RULE NO. 424(b)(2)
REGISTRATION NO. 333-13617
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 10, 1996)
$54,672,353
BEAR STEARNS MORTGAGE SECURITIES INC.
PASS-THROUGH CERTIFICATES,
SERIES 1997-3
The Pass-Through Certificates, Series 1997-3 (the "Certificates"), consist
of the Class identified in the chart below. It is a condition to their issuance
that the Certificates receive a rating of "Aaa" from Moody's Investors Service,
Inc. ("Moody's") and a rating of "AAA" from Fitch Investors Service, L.P.
("Fitch"). See "Summary of Terms -- Certificate Rating".
Prospective investors should consider the factors set forth on page S-3 and
under "Yield and Prepayment Considerations."
(cover continued on next page)
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN BSMSI,
THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. THE CERTIFICATES ARE NOT
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, BSMSI OR ANY OF THEIR
AFFILIATES, OR ANY OTHER PERSON. DISTRIBUTIONS ON THE CERTIFICATES WILL BE
PAYABLE SOLELY FROM ASSETS TRANSFERRED OR PLEDGED TO THE TRUST FOR THE
BENEFIT OF THE CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INITIAL PRINCIPAL AMOUNT PASS-THROUGH RATE
Class A-1 $54,672,353 (1)
Certificates
- ---------------
(1) The effective per annum interest rate borne by the Certificates
during each Interest Accrual Period (as defined herein) with
respect to a Distribution Date (as defined herein) will equal a
fraction, expressed as a percentage truncated at the fourth
decimal place, the numerator of which is equal to the aggregate
amount in respect of interest paid to the Certificateholders for
the related Interest Accrual Period multiplied by 12, and the
denominator of which is the principal amount of the Certificates
immediately prior to such Distribution Date. Under certain
circumstances, the principal amount of the Certificates could be
paid in full while interest would remain payable, in which case,
the calculation of the effective per annum interest rate borne by
the Certificates would not be meaningful. The effective per annum
interest rate borne by the Certificates during the first Interest
Accrual Period is projected to be approximately 11.5328%.
The Certificates will be purchased by Bear, Stearns & Co. Inc. (the
"Underwriter") from Bear Stearns Mortgage Securities, Inc. ("BSMSI") and will be
offered by the Underwriter from time to time in negotiated transactions at
varying prices to be determined at the time of sale. Proceeds to BSMSI from the
sale of the Certificates are expected to be approximately 100.4% of the
aggregate principal balance of the Certificates, plus accrued interest thereon
from March 25, 1997 to but not including the Closing Date, but before deducting
expenses payable by BSMSI, estimated to be $200,000.
The Certificates are offered by the Underwriter when, as and if issued,
delivered to and accepted by the Underwriter and subject to certain other
conditions. Delivery of the Certificates is expected to be made in book entry
form only, through the same day funds settlement system of The Depository Trust
Company on or about March 27, 1997.
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 25, 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 all or a
portion of (i) three classes of Guaranteed REMIC Pass-Through Certificates
issued by the Federal National Mortgage Association ("FNMA") representing
beneficial ownership interests in three separate FNMA REMIC Trusts (the "FNMA
REMIC Certificates"), (ii) one class of Stripped Mortgage-Backed Securities
issued by FNMA (the "FNMA SMBS" and together with the FNMA REMIC Certificates,
the "Pooled FNMA Certificates") and (iii) seven classes of Multiclass Mortgage
Securities, Multiclass Mortgage Participation Certificates, or Modifiable and
Combinable REMIC Certificates ("MACRs") issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") as part of six separate series of such securities or
certificates (the "Pooled FHLMC Certificates" and together with the Pooled FNMA
Certificates, the "Pooled Certificates"). The designations used herein for each
Pooled Certificate is set forth under "Description of the Pooled Certificates -
General" and the characteristics of the Pooled Certificates are described herein
under "Description of the Pooled Certificates" and in Annex 1 and Annex 2
attached hereto.
The Pooled FNMA Certificates are guaranteed as to timely distribution of
principal and interest by FNMA, except to the extent set forth under
"Description of the Pooled Certificates - Pooled FNMA 93-246/F Certificates."
The Pooled FHLMC Certificates are guaranteed as to the timely payment of
interest at the rates described herein and the payment of the principal amount
of the Pooled FHLMC Certificates.
The Pooled FNMA Certificates are each one class of four separate series of
FNMA SMBS or FNMA REMIC Certificates (each, an "Underlying FNMA Series") which
represent beneficial ownership interests in separate trusts established by FNMA
(the "Underlying FNMA Trusts"). The assets of the Underlying FNMA Trusts consist
of direct or indirect beneficial ownership interests in certain FNMA MBS and/or
certain "fully modified pass-through" mortgage backed securities ("GNMA
Certificates") guaranteed as to timely payment of principal and interest by the
Government National Mortgage Association. Each FNMA MBS represents a beneficial
ownership interest in a pool of first lien, single-family, fixed rate
residential mortgage loans having the characteristics described herein. Each
GNMA Certificate is based on and backed by a pool of first lien, single-family,
fixed-rate residential mortgage loans (together with the mortgage loans
underlying the FNMA MBS, the "FNMA Mortgages") which are either insured by the
Federal Housing Administration or partially guaranteed by the Department of
Veterans Affairs.
The Pooled FHLMC Certificates are each one class of six separate series of
FHLMC Multiclass Mortgage Securities, Multiclass Mortgage Participation
Certificates, or MACRs (each, an "Underlying FHLMC Series" and together with the
Underlying FNMA Series, each an "Underlying Series") which receive payments from
the cash flows provided by separate groups of FHLMC Gold Mortgage Participation
Certificates ("Gold PCs") and/or FHLMC Gold Giant Mortgage Participation
Certificates ("Gold Giant PCs") or by GNMA Certificates. Underlying the Gold PCs
and Gold Giant PCs are pools of fixed-rate, first lien, residential mortgages
and mortgage participations ("FHLMC Mortgages").
Four classes of the Pooled Certificates are entitled to receive
distributions of or accrue interest on the principal balance or notional
principal balance thereof at fixed rates of interest ("Pooled Fixed Rate
Certificates"). One class of the Pooled Certificates is entitled to receive
distributions of interest on the principal balance thereof based on a formula
that varies directly with the London interbank offered quotations for one-month
Euro dollar deposits ("LIBOR"), subject to minimum and maximum rates and to cash
flows from the securities included in the applicable Underlying FNMA Trust
("Pooled Floating Rate Certificates"). Six classes of the Pooled Certificates
are entitled to receive distributions of interest on the principal or notional
principal balance thereof based on separate formulae that vary inversely with
LIBOR, subject to minimum and maximum rates ("Pooled Inverse Floating Rate
Certificates"). Four of the classes of the Pooled Certificates are "interest
only" certificates ("Pooled IO Certificates"). Two of the classes of the Pooled
FNMA Certificates are accrual classes ("Z Classes").
Distributions of principal and interest on the Certificates with respect to
a month will be made on the 25th day of such month (each, a "Distribution Date")
or, if such day is not a Business Day (as defined herein), then on the next
succeeding Business Day. A "Business Day" means a day other than a Saturday, a
Sunday or a day on which banking institutions in New York, New York or the city
in which the corporate trust office of the Trustee is located are authorized or
obligated by law or executive order to be closed. On each Distribution Date,
holders of Certificates will be entitled to receive interest from funds received
as interest on the Pooled Certificates and principal from funds received as
principal on the Pooled Certificates, as more fully described herein under
"Description of the Certificates".
THE CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE CERTIFICATES UNLESS THE INVESTOR
UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD, LIQUIDITY AND MARKET
RISKS ASSOCIATED WITH THE CERTIFICATES.
The Certificates are complex securities and it is important that each
investor in the Certificates possess, either alone or together with an
investment advisor, the expertise necessary to evaluate the information
contained and incorporated in this Prospectus Supplement in the context of that
investor's financial situation.
The yield to maturity on the Certificates will depend on the purchase price
and the rate and timing of principal payments on the Pooled Certificates which
in turn will be affected by the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) on the FNMA Mortgages and
the FHLMC Mortgages (collectively, the "Mortgage Loans" and with respect to any
Pooled Certificates, the "Underlying Mortgage Loans" or a "Mortgage Pool").
Generally, the Mortgage Loans may be prepaid at any time without penalty. The
yield to maturity on the Certificates will also be sensitive to the level of
LIBOR. Mortgage Loan prepayment rates are likely to fluctuate significantly from
time to time as is the level of LIBOR. Investors should consider the associated
risks, including:
. Low levels of LIBOR can reduce the interest due on the Pooled
Floating Rate Certificates. High levels of LIBOR can
significantly reduce the interest due on the Pooled Inverse
Floating Rate Certificates. Generally, a high level of LIBOR
will have a negative effect on the yield to investors in the
Certificates.
. If the notional principal balances of the Pooled IO
Certificates are reduced to zero (or, alternatively, in the
case of the Pooled Inverse Floating Rate Certificates, if
increased LIBOR levels reduce the interest rate payable on
such certificates to zero), interest payments on the
Certificates will be significantly reduced.
. Slight variations in Mortgage Loan characteristics could
substantially affect the weighted average lives and yields of
the Certificates.
. The Pooled Certificates were issued as parts of different
Underlying Series and the rates of prepayments on the
Underlying Mortgage Loans will be different. Under various
circumstances, including differing prepayment rates of the
Underlying Mortgage Loans, the Pooled FNMA Certificates or
the Pooled FHLMC Certificates could mature at times other
than expected by investors and the Certificates could take on
a cash flow profile different from that expected by
investors. For example, if the Pooled Fixed Rate Certificates
and the Pooled Floating Rate Certificates were to mature
prior to the maturity of one or more of the Pooled Inverse
Floating Rate Certificates, the Certificates would at that
point have the yield characteristics of an inverse floating
rate security.
. If, on any Distribution Date, the amount by which the Z Classes
have accreted exceeds the aggregate distributions of
principal on the other Pooled Certificates, the Class Balance
of the Certificates will be increased by the amount of such
excess.
. The yield to investors in the Certificates can be expected to
decrease to the extent that the notional principal balances
of the Pooled IO Certificates reduce faster than anticipated.
. The yield to maturity of Certificates purchased at a discount
or premium will be more sensitive to the rate and timing of
payments thereon. Holders of Certificates purchased at a
discount (or premium) should consider the risk that a slower
(or faster) than anticipated rate of principal payments to
the Certificates could result in an actual yield that is
lower than the anticipated yield.
To the extent statements contained herein do not relate to historic or
current information, this Prospectus Supplement may be deemed to contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "1934 Act"). Actual results could differ
materially from those projected in such statements as a result of the matters
set forth below, under "Summary of Terms -- Yield and Prepayment Considerations"
and "Yield and Prepayment Considerations" and elsewhere in this Prospectus
Supplement.
There is currently no secondary market for the Certificates and there can
be no assurance that one will develop. The Underwriter intends to establish a
market in the Certificates, but is not obligated to do so. There is no assurance
that any such market, if established, will continue.
No election will be made to treat the Trust or any of its assets as a "real
estate mortgage investment conduit" ("REMIC") for Federal income tax purposes.
Certificates offered by this Prospectus Supplement constitute a separate
series of Certificates being offered by BSMSI pursuant to its Prospectus dated
October 10, 1996, of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full. Prospective investors are also urged to read the documents
relating to the Pooled Certificates described under "Description of the Pooled
Certificates -- Additional Information."
