If a Series of Non-REMIC Certificates were treated as obligations of
a taxable mortgage pool, the Trust Fund would be ineligible to file consolidated
returns with any other corporation and could be liable for corporate tax.
Treasury regulations do not provide for the recharacterization of equity as debt
for purposes of determining whether an entity has issued debt with two
maturities, except in the case of transactions structured to avoid the taxable
mortgage pool rules.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes are imposed upon such
persons by Section 4975 of the Code. The Seller, Bear, Stearns & Co. Inc., each
Master Servicer or other servicer, any Pool Insurer, any Special Hazard Insurer,
the Trustee, and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition, holding or disposition of Certificates by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. Furthermore, if
an investing Plan's assets were deemed to include the Mortgage Assets and not
merely an interest in the Certificates, transactions occurring in the management
of Mortgage Assets might constitute prohibited transactions and the fiduciary
investment standards of ERISA could apply to the assets of the Trust Fund,
unless an administrative exemption applies.
In DOL Regulation ' 2510.3-101 (the "Regulation"), the U.S. Department
of Labor has defined what constitutes Plan assets for purposes of ERISA and
Section 4975 of the Code. The Regulation provides that if a Plan makes an
investment in an "equity interest" in an entity, the assets of the entity will
be considered the assets of such Plan unless certain exceptions apply. The
Seller can give no assurance that the Certificates will qualify for any of the
exceptions under the Regulation. As a result, the Mortgage Assets may be
considered the assets of any Plan which acquires a Certificate, unless some
administrative exemption is available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for
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indemnifying holders of Certificates against reductions in pass-through payments
due to defaults in loan payments or property damage in an amount at least equal
to the greater of 1% of the aggregate principal balance of the Mortgage Loans,
or 1% of the principal balance of the largest covered pooled Mortgage Loan; (ii)
the Trustee may not be an affiliate of the Seller; and (iii) the payments made
to and retained by the Seller in connection with the Trust Fund, together with
all funds inuring to its benefit for administering the Trust Fund, represent no
more than "adequate consideration" for selling the Mortgage Loans, plus
reasonable compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Seller, the Special Hazard Insurer, the Pool
Insurer, the Master Servicer, or other servicer, or the Trustee is a party in
interest if the Plan does not pay more than fair market value for such
Certificate and the rights and interests evidenced by such Certificate are not
subordinated to the rights and interests evidenced by other Certificates of the
same pool. PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the Mortgage
Pool, provided that any payments made to the Master Servicer in connection with
the servicing of the Trust Fund are made in accordance with a binding agreement,
copies of which must be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly approved
by an independent fiduciary who has authority to manage and control those plan
assets being invested in Certificates; (ii) the Plan pays no more for the
Certificates than would be paid in an arm's length transaction; (iii) no
investment management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Seller with regard to the sale, exchange or transfer
of Certificates to the Plan; (iv) the total value of the Certificates purchased
by such Plan does not exceed 25% of the amount issued; and (v) at least 50% of
the aggregate amount of Certificates is acquired by persons independent of the
Seller, the Trustee, the Master Servicer, and the Special Hazard Insurer or Pool
Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust Fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates," and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the following
general categories: single and multifamily residential or commercial mortgages,
motor vehicle receivables, consumer or commercial receivables and guaranteed
government mortgage pool certificates and the purchase, sale and holding of
mortgage-backed or asset- backed pass-through certificates representing
beneficial ownership interests in the assets of such investment trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by certain Plans must be on terms that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party. Second, the rights and interests evidenced by the Certificates must not
be subordinated to the rights and interests evidenced by other certificates of
the same trust. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Structured Rating Group, Moody's Investors Service Inc., Duff & Phelps
Credit Rating Co. or Fitch Investors Services, L.P. ("National Credit Rating
Agencies"). Fourth, the Trustee cannot be an affiliate of any member of the
"Restricted Group" which consists of any underwriter as defined in PTE 90-30,
the Seller, the Master Servicer, each servicer, the
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Pool Insurer, the Special Hazard Insurer and any obligor with respect to
obligations or receivables constituting more than 5% of the aggregate
unamortized principal balance of the obligations or receivables as of the date
of initial issuance of the Certificates. Fifth, the sum of all payments made to
and retained by such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the obligations or
receivables to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any servicer must represent not more than
reasonable compensation for such person's services under the Trust Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, (i) the investment pool consists only of assets of the type enumerated in