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying prospectus dated October 10, 1996 (the "Prospectus"). A
description of the Pooled Certificates being deposited into the Trust is set
forth under "Description of the Pooled Certificates -- General". Unless
otherwise specified herein, references herein to an amount or percentage of
Pooled Certificates refers to the amount or percentage calculated based on the
aggregate outstanding principal balance or notional principal balance as
reported by the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") with respect to the Underlying Series
(in the case of the Pooled Certificates, other than the Pooled IO Certificates,
"Pooled Certificate Principal Balance") of such Pooled Certificates as of March
25, 1997 in the case of the Pooled FNMA Certificates, except for the Pooled FNMA
97-G2/Z Certificates, which is as of March 17, 1997, and March 15, 1997 in the
case of the Pooled FHLMC Certificates , except for the Pooled FHLMC G003/SA
Certificates, which is as of March 25, 1997, in each case, after giving effect
to distributions made on the Pooled Certificates on or prior to such dates.
Title of Series..................... Pass-Through Certificates, Series
1997-3, Class A-1 (the "Certificates").
Trust................................The Certificates will represent
the entire beneficial ownership
interest in a trust (the "Trust")
formed pursuant to a Pooling Agreement
(the "Agreement") between Bear Stearns
Mortgage Securities Inc., as depositor
("BSMSI" or the "Depositor"), and First
Trust National Association, as trustee
(the "Trustee"). BSMSI is an affiliate
of Bear, Stearns & Co. Inc. (the
"Underwriter"). See "The Seller" in the
Prospectus.
Book-Entry;
Denominations.........................The Certificates will be
registered as a single Certificate held
by a nominee of The Depository Trust
Company ("DTC"), and beneficial
interests will be held by investors
through the book-entry facilities of
DTC in minimum denominations of $25,000
and increments of $1 in excess thereof.
Notwithstanding the foregoing, one
Certificate may be held by investors in
a different denomination to accommodate
the remainder of the initial principal
amount of the Certificates. See
"Description of the Certificates --
Book Entry; Physical Certificates"
herein.
Pooled Certificates..................The Trust will include primarily the
Pooled Certificates, which will consist
of all or a portion of (i) three
classes of Guaranteed REMIC
Pass-Through Certificates issued by
FNMA representing beneficial ownership
interests in three separate FNMA REMIC
Trusts (the "FNMA REMIC Certificates"),
(ii) one class of Stripped Mortgage-
Backed Securities issued by FNMA (the
"FNMA SMBS" and together with the FNMA
REMIC Certificates, the "Pooled FNMA
Certificates") and (iii) seven classes
of Multiclass Mortgage Securities,
Multiclass Mortgage Participation
Certificates, or MACRs issued by FHLMC
as part of six separate series of such
securities or certificates (the "Pooled
FHLMC Certificates" and together with
the Pooled FNMA Certificates, the
"Pooled Certificates"). The
designations used herein for each
Pooled Certificate is set forth under
"Description of the Pooled Certificates
- General" and the characteristics of
the Pooled Certificates are described
herein under "Description of the Pooled
Certificates" and in Annex 1 and Annex
2 attached hereto.
The Pooled FNMA Certificates are
guaranteed as to timely distribution of
principal and interest by FNMA, except
to the extent set forth under
"Description of the Certificates Pooled
FNMA 93- 246/F Certificates." FHLMC
guarantees to the record holder of the
Pooled FHLMC Certificates the timely
payment of interest at the rates
described herein and the payment of the
principal amount of the Pooled FHLMC
Certificates. See "Description of the
Pooled Certificates -- Pooled FHLMC
Certificates - General."
The Pooled FNMA Certificates are each
one class of four separate series of
FNMA SMBS or FNMA REMIC Certificates
(each, an "Underlying FNMA Series")
which represent beneficial ownership
interests in separate trusts
established by FNMA (the "Underlying
FNMA Trusts"). The assets of the
Underlying FNMA Trusts are direct or
indirect beneficial ownership interests
in certain FNMA MBS and certain "fully
modified pass-through" mortgage backed
securities ("GNMA Certificates")
guaranteed as to timely payment of
principal and interest by the
Government National Mortgage
Association ("GNMA"). Each FNMA MBS
represents a beneficial ownership
interest in a pool of first lien,
single-family, fixed rate residential
mortgage loans having the
characteristics described herein. Each
GNMA Certificate is based on and backed
by a Pool of first lien, single-family,
fixed-rate residential mortgage loans
(together with the mortgage loans
underlying the MBS, the "FNMA
Mortgages") which are either insured by
the Federal Housing Administration
("FHA") or partially guaranteed by the
Department of Veterans Affairs ("VA").
See "Description of the Pooled
Certificates" herein for additional
information concerning the FNMA Pooled
Certificates.
The Pooled FHLMC Certificates are
each one class of six separate series
of FHLMC Multiclass Mortgage
Securities, Multiclass Mortgage
Participation Certificates, or MACRs
(each, an "Underlying FHLMC Series"
and, with the Underlying FNMA Series,
each an "Underlying Series") will
receive payments from the cash flows
provided by separate groups of FHLMC
Gold Mortgage Participation
Certificates ("Gold PCs") and/or FHLMC
Gold Giant Mortgage Participation
Certificates ("Gold Giant PCs" ) or by
GNMA Certificates. Underlying the Gold
PCs and Gold Giant PCs are pools of
fixed-rate, first lien, residential
mortgages and mortgage participations
(the "FHLMC Mortgages").
Each Underlying Series was issued
pursuant to a separate agreement (each,
an "Underlying Agreement").
In the case of the Pooled FNMA
Certificates, the distribution date is
the 25th day of each month and, in the
case of the Pooled FNMA 97- G2/Z
Certificates, the distribution date is
the 17th day of each month (in each
case, the "FNMA Pooled Certificate
Distribution Date") and, in the case of
the Pooled FHLMC Certificates, the
distribution date is the 15th day of
each month and, in the case of the
Pooled FHLMC G003/SA Certificates, the
distribution date is the 25th day of
each month (in each case, the "FHLMC
Pooled Certificate Distribution Date"
and, with the FNMA Pooled Certificate
Distribution Date, a "Pooled
Certificate Distribution Date") or if,
in each case, such day is not a
business day as defined in the
applicable Underlying Agreement then
the next succeeding business day, as so
defined in each case.
Four classes of the Pooled
Certificates are entitled to receive
distributions of or accrue interest on
the principal balance or notional
principal balance thereof at fixed
rates of interest ("Pooled Fixed Rate
Certificates"). One class of the Pooled
Certificates is entitled to receive
distributions of interest on the
principal balance thereof based on a
formula that varies directly with the
London interbank offered quotations for
one-month Euro dollar deposits
("LIBOR"), subject to minimum and
maximum rates and to cash flows from
the securities included in the
applicable Underlying FNMA Trust
("Pooled Floating Rate Certificates").
Six classes of the Pooled Certificates
are entitled to receive distributions
of interest on the principal or
notional principal balance thereof
based on separate formulae that vary
inversely with LIBOR, subject to
minimum and maximum rates ("Pooled
Inverse Floating Rate Certificates").
Four of the classes of the Pooled
Certificates are "interest only"
certificates ("Pooled IO
Certificates"). Two of the classes of
Pooled Certificates are Z Classes (as
defined herein).
Annex 2 hereto contains the
Prospectus Supplements for each of the
Pooled FNMA Certificates, except for
the Pooled FNMA 97-G2/Z Certificates,
for which it contains the cover page
and the reference sheet (the
"Underlying FNMA Prospectus
Information"), and the cover page and
terms sheet from the Offering Circular
Supplements for each of the Pooled
FHLMC Certificates (the "Underlying
FHLMC Offering Circular Term Sheets"
and together with the Underlying FNMA
Prospectus Information, the "Underlying
Prospectus Information"). The
Prospectuses underlying the Prospectus
Supplements for each of the Pooled FNMA
Certificates are incorporated herein by
reference, and the Offering Circular
Supplements and the related Offering
Circulars for each of the Pooled FHLMC
Certificates are incorporated herein by
reference. The related Prospectuses and
Offering Circulars are hereinafter
referred to as the "Underlying
Prospectuses." Investors should
purchase Certificates only if they have
read and understood this Supplement,
the Prospectus, the Underlying
Prospectus Information and the other
documents described under "Description
of the Pooled Certificates--Additional
Information."
It should be noted that there have
been material changes in facts and
circumstances since the dates of the
Underlying Prospectus Information,
including changes in prepayment rates,
prevailing interest rates and other
economic factors, which may limit the
usefulness of, and be directly contrary
to the assumptions used in preparing
the information set forth in, such
documents.
Annex 1 hereto sets forth approximate
information for each of the Pooled
Certificates. The tables and the
descriptions of the Pooled Certificates
herein are subject to and qualified by
reference to the provisions of the
Underlying Prospectus Information and
the other documents related to the
Pooled Certificates or the other
mortgage- backed securities issued as
part of the Underlying Series. THE
INFORMATION SET FORTH IN THE TABLES AND
ELSEWHERE HEREIN HAS BEEN DERIVED FROM
FNMA AND FHLMC, BUT SUCH INFORMATION
HAS NOT BEEN INDEPENDENTLY VERIFIED.
THIS INFORMATION COMPRISES ALL MATERIAL
INFORMATION ON THE SUBJECT THAT THE
DEPOSITOR AND THE UNDERWRITER POSSESS
OR CAN ACQUIRE WITHOUT UNREASONABLE
EFFORT AND EXPENSE.
Closing Date......................... On or about March 27, 1997 (the "Closing
Date").
Distribution Dates................... Distributions of principal and
interest on the Certificates with
respect to a month will be made on the
25th day of such month (each, a
"Distribution Date") or, if such day is
not a Business Day (as defined herein),
then on the next succeeding Business
Day. A "Business Day" means a day other
than a Saturday, a Sunday or a day on
which banking institutions in New York,
New York or the city in which the
corporate trust office of the Trustee
is located are authorized or obligated
by law or executive order to be closed.
The first Distribution Date is expected
to be April 25, 1997. In addition, if
the Trustee has not received a
distribution on, or distribution
information with respect to, any of the
Pooled Certificates by noon on the
Distribution Date (the "Determination
Time"), the distribution allocable to
such Pooled Certificates will not be
made on the Distribution Date, but, (i)
if such distribution and such
distribution information are received
by noon on the third Business Day after
the Determination Time, it will be made
on the third Business Day after the
Determination Time (a "Supplemental
Distribution Date") or (ii) if received
after noon on the third Business Day
after the Determination Time, it will
be made on the next succeeding
Distribution Date, and in neither case
will additional interest be paid
thereon.
Record Date..........................Distributions will be made on each
Distribution Date to holders of record
as of the close of business on the last
Business Day of the calendar month
preceding the month in which such
Distribution Date occurs; provided that
for this purpose the Distribution Date
is deemed to occur on the 25th of each
month, without regard to whether such
day is a Business Day (the "Record
Date"). See "Description of the
Certificates -- Distributions of
Interest and Principal."
Original Principal Amount............The initial aggregate principal
amount of the Certificates (the
"Original Principal Balance") will be
equal to the Pooled Certificate
Principal Balance of the Pooled
Certificates following the March 1997
Pooled Certificate Distribution Date.
Distributions of Interest
and Principal........................The effective per annum interest
rate borne by the Certificates during
the one month period beginning on the
25th day of the month preceding the
month of the Distribution Date and
ending on the 24th day of the month of
the Distribution Date (each, an
"Interest Accrual Period") will equal a
fraction, expressed as a percentage
truncated at the fourth decimal place,
the numerator of which is equal to the
aggregate amount in respect of interest
paid to the Certificateholders for the
related Interest Accrual Period
multiplied by 12, and the denominator
of which is the principal amount of the
Certificates immediately prior to such
Distribution Date. Under certain
circumstances, the principal amount of
the Certificates could be paid in full
while interest would remain payable, in
which case, the calculation of the
effective per annum interest rate borne
by the Certificates would not be
meaningful. The effective per annum
interest rate borne by the Certificates
during the first Interest Accrual
Period is projected to be approximately
11.5328%.
On each Distribution Date, holders of
the Certificates will be entitled to
receive interest from funds received as
interest on the Pooled Certificates and
principal from funds received as
principal on the Pooled Certificates,
as more fully described herein under
"Description of the Certificates."
Optional Termination by
the Depositor......................The Trust may be terminated, at
the option of the Depositor on any
Distribution Date on or after the date
on which the aggregate Pooled
Certificate Principal Balance has
declined to 10% or less of the
aggregate Pooled Certificate Principal
Balance on the Closing Date. In such
event, the Certificateholders will
receive the unpaid principal balance of
the Certificates plus accrued interest
thereon [plus, in the case of the
Pooled FNMA 93-246/F Certificates, any
Interest Deficiency (as defined herein)
and interest thereon as described under
"Description of the Pooled Certificates
-- Pooled FNMA 93-246/F Certificates."
See "Description of the Certificates --
Optional Termination."
Mandatory Termination..............The Trust will be terminated on the
Distribution Date following the first
Distribution Date on which the
principal balance or the notional
principal balance of all but one of the
Pooled Certificates has been reduced to
zero and, in the case of the Pooled
FNMA 93- 246/F Certificates, if the
principal balance of such Pooled FNMA
93-246/F Certificates has been reduced
to zero and no further amount is
payable in respect of any Interest
Deficiency and interest thereon. See
"Description of the Certificates --
Mandatory Termination."
Exchange of Certificates...........Beginning on the Distribution Date
in April 1998, holders of a minimum of
10% of the outstanding principal amount
of the Certificates will be entitled to
exchange such Certificates for a pro
rata portion of each of the Pooled
Certificates. Holders of Certificates
to be exchanged will be charged an
exchange fee by the Trustee equal to
the greater of (i) $500 and (ii) 0.02%
of the outstanding principal amount of
such Certificates.
Yield and Prepayment
Considerations.......................General Considerations. The yield
to maturity and weighted average life
of the Certificates will be affected
by, among other things, the amount and
timing of principal and interest
payments, the level of LIBOR, the
payment priorities and other
characteristics of the Pooled
Certificates, the occurrence of an
optional or mandatory termination with
respect to the Pooled Certificates and
the purchase price paid for the
Certificates. In addition to the
discussion below, prospective investors
should review the discussion under
"Yield and Prepayment Considerations"
herein.
Mortgage Loan Prepayments. If
prevailing mortgage rates fall
significantly below the mortgage rates
on the FNMA Mortgages or the FHLMC
Mortgages (collectively, the "Mortgage
Loans" and with respect to any Pooled
Certificates, the "Underlying Mortgage
Loans" or a "Mortgage Pool"), the
Mortgage Loans are likely to be subject
to higher prepayment rates than if
prevailing rates remain at or above the
mortgage rates on the Mortgage Loans.
Other factors affecting prepayments of
Mortgage Loans include changes in
mortgagors' housing needs, job
transfers, unemployment, net equity in
the mortgaged properties and servicing
decisions. The Mortgage Loans may be
prepaid at any time without penalty and
usually have due-on-sale clauses. Since
FNMA and FHLMC guarantee the timely
payment of installments of principal of
and interest on the respective
Underlying Mortgage Loans, losses in
respect of the respective Underlying
Mortgage Loans will have the effect of
a prepayment.
Timing of Payments. The timing and
amount of payments on the Mortgage
Loans may significantly affect an
investor's yield. In general, the
earlier a prepayment of principal on a
Mortgage Loan, the greater will be the
effect on an investor's yield to
maturity. As a result, the effect on an
investor's yield of principal
prepayments occurring at a rate higher
(or lower) than the rate anticipated
during the period immediately following
the issuance of the Certificates will
not be offset by a subsequent like
reduction (or increase) in the rate of
principal prepayments.
Underlying Securities. The Trust
contains Pooled Certificates which were
issued at different times, are backed
by different Mortgage Pools, have
different allocations of principal and
interest among various classes and will
perform differently in various interest
and prepayment rate environments. In
addition, certain of the Pooled
Certificates are backed by underlying
securities that are also unrelated. The
performance characteristics of the
Certificates will reflect a combination
of the performance characteristics of
the Pooled Certificates. As a result,
it may be more difficult to analyze the
likely yield and payment experience of
the Certificates.
Discounts and Premiums. In the case
of any Certificates purchased at a
discount, a slower than anticipated
rate of principal payments to the
Certificates, 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 to the
Certificates, other things being equal,
could result in an actual yield that is
lower than the anticipated yield.
Reinvestment Risk. Since prevailing
interest rates are subject to
fluctuation, there can be no assurance
that investors in the Certificates will
be able to reinvest the distributions
thereon at yields equaling or exceeding
the yield on the Certificates. Yields
on any such reinvestments may be lower,
and may even be significantly lower,
than the yield on the Certificates.
Generally, when prevailing interest
rates increase, prepayment rates on
mortgage loans tend to decrease,
resulting in a reduced return of
principal to investors at a time when
reinvestment at such higher prevailing
rates would be desirable. Conversely,
when prevailing interest rates decline,
prepayment rates on mortgage loans tend
to increase, resulting in a greater
return of principal to investors at a
time when reinvestment at comparable
yields may not be possible. Prospective
investors in the Certificates should
consider the related reinvestment risks
in light of other investments that may
be available to such investors.
Pooled FNMA 93-246/F Certificates. The
amount of interest distributions on the
Pooled FNMA 93-246/F Certificates is
dependent on the level of LIBOR and on
amounts available from cash flows on
the securities held in the Underlying
FNMA REMIC Trust of which the Pooled
FNMA 93-246/F Certificates represent a
beneficial interest. There can be no
assurance as to whether holders of the
Pooled FNMA 93-246/F Certificates will
in the future receive full
distributions of interest at the rate
calculated according to their interest
rate formula on a timely basis or as to
the payment of any of the Interest
Deficiency (as defined herein).
Notional Balances. Four classes of
Pooled Certificates have notional
principal balances which reduce
proportionately with the aggregate
outstanding principal balances of
certain related classes in the same
Underlying Series (the "Related
Certificates"). Accordingly, the amount
and timing of payments on such Pooled
Certificates, and accordingly the yield
on the Certificates, will be sensitive
to the rate and timing of principal
payments on such Related Certificates.
Relatively fast prepayments of the
underlying Mortgages may significantly
shorten, and relatively slow underlying
Mortgage prepayments may significantly
extend, the life of the Related
Certificates and therefore the Pooled
IO Certificates. Generally, a rapid
rate of principal prepayments on the
Mortgages will have a negative effect
on the yield on the Certificates.
Similarly, the exercise of any optional
redemption rights with respect to the
Underlying Series of which any of the
Pooled Certificates are a part may have
a negative effect on the yield on the
Certificates. If the life of any of the
Related Certificates is significantly
shortened, the life of the related
Pooled IO Certificates will be
significantly shortened and the yield
to investors in the Certificates can be
expected to decrease.
LIBOR. The amount of interest payable on the
Pooled Floating Rate Certificates will
be sensitive, and the amount of
interest payable on the Pooled Inverse
Floating Rate Certificates will be
highly sensitive, to the level of
LIBOR. In general, a high level of
LIBOR will reduce the yield to
investors in the Certificates. In
addition, a high rate of principal
payments (including prepayments) on the
Mortgage Loans underlying the Pooled
Inverse Floating Rate Certificates
and/or a high level of LIBOR will have
a materially negative effect on the
amount of interest payable on the
Pooled Inverse Floating Rate
Certificates.
Unrelated Underlying Securities. The assets
of the Trust consist of only the Pooled
FNMA Certificates and the Pooled FHLMC
Certificates. Because each of the
Pooled Certificates were issued as
parts of different Underlying Series,
the rates of prepayment of each of the
Pooled Certificates will be different
from the rates of prepayment on each of
the other Pooled Certificates. Under
various circumstances, the principal
balance or the notional principal
balance of one or more of the Pooled
Certificates could be reduced to zero
prior to the other Pooled Certificates.
In addition, either one or more of the
Pooled Certificates could be
repurchased as described under "The
Pooling Agreement -- Assignment of
Pooled Certificates" or any of the
Underlying Agreements could be
terminated. In such event, the Trust
might consist solely of one or more of
the Pooled FNMA Certificates or one or
more of the Pooled FHLMC Certificates,
or a combination thereof, and investors
would be exposed to the risk that the
Certificates could take on a cash flow
profile different from that expected by
investors. For example, if the Pooled
Fixed Rate Certificates and the Pooled
Floating Rate Certificates were to
mature prior to the maturity of one or
more of the Pooled Inverse Floating
Rate Certificates, the Certificates
would at that point have the yield
characteristics of an inverse floating
rate security.
Liquidity............................There is currently no secondary
market for the Certificates, and there
can be no assurance that one will
develop. The Underwriter intends to
establish a market in the Certificates,
but it is not obligated to do so. There
is no assurance that any such market,
if established, will continue. Each
Certificateholder will receive monthly
reports pertaining to the Certificates
as described under "The Pooling
Agreement -- Reports to
Certificateholders" herein. There are a
limited number of sources which provide
certain information about mortgage
pass-through certificates in the
secondary market; however, there can be
no assurance that any of these sources
will provide information about the
Certificates. Investors should consider
the effect of limited information on
the liquidity of the Certificates.
Certain Federal Income Tax
Consequences.........................No election will be made to treat
the Trust as a real estate mortgage
investment conduit (a "REMIC") for
federal income tax purposes. For
federal income tax purposes, the Trust
will be classified as a grantor trust
under Subpart E, part I of Subchapter J
of the Code and not as a partnership or
as an association taxable as a
corporation. See "Federal Income Tax
Considerations" herein and "Certain
Federal Income Tax Consequences --
Non-REMIC Certificates" in the
Prospectus.
ERISA Considerations.................Fiduciaries of employee benefit
plans subject to Title I of the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should
consider the ERISA fiduciary investment
standards before authorizing an
investment by a plan in the
Certificates. In addition, fiduciaries
of employee benefit plans or other
retirement arrangements (such as
individual retirement accounts or
certain Keogh plans) which are subject
to Title I of ERISA, and/or Section
4975 of the Code, as well as any
entity, including an insurance company
general account, whose underlying
assets include plan assets by reason of
a plan or account investing in such
entity (collectively, "Plan(s)"),
should consult with their legal counsel
to determine whether an investment in
the Certificates will cause the assets
of the Trust ("Trust Assets") to be
considered plan assets pursuant to the
plan asset regulations set forth in 29
C.F.R. ' 2510.3-101, thereby subjecting
the Plan to the prohibited transaction
rules with respect to the Trust Assets
and the Trustee to the fiduciary
investment standards of ERISA, or cause
the excise tax provisions of Section
4975 of the Internal Revenue Code of
1986, as amended (the "Code") to apply
to the Trust Assets, unless some
exemption granted by the Department of
Labor applies to the acquisition,
holding or transfer of the
Certificates.
Subject to the considerations set
forth under "ERISA Considerations"
herein and in the Prospectus, the
purchase or holding of the Certificates
by, on behalf of, or with plan assets
of, a Plan may qualify for exemptive
relief under Prohibited Transaction
Exemption 90-30.
Legal Investment.....................Institutions whose investment
activities are subject to legal
investment laws and regulations or to
review by certain regulatory
authorities may be subject to
restrictions on investment in the
Certificates. Any such institution
should consult its legal advisors in
determining whether and to what extent
there may be restrictions on its
ability to invest in the Certificates.
The Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). See "Legal Investment"
herein and in the Prospectus.
Rating...............................As a condition of their issuance,
the Certificates will be rated "Aaa" by
Moody's and "AAA" by Fitch. Moody's and
Fitch are referred to herein as the
"Rating Agencies."
The ratings of the Certificates should
be evaluated independently from similar
ratings on other types of securities. A
rating is not a recommendation to buy,
sell or hold securities and may be
subject to revision or withdrawal at
any time by the rating Agencies. See
"Ratings" herein.
BSMSI has not requested a rating
of the Certificates by any rating
agency other than the Rating Agencies.