the exemption and which have been included in other investment pools; (ii)
certificates evidencing interests in such other investment pools have been rated
in one of the three highest generic rating categories by one of the National
Credit Rating Agencies for at least one year prior to a Plan's acquisition of
certificates; and (iii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to a Plan's acquisition of certificates. Finally, the investing
Plan must be an accredited investor as defined in Rule 501(a)(1) of Regulation D
of the Commission under the Securities Act of 1933, as amended. The Seller
assumes that only Plans which are accredited investors under the federal
securities laws will be permitted to purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the Certificates,
no more than 25% of the assets over which the fiduciary has investment authority
are invested in Certificates of a trust containing assets which are sold or
serviced by the same entity. Finally, in the case of initial issuance (but not
secondary market transactions), at least 50% of each class of Certificates, and
at least 50% of the aggregate interests in the trust, must be acquired by
persons independent of the Restricted Group.
Before purchasing a Certificate in reliance on any of these exemptions
or any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain
prohibited transactions to which neither PTCE 83-1 nor PTE 90-30 is applicable,
depending in part upon the type of Plan fiduciary making the decision to acquire
Certificates and the circumstances under which such decision is made, including,
but not limited to PTCE 90-1 (regarding investments by insurance company pooled
separate accounts), PTCE 91-38 (regarding investments by bank collective
investments funds), PTCE 84-14 (regarding transactions effected by "qualified
professional asset managers"), PTCE 95-60 (regarding investments by insurance
company general accounts) and PTCE 96-23 (regarding transactions effected by
"in-house asset managers"). However, even if the conditions specified in either
of these exemptions are met, the scope of the relief provided by these
exemptions might or might not cover all acts which might be construed as
prohibited transactions.
Any Plan fiduciary considering whether to purchase a Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
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LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement and for
so long as they are rated in one of the two highest rating categories by a least
one nationally recognized statistical rating organization, the Certificates will
constitute "mortgage related securities" for purposes of SMMEA, and as such,
absent state legislation described below, will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that under applicable law obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
the Certificates will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Certain states adopted
legislation which limits the ability of insurance companies domiciled in these
states to purchase mortgage-related securities, such as the Certificates.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with Certificates without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in Certificates, and
national banks may purchase Certificates for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. ss. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review the National Credit Union Administration
("NCUA") Letter to Credit Unions No. 96, as modified by Letter to Credit Unions
No. 108, which included guidelines to assist federal credit unions in making
investment decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Certificates under consideration for purchase constitutes a "mortgage
related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is
not suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
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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 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
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should consult their own legal advisors in determining whether and to what
extent the Certificates constitute legal investments for such investors and
comply with any other applicable requirements.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will
be offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Bear, Stearns & Co. Inc. ("Bear, Stearns"), an affiliate of the Seller,
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Seller. In connection with the
sale of the Certificates, underwriters may receive compensation from the Seller
or from purchasers of the Certificates in the form of discounts, concessions or
commissions. The Prospectus Supplement will describe any such compensation paid
by the Seller.
Alternatively, the Prospectus Supplement may specify that the
Certificates will be distributed by Bear, Stearns acting as agent or in some
cases as principal with respect to Certificates that it has previously purchased
or agreed to purchase. If Bear, Stearns acts as agent in the sale of
Certificates, Bear, Stearns will receive a selling commission with respect to
each Series of Certificates, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the Certificates sold hereunder
as of the Cut-off Date. The exact percentage for each Series of Certificates
will be disclosed in the related Prospectus Supplement. To the extent that Bear,
Stearns elects to purchase Certificates as principal, Bear, Stearns may realize
losses or profits based upon the difference between its purchase price and the
sales price. The Prospectus Supplement with respect to any Series offered other
than through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Seller and purchasers
of Certificates of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Seller anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Seller by Stroock & Stroock & Lavan, Seven Hanover Square, New York, New
York 10004.
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FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates under certain scenarios might fail to recoup
their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
-89-
<PAGE>
GLOSSARY
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
TERM PAGE
Accounts...................................................... 30
APR........................................................... 6
ARM........................................................... 81
Accrual Certificates.......................................... 32
Agency Securities............................................. 1
Agreement..................................................... 9
Available Funds............................................... 31
Basis Risk Shortfall.......................................... 64
Bear, Stearns................................................. 88
Bankruptcy Bond............................................... 12
Buydown Funds ................................................ 65
Buydown Loans................................................. 5
CMO........................................................... 7
Capitalized Interest Account.................................. 9
Cede.......................................................... 35
Certificateholders............................................ 1
Certificate Account........................................... 47
Certificate Register.......................................... 31
Certificates.................................................. 1
Charter Act................................................... 22
Cleanup Costs................................................. 64
Code.......................................................... 14
Collateral Value.............................................. 18
Commission.................................................... 2
Contracts..................................................... 1
Cooperative Loans............................................. 1
Cooperatives.................................................. 4
Current Principal Amount...................................... 33
Cut-off Date.................................................. 10
Definitive Certificates....................................... 36
Detailed Description.......................................... 16
Determination Date............................................ 31
Distribution Dates............................................ 2
DTC........................................................... 35
ERISA......................................................... 15
Events of Default............................................. 54
FDIC.......................................................... 28
FHA........................................................... 4
FHA Insurance................................................. 30
FHA Loans..................................................... 20
FHLMC......................................................... 1
FHLMC Act..................................................... 23
FHLMC Certificate group....................................... 23
FHLMC Certificates............................................ 7
FNMA.......................................................... 1
-90-
<PAGE>
FNMA Certificates............................................. 6
FTC Rule...................................................... 62
GNMA.......................................................... 1
GNMA Certificates............................................. 6
GNMA Issuer................................................... 20
Garn-St Germain Act........................................... 62
Guaranty Agreement............................................ 20
HUD........................................................... 25
Housing Act................................................... 20
Indirect Participant.......................................... 35
Insurance Proceeds............................................ 47
Insured Expenses.............................................. 47
Lender........................................................ 1
LIBOR......................................................... 87
Liquidation Expenses.......................................... 47
Liquidation Proceeds.......................................... 47
Loan-to-Value Ratio........................................... 18
Lower Tier REMIC.............................................. 74
Manufactured Homes............................................ 20
Manufacturer's Invoice Price.................................. 18
Master Servicer............................................... 1
Mortgage...................................................... 45
Mortgage Assets............................................... 1
Mortgage Loans................................................ 4
Mortgage Pool................................................. 4
Mortgage Rate................................................. 5
Mortgaged Property............................................ 16
Mortgagors.................................................... 32
Multifamily Loans............................................. 1
Multiple Variable Rate REMIC Regular Certificate.............. 70
National Credit Rating Agencies............................... 84
NCUA.......................................................... 86
Non-REMIC Certificates........................................ 15
OID Regulations............................................... 66
Participants.................................................. 35
Pass-Through Rate............................................. 2
Plan.......................................................... 83
PMBS Agreement................................................ 25
PMBS Issuer................................................... 8
PMBS Servicer................................................. 8
PMBS Trustee.................................................. 8
Percentage Interests ......................................... 54
Permitted Investments......................................... 42
Policy Statement.............................................. 86
Pool Insurance Policy......................................... 12