However, there can be no assurance as
to whether any other rating agency will
rate the Certificates or, if it does,
what rating would be assigned by such
other rating agency. The rating
assigned by such other rating agency to
the Certificates could be lower than
the respective ratings assigned by the
Rating Agencies.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the Certificates
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the Prospectus and the provisions of the Agreement
relating to the Certificates offered hereby.
BOOK ENTRY; PHYSICAL CERTIFICATES
The Certificates will be represented by a single certificate registered in
the name of Cede & Co. ("Cede") as the nominee of DTC, and beneficial interests
therein will be held by investors through the book-entry facilities of DTC, in
minimum denominations of $25,000 and increments of $1 in excess thereof, except
that one Certificate may be held by investors in a different denomination. The
Certificate registered in the name of Cede can be held in physical certificate
form by investors only if (i) BSMSI advises the Trustee in writing that DTC is
no longer willing or able to discharge properly its responsibilities as
depository with respect to the Certificates and BSMSI is unable to locate a
qualified successor within 30 days or (ii) BSMSI, at its option, elects to
terminate the book-entry system through DTC.
With respect to the Certificate registered in the name of Cede, all
references herein to actions by holders of the Certificates shall refer to
actions taken by DTC upon instructions from its participants, and all references
herein to distributions, notices, reports and statements to holders of the
Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the case may be, for distribution to the beneficial owners of
the Certificates in accordance with DTC procedures. Because DTC can only act on
behalf of participants, who in turn act on behalf of indirect participants and
certain banks, the ability of a beneficial owner of a Certificate to pledge such
Certificate to persons or entities who do not participate in the DTC system may
be limited. In addition, beneficial owners of Certificates held through DTC may
experience delays in the receipt of distributions on such Certificates. The book
entry procedures of DTC are more fully described under "Description of the
Certificates -- Book-Entry Registration" in the Prospectus.
Certificates in physical certificate form will be transferable and
exchangeable on a "Certificate Register" to be maintained by the Trustee at the
office or agency of the Trustee maintained for that purpose in St. Paul,
Minnesota. Certificates surrendered to the Trustee for registration of transfer
or exchange must be accompanied by a written instrument of transfer in form
satisfactory to the Trustee. No service charge will be made for any registration
of transfer or exchange of Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required. Such office or
agency of the Trustee is currently located at 180 East 5th Street, St. Paul,
Minnesota 55101.
PAYMENTS OF INTEREST AND PRINCIPAL
Distributions of principal and interest on the Certificates with respect to
a month will be made on the 25th day of such month (each, a "Distribution Date")
or, if such day is not a Business Day (as defined below) then on the next
succeeding Business Day. A "Business Day" means a day other than a Saturday, a
Sunday or a day on which banking institutions in New York, New York or St. Paul,
Minnesota, the city in which the corporate trust office of the Trustee is
located, are authorized or obligated by law or executive order to be closed. The
first Distribution Date is expected to be April 25, 1997. In addition, if the
Trustee has not received a distribution on, or distribution information with
respect to, any of the Pooled Certificates by noon on the Distribution Date (the
"Determination Time"), the distribution allocable to such Pooled Certificates
will not be made on such Distribution Date, but (i) if such distribution and
such distribution information are received by noon on the third Business Day
after the Determination Time, it will be made on the third Business Day after
the Determination Time (a "Supplemental Distribution Date") or (ii) if received
after noon on the third Business Day after the Determination Time, it will be
made on the next succeeding Distribution Date, and in neither case will
additional interest be paid thereon. Notwithstanding the foregoing, for
accounting purposes, each Distribution Date is deemed to occur in the same month
as the concurrent or immediately preceding Pooled Certificate Distribution Date.
Distributions will be made on each Distribution Date to holders of record
as of the close of business on the last Business Day of the calendar month
preceding the month in which such Distribution Date occurs; provided that for
this purpose the Distribution Date is deemed to occur on the 25th of each month,
without regard to whether such day is a Business Day (the "Record Date").
The effective per annum interest rate borne by the Certificates during the
one month period beginning on the 25th day of the month preceding the month of
the Distribution Date and ending on the 24th day of the month of the
Distribution Date (each, an "Interest Accrual Period") will equal a fraction,
expressed as a percentage truncated at the fourth decimal place, the numerator
of which is equal to the aggregate amount in respect of interest paid to
Certificateholders for the related Interest Accrual Period, multiplied by 12,
and the denominator of which is the principal amount of the Certificates
immediately prior to such Distribution Date. Under certain circumstances, the
principal amount of the Certificates could be paid in full while interest would
remain payable, in which case, the calculation of the effective per annum
interest rate borne by the Certificates would not be meaningful. The effective
per annum interest rate borne by the Certificates during the first Interest
Accrual Period is projected to be approximately 11.5328%.
On each Distribution Date, holders of the Certificates will be entitled to
receive interest from funds received as interest and, to the extent described
below, principal on the Pooled Certificates, and principal from funds received
as principal on the Pooled Certificates.
The Trustee will cause all distributions received on the Pooled
Certificates by the Trustee in its capacity as holder of the Pooled
Certificates, from whatever source, to be deposited directly into one or more
accounts held in trust by the Trustee for the benefit of the Certificateholders
(such accounts referred to collectively herein as the "Certificate Account").
On each Distribution Date, the Trustee will apply the Available Funds (as
defined herein) on deposit in the Certificate Account as of such Distribution
Date, in the following manner and order of priority:
first, from amounts with respect to interest received on the Pooled
Certificates, to the Trustee, to pay the portion of the Trustee Fee not being
covered by a withdrawal from the Trustee Fee Escrow Account (as defined herein)
and, after payment of the Trustee Fee, to deposit the Escrow Amount (as defined
herein) in the Trustee Fee Escrow Account;
second, from amounts with respect to principal received on the Pooled
Certificates, to the Certificateholders, an amount with respect to principal, if
any, such that the principal balance of the Certificates after such distribution
is equal to the aggregate balance of the Pooled Certificates; and
third, from the remaining Available Funds, to the Certificateholders as
interest.
"Available Funds" means, as of any Distribution Date, the aggregate
amount on deposit in the Certificate Account.
The "Trustee Fee" means, with respect to any Distribution Date, the
monthly fee equal to 1/12th of the product of 0.0175% and the Certificate
Balance immediately prior to the Distribution Date, but not less than $300 with
respect to any Distribution Date. In addition, an amount equal to 1/12th of the
product of .0025% and the Certificate Balance immediately prior to each
Distribution Date (the "Escrow Amount") will be deposited by the Trustee in a
separate escrow account (the "Trustee Fee Escrow Account'). The Trustee Fee
Escrow Account will not be part of the Trust. Any amount deposited in the
Trustee Fee Escrow Account will be permitted to be invested as described in the
Agreement. If on any Distribution Date, the Trustee Fee exceeds the amount of
interest received on the Pooled Certificates for such Distribution Date, the
Trustee shall withdraw the amount of the excess from the Trustee Fee Escrow
Account. If the Trustee resigns or is removed and a successor trustee is
appointed, any amounts on deposit in the Trustee Fee Escrow Account shall
thereafter be held by and for the benefit of the successor trustee. Any funds
remaining in the Trustee Fee Escrow Account upon the termination of the Trust
will be remitted to the Depositor or any successor thereto.
The full name of each abbreviated Underlying Series is set forth under
"Description of the Pooled Certificates -- General." Copies of the Underlying
Agreements are available from the Underwriter, at 245 Park Avenue New York, New
York, Attention: Mortgage Department.
Notwithstanding the foregoing, if, as described under the "The Pooling
Agreement -- Assignment of Pooled Certificates," the Depositor breaches a
representation or warranty with respect to the Pooled Certificates which
materially and adversely affects the interests of the Certificateholders and the
Depositor repurchases, or in the case of any Pooled Certificates which are not
IO Certificates elects to substitute one or more mortgage related securities
for, a Pooled Certificate, the foregoing definition will be modified with
respect to the related Distribution Date to delete the portion thereof relating
to the Pooled Certificate being repurchased or in the case of any Pooled
Certificates which are not IO Certificates substituted for and to reflect, in
the case of a repurchase, the repurchase price received with respect thereto as
described under "The Pooling Agreement -- Assignment of Pooled Certificates" or
in the case of a substitution, the addition of a comparable provision with
respect to the new mortgage related security or securities
The "Class Balance" of the Certificates means the principal amount of the
Certificates outstanding as of any date of determination, which is equal to the
Original Principal Balance of the Certificates minus all amounts received as
principal on the Pooled Certificates plus all amounts of accreted interest added
to the outstanding principal balance of the Z Classes.
If, on any Distribution Date, the amount by which the Z Classes have
accreted exceeds the aggregate distributions of principal on the other Pooled
Certificates, the Class Balance of the Certificates will be increased by the
amount of such excess.
The sole source of payment on the Certificates will be distributions on the
Pooled Certificates. The Certificates will not be guaranteed by the Depositor,
Bear, Stearns & Co. Inc., the Trustee or any other person.
OPTIONAL TERMINATION
The Trust may be terminated at the option of the Depositor on any
Distribution Date on or after the date on which the aggregate Pooled Certificate
Principal Balance has declined to 10% or less of the aggregate Pooled
Certificate Principal Balance on the Closing Date. In such event, the
Certificateholders will receive the unpaid principal balance of the Certificate
plus accrued interest thereon, plus, in the case of the Pooled FNMA 93-246/F
Certificates, any Interest Deficiency (as defined herein) and interest thereon
as described under "Description of the Pooled Certificates - Pooled FNMA
93-246/F Certificates." Following such purchase, the Available Funds then on
deposit in the Certificate Account will be disbursed to the Trustee,
Certificateholders and other persons entitled thereto, in accordance with the
terms of the Agreement.
MANDATORY TERMINATION
The Trust will be terminated on the Distribution Date following the first
Distribution Date on which the principal balance or the notional principal
balance of all but one of the Pooled Certificates has been reduced to zero and,
in the case of the Pooled FNMA 93-246/F Certificates, if the principal balance
of such Pooled FNMA 93-246/F Certificates has been reduced to zero and no
further amount is payable in respect of any Interest Deficiency and interest
thereon.
EXCHANGE OF CERTIFICATES
Beginning on the Distribution Date in April 1998, holders of a minimum of
10% of the outstanding principal amount of the Certificates will be entitled to
exchange such Certificates for a pro rata portion of each of the Pooled
Certificates. Holders of Certificates to be exchanged will be charged an
exchange fee by the Trustee equal to the greater of (i) $500 and (ii) .02% of
the outstanding principal amount of such Certificates. Holders will be required
to provide the Trustee with irrevocable written notice, accompanied by the
exchange fee, of any proposed exchange of Certificates at least five Business
Days prior to the proposed date of such exchange, which must be a Business Day.
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 with the designations used
herein for such Pooled Certificates and other related information.
Pooled FNMA Certificates
Guaranteed REMIC Pass-Through Certificates,
Fannie Mae REMIC Trust 1992-45, Class 45-Z
Designation: Pooled FNMA 92-45/Z Certificates
Class % in Trust: 35.29%
Principal Type: Sequential Pay
Principal Amount: $7,893,773
Interest Type: Fixed; Accrual
Interest Rate or Formula: 6.0%
Stripped Mortgage Backed Securities
Trust Number 000252-CL, Class 2
Designation: Pooled FNMA 252-CL/2 Certificates
Class % in Trust: 0.30%
Principal Type: Notional Strip
Notional Principal Amount: $4,314,176
Interest Type: Fixed; Interest Only
Interest Rate or Formula: 7.5%
Guaranteed REMIC Pass-Through Certificates,
Fannie Mae REMIC Trust, 1993-246, Class F
Designation: Pooled FNMA 93-246/F Certificates
Class % in Trust: 48.90%
Principal Type: Cash Flow
Principal Amount: $38,190,967
Interest Type: Floating
Interest Rate or Formula: LIBOR + 1.75%; Minimum Rate:
1.75%; Maximum Rate: 11.00%
Guaranteed REMIC Pass-Through Certificates,
Fannie Mae REMIC Trust, 1997-G2, Class Z
Designation: Pooled FNMA 97-G2/Z Certificates
Class % in Trust: 13.96%
Principal Type: Targeted Amortization
Principal Amount: $2,809,532
Interest Type: Fixed; Accrual
Interest Rate or Formula: 8.5%
Pooled FHLMC Certificates
Multiclass Mortgage Securities, Series G003, Class SA
Designation: Pooled FHLMC G003/SA Certificates
Class % in Trust: 42.45%
Principal Type: Support
Principal Amount: $958,958
Interest Type: Inverse Floating
Interest Rate or Formula: 35% - (LIBOR x 4); Minimum
Rate: 0%; Maximum Rate: 35.0%
Multiclass Mortgage Participation Certificates
Series 1505, Class QB
Designation: Pooled FHLMC 1505/QB Certificates
Class % in Trust: 23.60%
Principal Type: Component/Scheduled
Principal Amount: $2,280,000
Interest Type: Inverse Floating
Interest Rate or Formula: 20.76666% - (LIBOR x 2.333333);
Minimum Rate: 0%; Maximum Rate:
20.76666 %
Multiclass Mortgage Participation Certificates
Series 1603, Class SB
Designation: Pooled FHLMC 1603/SB Certificates
Class % in Trust: 36.37%
Principal Type: Support
Principal Amount: $2,104,653
Interest Type: Inverse Floating
Interest Rate of Formula: 28.7% - (LIBOR x 3.5); Minimum Rate:
0%; Maximum Rate: 28.7%
Multiclass Mortgage Participation Certificates
Series 1723, Class SB
Designation: Pooled FHLMC 1723/SB Certificates
Class % in Trust: 20.53%
Principal Type: Support
Principal Amount: $434,470
Interest Type: Inverse Floating
Interest Rate or Formula: 43.7499853% - (LIBOR x 6.9999972);
Minimum Rate: 0%; Maximum Rate:
43.7499853%
Multiclass Mortgage Participation Certificates
Series 1869, Class TG
Designation: Pooled FHLMC 1869/TG Certificates
Class % in Trust: 47.05%
Principal Type: Notional/Targeted Amortization
Notional Principal
Amount: $10,548,406
Interest Type: Fixed; Interest Only
Interest Rate or Formula: 8.0%
Multiclass Mortgage Participation Certificates
Series 1933, Class SA
Designation: Pooled FHLMC 1933/SA Certificates
Class % in Trust: 100.00%
Principal Type: Notional/Planned Amortization
Notional Principal
Amount: $43,803,029
Interest Type: Inverse Floating; Interest Only
Interest Rate or Formula: 7.0% - LIBOR; Minimum Rate:
0%; Maximum Rate: 7.0%
Modifiable and Combinable REMIC Certificates
Series 1933, Class SG
Designation: Pooled FHLMC 1933/SG Certificates
Class % in Trust: 10.44%
Principal Type: Modifiable and Combinable/Notional/
Targeted Amortization
Notional Principal
Amount: $21,927,728
Interest Type: Inverse Floating; Interest Only
Interest Rate or Formula: 7.5% - LIBOR; Minimum Rate:
0%; Maximum Rate:7.5%
The Pooled FNMA Certificates are guaranteed as to timely distribution of
principal and interest by FNMA, except to the extent set forth under
"Description of the Pooled Certificates Pooled FNMA 93-246/F." FHLMC guarantees
to each holder of the Pooled FHLMC Certificates the timely payment of interest
at the rates described above and the payment of the principal amount of the
Pooled FHLMC Certificates.
The Pooled FNMA Certificates are each one class of four separate Underlying
FNMA Series which represent beneficial ownership interests in separate
Underlying FNMA Trusts. The assets of the Underlying FNMA REMIC Trusts consist
of direct or indirect beneficial ownership interests in certain FNMA MBS and
GNMA Certificates. Each FNMA MBS represents a beneficial ownership interest in a
pool of first lien, single-family, fixed rate residential mortgage loans having
the characteristics described herein. Each GNMA Certificate is based on and
backed by a pool of first lien, single- family, fixed-rate residential mortgage
loans which are either insured by the FHA or partially guaranteed by the VA.
The Underlying FHLMC Series will receive payments from the cash flows
provided by separate groups of Gold PCs and/or Gold Giant PCs or by GNMA
Certificates. Underlying the Gold PCs and Gold Giant PCs are pools of fixed-
rate, first lien, residential mortgages and mortgage participations.
The Pooled FHLMC 1933/SG Certificates are MACRs. In the Agreement, the
Trustee has agreed not to exchange all or a portion of the Pooled FLHMC 1933/SG
Certificates for a related class or classes of Multiclass Mortgage Participation
Certificates pursuant to the relevant Underlying Agreement.
The distribution date for the FNMA Pooled Certificates is the 25th day of
each month (except for the Pooled FNMA 97-G2/Z Certificates, for which the
distribution date is the 17th day of each month) and the distribution date for
the FHLMC Pooled Certificates is the 15th day of each month (except for the
Pooled FHLMC G003/SA Certificates, for which the distribution date is the 25th
day of each month) or if, in each case, such day is not a business day as
defined in the applicable Underlying Agreement, then the next succeeding
business day, as so defined in each case.
Additional characteristics of the Pooled Certificates are described below
and in Annex 1 and Annex 2.
POOLED CERTIFICATES - PRINCIPAL TYPES
Certain of 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").
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 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 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
assurance can be given that any of the PAC, TAC or Scheduled Classes have paid
in accordance with their respective schedules or, to the extent that any such
class has done so, that such class will continue to do so in the future. No
assurance can be given that prepayments on the related underlying Mortgage Loans
will occur at a constant rate within any particular range in the future.
A sequential pay class receives principal payments in a prescribed
sequence, does not have a predetermined schedule and, in most cases, receives
payments of principal continuously from the first payment date on which it
receives principal until it retires.
A cash flow class (i) is entitled to receive the entire amount of principal
distributions on the underlying securities until it is retired and (ii) excess
interest above the amount payable under the stated formula will be applied to
principal.
POOLED CERTIFICATES - INTEREST TYPES
Four classes of the Pooled Certificates are entitled to receive
distributions of or accrue interest on the principal balance or notional
principal balance thereof at fixed rates of interest. One class of the Pooled
Certificates is entitled to receive distributions of interest on the principal
balance thereof based on a formula that varies directly with LIBOR, subject to
minimum and maximum rates and to cash flows from the securities included in the
applicable Underlying FNMA Trust. Six classes of the Pooled Certificates are
entitled to receive distributions of interest on the principal or notional
principal balance thereof based on separate formulae that vary inversely with
LIBOR, subject to minimum and maximum rates. Four of the classes of the Pooled
Certificates are "interest only" certificates.
Two classes of the Pooled FNMA Certificates are Z Classes. Z Classes
accrete all of their interest, which is added to the outstanding principal
balance. This accretion may continue until the class begins receiving principal
payments, until some other event has occurred or until the class is retired. In
the case of Pooled FNMA 92-45/Z Certificates, the accretion continues until the
principal balance of another specified class of the same Underlying FNMA Series
(Class H) has been reduced to zero. In the case of the Pooled FNMA 97-G2/Z
Certificates, the accretion continues so long as such class remains outstanding
and the accreted interest is paid as principal.
POOLED FNMA 93-246/F CERTIFICATES
The assets of the Underlying FNMA REMIC Trust of which the Pooled FNMA
93-246/F Certificates represent a beneficial interest include (i) a single
"principal only" FNMA Stripped Mortgage-Backed Security and (ii) five separate
FNMA Guaranteed REMIC Pass-Through Certificates evidencing beneficial ownership
interests in four separate FNMA REMIC Trusts. The REMIC Pass-Through
Certificates underlying Pooled FNMA 93-246/F include two principal only TAC
Classes, one floating rate class and two "interest only" inverse floating rate
classes.
The Pooled FNMA 93-256/F Certificates have several important features.
First, the interest payable is subject to the cash flows from the underlying
securities. Accordingly, the interest payable on any distribution date in
respect of the Pooled FNMA 93-246/F Certificates may be less than the amount
calculated accordingly to their interest rate formula (an "Interest
Deficiency"). Second, any excess interest payments will be used to pay
principal. Third, Interest Deficiencies may be payable after the principal
balance of the Pooled FNMA 92-246/F Certificate has been reduced to zero.
FNMA guarantees to the holders of the Pooled FNMA 93-246/F Certificates the
distribution of the principal distribution amount and the interest distribution
amount calculated as set forth in the applicable Underlying FNMA Prospectus
Supplement. The guaranty of FNMA does not cover any unpaid Interest Deficiency
carried forward once the principal balances or notional principal balances of
the underlying securities have been reduced to zero.
THE UNDERLYING MORTGAGE LOANS
The Mortgage Loans consist of conventional, fixed rate, one- to
four-family, fully-amortizing, level monthly payment, first mortgage loans with
original maturities of up to approximately 30 years.
ADDITIONAL INFORMATION
The descriptions of the Pooled Certificates and the Mortgage Loans do not
purport to be complete. Documents relevant to the Pooled FNMA 92-45/Z
Certificates include the following:
. FNMA Prospectus for Guaranteed REMIC Pass-Through Certificates dated
January 4, 1990.
. FNMAProspectus for Guaranteed Mortgage Pass-Through Certificates
dated January 1, 1992.
. FNMA Information Statement dated November 21, 1991.
Documents relevant to the Pooled FNMA 252-CL/Z Certificates include the
following:
. FNMA Prospectus dated December 1, 1992.
Documents relevant to the Pooled FNMA 93-246/F Certificates include the
following:
. FNMA Prospectus for Guaranteed REMIC Pass-Through Certificates.
. FNMA Prospectus for Guaranteed Mortgage Pass-Through Certificates dated
October 1, 1993.
. FNMA Prospectus for Stripped Mortgage-Backed Securities dated December
1, 1992.
. FNMA Prospectus for Guaranteed MBS Pass-Through Certificates dated
December 1, 1992.
. FNMA Prospectus Supplements for Trust 1992-50, Trust 1992-150, Trust
1993-21 and Trust 1993-216 and the Information Statement dated
February 16, 1993 and any supplements thereto.
Documents relevant to the Pooled FNMA 97-G2/Z Certificates include the
following:
. FNMA Prospectus for Guaranteed REMIC Pass-Through Certificates dated
June 14, 1996.
. FNMA Prospectus for Guaranteed REMIC Pass-Through Certificates dated
June 14, 1996.
. FNMA Prospectus for Guaranteed Mortgage Pass-Through Certificates dated
January 1, 1997.
. FNMA Information Statement dated February 22, 1996.
Documents relevant to the Pooled FHLMC G003/SA Certificates include the
following:
. FHLMC Multiclass Mortgage Securities Offering Circular
dated September 1, 1992.
. FHLMCGiant GNMA-Backed Securities Offering Circular dated September 1,
1992.
. FHLMC Information Statement dated March 19, 1992, its Information
Statement Supplements dated April 28, 1992, July 30, 1992 and
November 13, 1992 and any other Information Statement Supplements
published by Freddie Mac through the time of purchase.
Documents relevant to the Pooled FHLMC 1505/QB Certificate include the
following:
. FHLMC Multiclass Mortgage Participation Certificates Offering Circular
dated January 1, 1993.
. FHLMC Mortgage Participation Certificates Offering Circular dated June
30, 1992 and its Mortgage Participation Certificates Offering
Circular Supplements dated August 3, 1992, November 2, 1992 and
April 30, 1993.
. FHLMC Giant Mortgage Participation Certificates Offering
Circular dated December 23, 1991 and its Giant Mortgage
Participation Certificates Offering Circular Supplement
dated December 3, 1992.