Pool Insurer.................................................. 37
Pre-Funding Account........................................... 8
Pre-Funded Amount ............................................ 8
Pre-Funding Period............................................ 8
Prepayment Assumption......................................... 67
Presumed Single Qualified Floating Rate....................... 69
Presumed Single Variable Rate................................. 70
Primary Insurance Policy ..................................... 16
-91-
<PAGE>
Primary Insurer............................................... 51
Principal Prepayments......................................... 33
Private Mortgage-Backed Securities............................ 1
Protected Account............................................. 46
PTCE 83-1..................................................... 83
PTE 90-30..................................................... 84
Purchase Price................................................ 29
REMIC......................................................... 1
REMIC Certificates............................................ 65
REMIC Regular Certificates.................................... 14
REMIC Regulations............................................. 65
REMIC Residual Certificates................................... 14
Rating Agency................................................. 12
Record Date................................................... 31
Refinance Loan................................................ 18
Regulation.................................................... 83
Relief Act.................................................... 63
Reserve Account............................................... 2
Restricted Group.............................................. 84
Retained Interest............................................. 30
RICs ......................................................... 74
REIT ......................................................... 74
SMMEA......................................................... 13
Seller........................................................ 1
Senior Certificates........................................... 9
Single Family Loans........................................... 1
Single Variable Rate REMIC Regular Certificate ............... 70
Special Hazard Insurance Policy............................... 12
Special Hazard Insurer........................................ 38
Sub-Servicer.................................................. 13
Sub-Servicing Agreement....................................... 48
Subordinated Certificates..................................... 9
Superlien..................................................... 64
Tiered REMICs................................................. 66
Title V....................................................... 63
Trust Fund.................................................... 1
Trustee....................................................... 1
UCC........................................................... 35
United States person.......................................... 77
VA............................................................ 4
VA Guarantees................................................. 30
VA Loans...................................................... 20
Variable Rate Non-REMIC Certificates.......................... 81
Variable Rate REMIC Regular Certificate....................... 69
Yield Supplement Agreement.................................... 64
-92-
<PAGE>
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY BSMSI OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
CERTIFICATES OFFERED HEREBY NOR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON, IN
ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms..................................... S-4
<S> <C>
Description of the Certificates...................... S-12
Description of the Pooled Certificates............... S-14
Yield and Prepayment Considerations.................. S-16
The Pooling Agreement................................ S-22
Federal Income Tax Considerations.................... S-25
Certain State Tax Considerations..................... S-26
ERISA Considerations................................. S-26
Legal Investment..................................... S-27
Restrictions on Purchase and Transfer of the Residual
Certificates....................................... S-27
Method of Distribution............................... S-28
Legal Matters........................................ S-28
Certificate Rating................................... S-28
Glossary............................................. S-30
Annex 1 -- Pooled Certificate Information............ 1-1
Annex 2 -- Collateral Information.................... 2-1
PROSPECTUS
Prospectus Supplement................................ 3
Available Information................................ 3
Incorporation of Certain Documents By Reference...... 3
Reports to Certificateholders........................ 4
Summary of Terms..................................... 5
The Trust Fund....................................... 17
Use of Proceeds...................................... 27
The Seller........................................... 27
Mortgage Loan Program................................ 28
Description of the Certificates...................... 31
Credit Enhancement................................... 37
Yield and Prepayment Considerations.................. 43
The Pooling and Servicing Agreement.................. 45
Certain Legal Aspects of the Mortgage Loans.......... 57
Certain Federal Income Tax Consequences.............. 65
ERISA Considerations................................. 84
Legal Investment..................................... 87
Method of Distribution............................... 89
Legal Matters........................................ 89
Financial Information................................ 90
Rating............................................... 90
Glossary............................................. 91
</TABLE>
$82,301,477
(APPROXIMATE)
BEAR STEARNS
MORTGAGE SECURITIES INC.
PASS-THROUGH
CERTIFICATES,
SERIES 1997-2
PROSPECTUS SUPPLEMENT
BEAR, STEARNS & CO. INC.
March 24, 1997