. FHLMC Information Statement dated April 9, 1993, its Information
Statement Supplement dated April 30, 1993 and any other
Information Statement Supplements published by FHLMC through the
time of purchase.
Documents relevant to the Pooled FHLMC 1603/SB Certificates include the
following:
. FHLMC Multiclass Mortgage Participation Certificates Offering Circular
dated August 1, 1993.
. FHLMC Mortgage Participation Certificates Offering Circular dated June
30, 1992 and its Mortgage Participation Certificates Offering
Circular Supplements dated August 3, 1992, November 2, 1992, April
30, 1993 and August 17, 1993.
. FHLMC Giant Mortgage Participation Certificates Offering
Circular dated December 23, 1991 and its Giant Mortgage
Participation Certificates Offering Circular Supplement
dated December 3, 1992.
. FHLMC Information Statement dated April 9, 1993, its Information
Statement Supplements dated April 30, 1993 and August 2, 1993 and
any other Information Statement Supplements published by FHLMC
through the time of purchase.
Documents relevant to the Pooled FHLMC 1723/SB Certificates include the
following:
. FHLMC Multiclass Mortgage Participation Certificates Offering Circular
dated January 18, 1994.
. FHLMC Mortgage Participation Certificates Offering Circular
dated February 15, 1994.
. FHLMC Giant Mortgage Participation Certificates Offering Circular dated
December 23, 1991, its Giant Mortgage Participation Certificates
Offering Circular Supplement dated December 3, 1992 and its
Stripped Giant Mortgage Participation Certificates, Series 165
Offering Circular Supplement dated March 29, 1994.
. FHLMC Information Statement dated March 31, 1994 and any Information
Statement Supplements published by FHLMC through the time of
purchase.
Documents relevant to the Pooled FHLMC 1869/TG Certificates include the
following:
. FHLMC Offering Circular Supplement dated July 12, 1996 to Offering
Circular dated October 1, 1995.
. FHLMC Offering Circular Supplement dated August 31, 1993 to Offering
Circular dated August 1, 1993 and FHLMC Offering Circular
Supplement dated February 17, 1994 to Offering Circular Dated
January 18, 1994.
. FHLMC Mortgage Participation Certificates Offering Circular
dated September 1, 1995.
. FHLMC Giant Participation Certificates and Other Structured
Pass-Through Participation Certificates Offering
Circular dated September 1, 1995.
. FHLMC Information Statement dated March 29, 1996, its Information
Statement Supplements dated May 15, 1996 and August 14, 1996 and
any other Information Statement Supplements published subsequently
by FHLMC.
Documents relevant to the Pooled FHLMC 1933/SA Certificates and the Pooled FHLMC
1933/SG Certificates include the following:
. FHLMC Offering Circular Supplement dated January 16, 1997 to Offering
Circular dated January 1, 1997.
. FHLMC Offering Circular Supplement dated February 6, 1997 to Offering
Circular dated January 1, 1997 and FHLMC Offering Circular
Supplement dated January 4, 1994 to Offering Circular dated August
1, 1993.
. FHLMC Mortgage Participation Certificates Offering Circular
dated September 1, 1995.
. FHLMC Giant Participation Certificates and Other
Pass-Through Certificates Offering Circular dated January 1,
1997.
. FHLMC Information Statement dated March 29, 1996, its Information
Statement Supplements dated May 15, 1996, august 14, 1996,
November 14, 1996 and January 30, 1997 and any other Information
Statement Supplements published subsequently by FHLMC.
Copies of the respective Prospectus Supplements, Prospectuses and the other
documents set forth above relating to the Pooled Certificates may be obtained
from the Underwriter by writing Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, New York 10167, Attention: Mortgage Department.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL CONSIDERATIONS
The yield to maturity and weighted average life of the Certificates will be
affected by, among other things, the amount and timing of principal payments,
including prepayments (for this purpose the term "prepayments" includes payments
resulting from refinancing, liquidations, purchases by the original transferors
or others), and interest payments on the Mortgage Loans, the level of LIBOR, the
payment priorities and other characteristics of the Pooled Certificates, the
purchase price paid for the Certificates and the occurrence of an optional
termination with respect to the Certificates or the Pooled Certificates. No
representation is made as to the anticipated rate of prepayments on the Mortgage
Loans or the anticipated yield to maturity of the Certificates. Prospective
investors are urged to consider their own estimates as to the anticipated rate
of future prepayments on the Mortgage Loans and the suitability of the
Certificates to their investment objectives. If prevailing mortgage rates fall
significantly below the mortgage rates on the Mortgage Loans, the Mortgage Loans
are likely to be subject to higher prepayment rates than if prevailing rates
remain at or above the mortgage rates on the Mortgage Loans. Other factors
affecting prepayments of Mortgage Loans include changes in mortgagors' housing
needs, job transfers, unemployment, net equity in the mortgaged properties and
servicing decisions. The Mortgage Loans may be prepaid at any time without
penalty and generally have due-on-sale clauses. Since FNMA and FHLMC guarantee
the timely payment of installments of principal of and interest on the
respective Underlying Mortgage Loans, liquidations resulting from default,
casualty or condemnation in respect of the respective Underlying Mortgage Loans
will have the effect of a prepayment.
The timing and amount of payments, including prepayments, on the Mortgage
Loans may significantly affect an investor's yield. In general, the earlier a
prepayment of principal on the Mortgage Loans, the greater will be the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments.
The Pooled Certificates were issued at different times, are backed by
different Mortgage Pools, have different allocations of principal and interest
and payment priorities among various classes, are subject to optional
termination to the extent described herein and in the Underlying Agreements and
will perform differently in various interest and prepayment rate environments.
In addition, certain of the Pooled Certificates are backed by underlying
securities that are also unrelated. The performance characteristics of the
Certificates will reflect a combination of the performance characteristics of
the Pooled Certificates. As a result, it will be difficult to predict the likely
yield and payment experience of the Certificates.
Since interest generally will be due on each Mortgage Loan on the first day
of the month, but the distribution of such interest will not be made until the
Pooled Certificate Distribution Dates and then the amounts received with respect
to a Pooled Certificate Distribution Date will not be distributed until the
related Distribution Date, the yield to investors in the Certificates will be
lower than the yield produced without such delays. Since the amount of the
distributions on the Certificates is based on information in respect of the
Underlying Series, if such information is not received in a timely manner,
payments will not be made until the following Distribution Date and the yield to
investors may be lower than the yield produced if such information had been
received in a timely manner.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments to the Certificates, 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 to the Certificates, 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 amount of interest distributions on the Pooled FNMA 93-246/F
Certificates is dependent on the level of LIBOR and on amounts available from
cash flows on the securities held in the Underlying FNMA REMIC Trust of which
the Pooled FNMA 93-246/F Certificates represent a beneficial interest. There can
be no assurance as to whether holders of the Pooled FNMA 93-246/F Certificates
will in the future receive full distributions of interest at the rate calculated
according to their interest rate formula on a timely basis or as to the payment
of any of the Interest Deficiency (as defined herein).
Four classes of Pooled Certificates have notional principal balances which
reduce proportionately with the principal balance of certain related classes in
the same Underlying Series. Accordingly, the amount and timing of payments on
the such Pooled Certificates, and accordingly the yield on the Certificates,
will be sensitive to the rate and timing of principal payments on such Related
Certificates.
Relatively fast prepayments of underlying Mortgages may significantly
shorten, and relatively slow prepayments of underlying Mortgages may
significantly extend, the life of the Related Certificates and therefore the
Pooled IO Certificates. Generally, a rapid rate of principal prepayments on the
Mortgage Loans underlying the Pooled IO Certificates will have a negative effect
on the yield on the Certificates. Similarly, the exercise of any optional
redemption rights with respect to the Underlying Series of which any of the
Pooled IO Certificates are a part may have a negative effect on the yield on the
Certificates. If the life of any of the Related Certificates is significantly
shortened, the life of the related Pooled IO Certificates will be significantly
shortened and the yield to investors in the Certificates can be expected to
decrease.
The yield to investors in the Certificates will also be affected by changes
in LIBOR. In general, a high level of LIBOR will reduce the yield to investors
in the Certificates. Changes in LIBOR may not correlate with changes in mortgage
interest rates. It is possible that lower mortgage interest rates could occur
concurrently with a decrease in the level of LIBOR. Conversely, higher mortgage
interest rates could occur concurrently with a decrease in the level of LIBOR.
The amount of interest payable on the Pooled Floating Rate Certificates
will be sensitive, and the amount of interest payable on the Pooled Inverse
Floating Rate Certificates will be highly sensitive, to the level of LIBOR. In
addition, a high rate of principal payments (including prepayments) on the
Mortgage Loans underlying the Pooled Inverse Floating Rate Certificates and/or a
high level of LIBOR will have a materially negative effect on the amount of
interest payable on the Pooled Inverse Floating Rate Certificates.
The assets of the Trust consist of only the Pooled FNMA Certificates and
the Pooled FHLMC Certificates. Because each of the Pooled Certificates were
issued as parts of different Underlying Series, the rates of prepayment of each
of the Pooled Certificates will be different from the rates of prepayment on
each of the other Pooled Certificates. Under various circumstances, the
principal balance of the notional principal balance of one or more of the Pooled
Certificates could be reduced to zero prior to the other Pooled Certificates. In
addition, either one or more of the Pooled Certificates could be repurchased as
described under "The Pooling Agreement - Assignment of Pooled Certificates" or
any of the Underlying Agreements could be terminated. In such an event, the
Trust might consist solely of one or more of the Pooled FNMA Certificates or one
or more of the Pooled FHLMC Certificates, or a combination thereof, and
investors would be exposed to the risk that the Certificates could take on a
cash flow profile different from that expected by investors. For example, if the
Pooled Fixed Rate Certificates and the Pooled Floating Rate Certificates were to
mature prior to the maturity of one or more of the Pooled Inverse Floating Rate
Certificates, the Certificates would at that point have the yield
characteristics of an inverse floating rate security.
ASSUMED FINAL DISTRIBUTION DATE
The "Assumed Final Distribution Date" for distributions on the Certificates
is the Distribution Date on April 25, 2025. The Assumed Final Distribution Date
is the Distribution Date one month after the latest final distribution date of
any of the Pooled Certificates. Since the rate of payment of principal on the
Mortgage Loans can be expected to exceed the rate of payments used in
calculating such final distribution date, the date of the final distribution on
the Certificates is expected to be earlier, and could be substantially earlier,
than the Assumed Final Distribution Date.
WEIGHTED AVERAGE LIVES
The weighted average life of a security refers to the average amount of
time that will elapse from the applicable settlement date until each dollar of
principal of such security will be distributed to the investor. The weighted
average life of a Certificate is determined by (i) multiplying the [amount of
payments made] in respect of principal on such Certificate on each Distribution
Date by the number of years from the Closing Date to such Distribution Date;
(ii) summing the results and (iii) dividing the sum by the aggregate amount of
the principal [payments on such Certificate] referred to in clause (i). The
weighted average lives of the Certificates will be influenced by, among other
factors, the rate at which principal is paid on the Mortgage Loans.
SPA MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The standard prepayment assumption model used in
this Memorandum ("SPA") represents an assumed rate of prepayment each month of
the then outstanding principal balance of a pool of new mortgage loans. SPA does
not purport to be either a historical description of the prepayment experience
of any pool of mortgage loans or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans
underlying the Pooled Certificates. 100% SPA assumes prepayment rates of 0.2%
per annum of the then outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter (for example 0.4% per annum in the second month)
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the mortgage loans, 100% SPA assumes a constant
prepayment rate of 6% per annum. Multiples will be calculated from this
prepayment rate series; for example, 125% SPA assumes prepayment rates will be
0.25% per annum in month one, 0.5% per annum in month two, reaching 7.5% per
annum in month 30 and remaining constant at 7.5% per annum thereafter. 0% SPA
assumes no prepayments.
PRICING ASSUMPTION
The Certificates were structured assuming, among other things, a prepayment
assumption of 200% SPA with respect to the Pooled Certificates. The prepayment
assumptions to be used for pricing purposes for the Certificates may vary as
determined at the time of sale. The actual prepayment rates may vary
considerably from the rates used for any pricing assumption.
DECREMENT AND WEIGHTED AVERAGE LIFE TABLE
The following tables indicate the percentages of the Original Principal
Balance of the Certificates outstanding after certain dates and the weighted
average lives (in years), assuming various constant percentages of SPA and LIBOR
levels.
For each of the following tables it was assumed, among other things, that
(i) the Trust consists of the Pooled Certificates in the principal and/or
notional amounts described in Annex 1 hereto; (ii) the Original Principal
Balance of the Certificates will be $54,672,353; (iii) Distribution Dates on the
Certificates occur on the 25th of each month commencing in April 1997; (iv) each
Mortgage Loan underlying a mortgage backed security issued by FNMA or GNMA or a
participation certificate issued by FHLMC has a mortgage rate, remaining term to
maturity and loan age equal to the weighted average mortgage rate, weighted
average remaining term to maturity and weighted average loan age, respectively,
of all of the Mortgage Loans underlying such mortgage backed security or
participation certificate; (v) the Mortgage Loans prepay at the constant
percentages of SPA specified in the tables; (vi) all amounts due with respect to
the Mortgage Loans underlying the Pooled Certificates are applied to the payment
of the respective Pooled Certificates on the 25th day of each month; (vii) there
are no optional terminations of the Certificates or the Pooled Certificate and
the mandatory termination is assumed not to occur; (viii) the settlement date is
the Closing Date, which is March 27, 1997; (ix) each month consists of 30 days;
(x) any reinvestment income on funds in the Certificate Account will be paid to
the Trustee and will not be available to make principal and interest payments on
the Certificates; (xi) the only expenses to be paid on any Distribution Date by
the Trust will be the monthly payment of the Trustee Fee and the Escrow Payment,
the sum of which is assumed to equal 1/12 of the product of 0.02% and the
Certificate Balance immediately prior to the applicable Distribution Date, but
without giving effect to the minimum Trustee Fee of $300 for any Distribution
Date; (xii) the effective interest rate borne by the Certificates during the
first Interest Accrual Period is 11.5328% per annum; (xiii) interest rates
applicable to the Certificates for each Interest Accrual Period subsequent to
the first Interest Accrual Period will be calculated based on the indicated
level of LIBOR; (xiv) there will be no substitution of Pooled Certificates; and
(xv) no Certificates will be exchanged for pro rata portions of each of the
Pooled Certificates.
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
OF THE CERTIFICATES
LIBOR = 2.5%
% of SPA
50% 100% 200% 350% 500%
<S> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100
March 25, 1998 97 95 90 82 69
March 25, 1999 94 90 83 65 51
March 25, 2000 91 86 76 53 42
March 25, 2001 89 83 72 45 31
March 25, 2002 87 80 67 38 22
March 25, 2003 86 78 63 29 8
March 25, 2004 85 77 59 23 6
March 25, 2005 84 75 51 14 4
March 25, 2006 84 75 43 7 3
March 25, 2007 84 72 36 6 2
March 25, 2008 82 67 29 4 1
March 25, 2009 80 62 21 3 1
March 25, 2010 75 57 14 2 0
March 25, 2011 70 50 7 2 0
March 25, 2012 65 42 6 1 0
March 25, 2013 60 32 4 1 0
March 25, 2014 51 22 3 0 0
March 25, 2015 39 14 2 0 0
March 25, 2016 27 6 1 0 0
March 25, 2017 18 1 1 0 0
March 25, 2018 10 1 0 0 0
March 25, 2019 2 0 0 0 0
March 25, 2020 0 0 0 0 0
March 25, 2021 0 0 0 0 0
March 25, 2022 0 0 0 0 0
March 25, 2023 0 0 0 0 0
Weighted Average
Life (in years) 15.1 12.2 7.8 4.3 2.9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
OF THE CERTIFICATES
LIBOR = 3.5%
% of SPA
50% 100% 200% 350% 500%
<S> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100
March 25, 1998 97 95 91 82 70
March 25, 1999 95 91 84 66 52
March 25, 2000 93 88 78 54 42
March 25, 2001 91 85 73 46 32
March 25, 2002 90 83 69 39 23
March 25, 2003 89 81 65 31 9
March 25, 2004 88 79 61 24 6
March 25, 2005 88 78 53 15 4
March 25, 2006 87 77 45 7 3
March 25, 2007 87 74 38 6 2
March 25, 2008 86 69 31 4 1
March 25, 2009 83 65 23 3 1
March 25, 2010 79 60 16 2 0
March 25, 2011 74 53 9 2 0
March 25, 2012 69 45 6 1 0
March 25, 2013 64 35 4 1 0
March 25, 2014 55 25 3 0 0
March 25, 2015 43 16 2 0 0
March 25, 2016 31 8 1 0 0
March 25, 2017 21 1 1 0 0
March 25, 2018 14 1 0 0 0
March 25, 2019 5 0 0 0 0
March 25, 2020 0 0 0 0 0
March 25, 2021 0 0 0 0 0
March 25, 2022 0 0 0 0 0
March 25, 2023 0 0 0 0 0
Weighted 15.8 12.7 8.0 4.4 3.0
Average
Life (in
years)
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
OF THE CERTIFICATES
LIBOR = 4.5%
% OF SPA
50% 100% 200% 350% 500%
<S> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100
March 25, 1998 98 96 92 83 70
March 25, 1999 96 92 85 67 52
March 25, 2000 94 89 79 55 43
March 25, 2001 93 87 75 47 33
March 25, 2002 92 85 70 40 23
March 25, 2003 91 83 66 32 10
March 25, 2004 91 81 62 25 6
March 25, 2005 90 80 54 16 4
March 25, 2006 90 79 46 8 3
March 25, 2007 90 76 39 6 2
March 25, 2008 88 71 32 4 1
March 25, 2009 86 66 24 3 1
March 25, 2010 81 62 17 2 0
March 25, 2011 77 55 10 2 0
March 25, 2012 71 47 6 1 0
March 25, 2013 66 37 4 1 0
March 25, 2014 57 27 3 0 0
March 25, 2015 45 18 2 0 0
March 25, 2016 33 10 1 0 0
March 25, 2017 24 3 1 0 0
March 25, 2018 16 1 0 0 0
March 25, 2019 7 0 0 0 0
March 25, 2020 0 0 0 0 0
March 25, 2021 0 0 0 0 0
March 25, 2022 0 0 0 0 0
March 25, 2023 0 0 0 0 0
Weighted 16.3 13.0 8.2 4.4 3.0
Average
Life (in years)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
OF THE CERTIFICATES
LIBOR 5.50% and higher
50% 100% 200% 350% 500%
<S> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100
March 25, 1998 98 96 92 83 70
March 25, 1999 97 93 85 67 53
March 25, 2000 95 90 80 55 43
March 25, 2001 94 88 75 47 33
March 25, 2002 93 85 71 41 24
March 25, 2003 92 83 67 32 10
March 25, 2004 92 82 63 25 6
March 25, 2005 91 81 54 17 4
March 25, 2006 91 80 47 8 3
March 25, 2007 91 77 40 6 2
March 25, 2008 89 72 33 4 1
March 25, 2009 87 67 24 3 1
March 25, 2010 82 63 17 2 0
March 25, 2011 78 56 11 2 0
March 25, 2012 72 48 6 1 0
March 25, 2013 67 38 4 1 0
March 25, 2014 58 27 3 0 0
March 25, 2015 46 19 2 0 0
March 25, 2016 34 11 1 0 0
March 25, 2017 25 4 1 0 0
March 25, 2018 17 1 0 0 0
March 25, 2019 8 0 0 0 0
March 25, 2020 0 0 0 0 0
March 25, 2021 0 0 0 0 0
March 25, 2022 0 0 0 0 0
March 25, 2023 0 0 0 0 0
Weighted 16.5 13.1 8.3 4.5 3.0
Average
Life (in years)
</TABLE>
<PAGE>
PRE-TAX YIELD TABLE
The significance of the effects of prepayments and changes in LIBOR on the
Certificates is illustrated in the following table entitled "Sensitivity of the
Certificates to Prepayments and LIBOR," which shows the pre-tax yield (on a
corporate bond equivalent basis) to the holders of such Certificates under
different constant percentages of SPA and levels of LIBOR. The yields of such
Certificates set forth in the following table were calculated using the
assumptions specified above under "---Decrement and Weighted Average Life
Tables" and assuming that (i) on each LIBOR determination date LIBOR will be at
the level shown, (ii) the aggregate purchase price (expressed as a percentage of
the Original Principal Balance) of the Certificates is 100.1% (including accrued
interest from March 25, 1997) and (iii) the Certificates are purchased on March
27, 1997.
THE YIELD TO INVESTORS IN THE CERTIFICATES WILL BE SENSITIVE TO THE LEVEL
OF LIBOR AND TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE MORTGAGE LOANS, WHICH GENERALLY CAN BE PREPAID AT ANY TIME.
GENERALLY, A HIGH LEVEL OF LIBOR WILL HAVE A MATERIAL NEGATIVE EFFECT ON THE
YIELD TO INVESTORS IN THE CERTIFICATES.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased level of LIBOR.
<TABLE>
<CAPTION>
SENSITIVITY OF THE CERTIFICATES
TO PREPAYMENTS AND LIBOR
(PRE-TAX YIELD TO MATURITY)
% of SPA
LIBOR 50% 100% 200% 350% 500%
<S> <C> <C> <C> <C> <C>
2.5% 11.6 11.2 11.3 11.6 12.4
3.5% 10.8 10.4 10.5 11.0 11.6
4.5% 9.9 9.5 9.6 10.4 10.9
5.5% 9.0 8.6 8.6 9.5 10.3
6.5% 8.1 7.8 7.7 8.6 9.5
7.5% 7.5 7.1 7.0 7.9 8.7
</TABLE>
The yields set forth in the above table were calculated by determining the
monthly discount rates which when applied to the assumed stream of cash flows to
be paid on the Certificates, would cause the discounted present value of such
assumed stream of cash flows to equal the assumed purchase price of the
Certificates indicated, and converting such monthly rates to corporate bond
equivalent rates. Such calculation does not take into account variations that
may occur in the interest rates at which investors may be able to reinvest funds
received by them as payments of principal of and interest on the Certificates
and consequently does not purport to reflect the return of any investment in the
Certificates when such reinvestment rates are considered.
ACTUAL EXPERIENCE WILL VARY FROM ASSUMPTIONS
Discrepancies will exist between the characteristics of the actual Pooled
Certificates and Mortgage Loans and characteristics of the Pooled Certificates
and Mortgage Loans assumed in preparing the tables contained herein. To the
extent that the Pooled Certificates and Mortgage Loans have characteristics
which differ from those assumed in preparing the tables, the Certificates may
mature earlier or later than indicated by the tables, and the weighted average
lives and pre-tax yields and the cash flows on the Certificates may also differ.
In addition, it is unlikely that the Mortgage Loans will prepay at any constant
rate. The timing of changes in the rate of prepayment may significantly affect
the yield realized by a holder of the Certificates.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling Agreement between
BSMSI, as the depositor, and First Trust National Association as the Trustee
(the "Agreement" ). BSMSI will provide to a prospective or actual
Certificateholder without charge, upon written request, a copy (without
exhibits) of the Agreement. Requests should be addressed to Bear Stearns
Mortgage Securities Inc., 245 Park Avenue, New York, New York 10167.
ASSIGNMENT OF POOLED CERTIFICATES
At the time of issuance of the Certificates, the Depositor will cause the
Pooled Certificates to be assigned to the Trustee. The Depositor will represent,
among other things, that as of the Closing Date (i) it is the owner of the
Pooled Certificates free and clear of any lien or adverse interests of any
person and (ii) that it has acquired its ownership in the Pooled Certificates in
good faith without notice of any adverse claim.
Upon discovery or receipt of notice by either the Depositor or the Trustee
of a breach of any of the representations and warranties regarding the Pooled
Certificates which materially and adversely affects the interests of the
Certificateholders, the Depositor or the Trustee, the party discovering such
breach will give prompt notice to the other. Within thirty days of the earlier
of either discovery by or notice to the Depositor of any such breach, the
Depositor shall use its best efforts promptly to cure such breach in all
material respects and, if such breach cannot be cured, the Depositor shall, at
the election of the Majority Certificateholders, repurchase each Pooled
Certificate affected by the breach at a repurchase price equal to (i) with
respect to any Pooled Certificate that is not a Pooled IO Certificate, the
outstanding Pooled Certificate Principal Balance thereof as of the date of
repurchase plus accrued interest thereon plus any Interest Deficiency and
interest thereon as described under "Description of the Pooled Certificates -
Distributions of Interest", and (ii) with respect to any Pooled IO Certificates,
the highest bid obtained from three dealers then active in the market for such
Pooled IO Certificates (or such lesser number as may then be active). In the
event the Trustee is able to obtain a bid from only one active dealer, then the
Trustee may obtain an opinion (a "FMV Opinion") of an investment banking firm of
national reputation (other than an affiliate of the Depositor) to determine
whether such bid is at least equal to the fair market value of such Pooled IO
Certificates and the repurchase price shall be the higher of the bid or the fair
market value as stated in any such FMV Opinion. If the Trustee is unable to
obtain a bid from any active dealer, then the Trustee shall obtain a FMV Opinion
and the repurchase price shall be equal to the fair market value of such Pooled
IO Certificates as stated in such FMV Opinion.
Notwithstanding the foregoing, in the case of any Pooled Certificates, that
are not IO Certificates, for a period of two years following the Closing Date,
in lieu of repurchasing Pooled Certificates as described above, the Depositor
may substitute therefor one or more mortgage related securities issued by GNMA,
FNMA or FHLMC (each a "Substitute Pooled Certificate") which meet the following
criteria: (i) such substitution shall be (a) in the case of the Pooled FNMA
93-246/F Certificates, with at least one floating rate certificate which is
entitled to receive interest based on LIBOR and which has a formula of LIBOR
plus a minimum of 175 basis points, (b) in the case of the Pooled FNMA 92-45/Z
Certificates and the Pooled FNMA 97-G2/Z Certificates, with one or more fixed
rate or accrual certificates bearing a coupon no less than the coupon of the
Pooled Certificate being substituted for, or (c) in the case of the Pooled
Inverse Floating Rate Certificates, one or more inverse floating rate
certificates based on LIBOR whose combined coupon will be at least equal to the
coupon of the Pooled Certificates being substituted for at all levels of LIBOR,
(ii) the sum of the outstanding principal amounts of the Substitute Pooled
Certificates equals or exceeds the sum of the outstanding principal amounts of
the Pooled Certificates being substituted for and (iii) the Substitute Pooled
Certificates as of the date of substitution (a) ultimately are backed by
mortgage loans (I) with a weighted average pass-through rate no more than 50
basis points below or no more than 50 basis points above the weighted average
pass-through rate of the FNMA Mortgages and (II) which are conventional, fixed
rate, one- to four-family, fully amortizing, level payments, first mortgage
loans with original maturities of up to 30 years, (b) the inclusion of which in
the Trust Fund will not result in a withdrawal or downgrading in the ratings
assigned to the Certificates by the Rating Agencies, written confirmation of
which shall be provided by the Rating Agencies to the Trustee and (c) will not
cause the Trust to lose its status as a grantor trust for federal income tax
purposes as indicated in an opinion of counsel to be provided to the Trustee.
ACCOUNTS
The Trustee shall establish and maintain the Certificate Account in the
name of the Trustee for the benefit of the Certificateholders. The Certificate
Account shall be an Eligible Account as defined in the Agreement. The Trustee
will cause all distributions received on the Pooled Certificates by the Trustee
in its capacity as holder of the Pooled Certificates, from whatever source, to
be deposited directly into the Certificate Account. Amounts on deposit in the
Certificate Account will be invested in certain investments permitted by the
Agreement ("Permitted Investments"). Any income on such investments will be paid
to the Trustee as additional compensation and losses on such investments shall
be reimbursed by the Trustee from its own funds.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will prepare, and will forward by
mail, a statement to each Certificateholder and to the Depositor stating:
(i) the Available Funds for such Distribution Date;
(ii) the interest distribution amount and the principal
distribution amount for such Distribution Date and, with
respect to each, the components thereof as described in the
definitions of such terms and as reported in the related
distribution information;
(iii) the Certificate Balance before and after applying
payments on such Distribution Date;
(iv) the effective interest rate on the Certificates
for such Distribution Date;
(v) the outstanding principal and/or notional amount, as the case
may be, immediately prior to and after taking into account
distributions made on such Distribution Date of, and the
current interest rate, on each of the Pooled Certificates on
such Distribution Date; and
(vi) the amount of the Trustee Fee for 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 $1000 of
principal face amount.
In addition, the Trustee promptly will furnish to the Depositor and,
upon request, to the Certificateholders, copies of any notices, statements,
reports or other information, including, without limitation, the Pooled
Certificate Distribution Date Statements received by the Trustee in its capacity
as the holder of the Pooled Certificates.
On or before March 31st of each calendar year, commencing in 1998, the
Trustee will prepare and deliver by first class mail to the Depositor and each
person who at any time during the prior calendar year was a Certificateholder of
record a statement containing the information required to be contained in the
regular monthly report to Certificateholders, as set forth in clauses (ii) and
(v) above aggregated for such prior calendar year or in the case of a
Certificateholder, the applicable portion thereof during which such person was a
Certificateholder. Such obligation of the Trustee will be satisfied to the
extent that substantially comparable information is provided by the Trustee
pursuant to any requirements of the Code and regulations thereunder as from time
to time are in force.
AMENDMENTS
The Agreement may be amended by the Depositor and the Trustee, without the
prior written consent of any Certificateholder (i) to cure any ambiguity or
mistake, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Agreement that
are not materially inconsistent with other provisions of the Agreement and (iv)
to make such modifications as may be required in connection with a substitution
or repurchase of a Pooled Certificate permitted under the Agreement; provided,
however, that such amendment will not, as evidenced by an opinion of counsel
delivered to the Trustee, adversely affect in any material respect the interests
of any Certificateholder. The Agreement may also be amended by the Depositor and
the Trustee and the holders of Certificates evidencing more than 50% of the
aggregate Class Balance of the Certificates (the "Majority Certificateholders")
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or modifying in any manner
the rights of Certificateholders; provided, however, that no such amendment may
(i) reduce in any manner the amount of, or delay the timing of, amounts required
to be distributed on any Certificate without the consent of the holder of such
Certificate; (ii) modify the provisions of the Section of the Agreement
governing amendments of the Agreement, without the consent of the holders of all
Certificates; or (iii) be made unless the Trustee has received an opinion of
counsel (at the expense of the party seeking such amendment) that such amendment
will not adversely affect the status of the Trust as a grantor trust for federal
income tax purposes.
CERTIFICATEHOLDER ACTION
No Certificateholder will have any right to institute any action, suit or
proceeding in equity or at law upon or under or with respect to the Agreement
unless such holder previously has given to the Trustee and the Depositor a
written notice of default and unless also the Majority Certificateholders have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee thereunder and have offered to the Trustee
such reasonable indemnity as each may require against the costs, expenses and
liabilities to be incurred therein or thereby, and the Trustee, for 30 days
after its receipt of such notice, request and offer of indemnity, will have
neglected or refused to institute any such action, suit or proceeding.
TERMINATION
The respective obligations and responsibilities of the Depositor and the
Trustee created by the Agreement will terminate upon the final distribution to
Certificateholders by the Trustee of all amounts required to be distributed
pursuant to the Agreement. Such distribution will occur, among other
circumstances, if the Depositor exercises its option to purchase the Pooled
Certificates as described herein under "Description of the Certificates --
Optional Termination."
INDEMNIFICATION OF THE TRUSTEE
The Trustee and its directors, officers, employees and agents, will be
indemnified by the Trust against any loss, liability or expense arising out of
or incurred in connection with, the exercise and performance of any powers and
duties of the Trustee under the Agreement, with certain exceptions described in
the Agreement. The Trustee and its directors, officers, employees and agents
will not be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of the
obligations and duties of the Trustee.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee for the Certificates will be First Trust National Association.
The Trustee's corporate office is located at 180 East 5th Street, St. Paul,
Minnesota 55101, Attention: Structured Finance Department, and its Bondholder
Services telephone number is (612) 973-6700.
The Trustee may at any time resign and be discharged from the trust by
giving 30 days' written notice thereof to the Depositor and the
Certificateholders. Upon receiving such notice of resignation, the Depositor
shall (in the latter case, with the written consent of the Certificate Insurer)
promptly appoint a successor trustee. If no successor trustee has been so
appointed and has accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. If at any time the
Trustee fails to meet the eligibility requirements or is incapable of acting, or
certain insolvency events occur, then the Depositor shall remove the Trustee and
appoint a successor trustee. The Majority Certificateholders may at any time
remove the Trustee and appoint a successor trustee. No resignation, discharge or
removal of the Trustee will become effective until a successor trustee shall
have assumed the Trustee's responsibilities and obligations under the Agreement.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP, special tax counsel to the Trust ("Tax Counsel"), as to the material
Federal income tax consequences of the purchase, ownership and disposition of
Certificates. However, the discussion does not purport to deal with Federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Prospective investors are urged
to consult their own tax advisors in determining the Federal, state, local,
foreign and any other tax consequences to them of the purchase, ownership and
disposition of Certificates.
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. No ruling on any of the
issues discussed below will be sought from the Internal Revenue Service (the
"IRS"). As a result, the IRS may disagree with all or part of the discussion
below.
TAX CHARACTERIZATION OF THE TRUST
Tax counsel is of the opinion that the Trust will be classified for Federal
income tax purposes as a grantor trust and not as an association taxable as a
corporation or a taxable mortgage pool taxable as a corporation. Accordingly,
each holder of a Certificate will be treated for Federal income tax purposes as
the owner of an undivided interest in the Pooled Certificates included in the
Trust. As further described below, each holder of a Certificate therefore must
report on its Federal income tax return the gross income from the portion of the
Pooled Certificates that is allocable to such Certificate and may deduct the
portion of the expenses incurred by the Trust that is allocable to such
Certificate, at the same time and to the same extent as such items would be
reported by such holder if it had purchased and held directly such interest in
the Pooled Certificates and incurred directly its share of expenses incurred by
the Trust.
A Certificateholder that is an individual, estate or trust will be allowed
deductions for such expenses only to the extent that the sum of those expenses
and the holder's other miscellaneous itemized deductions exceeds two percent of
such holder's adjusted gross income. In addition, in the case of a
Certificateholder who is an individual, certain otherwise allowable itemized
deductions will be reduced, but not by more than 80%, by an amount equal to 3%
of such Certificateholder's adjusted gross income in excess of a statutorily
defined threshold. Moreover, a Certificateholder that is not a corporation
cannot deduct such expenses for purposes of the alternative minimum tax (if
applicable). Such deductions will include servicing and administrative fees paid
to the Trustee.
TAXATION OF CERTIFICATEHOLDERS
A Certificateholder must allocate the purchase price of its Certificates
among its share of the Pooled Certificates based upon the relative fair market
value of the Pooled Certificates as of the date such Certificateholder purchased
its Certificates.
The tax consequences to a Certificateholder of ownership of an undivided
interest in each Pooled Certificate are described in the Underlying
Prospectuses. The Underlying Prospectuses for each of the Pooled Certificates
(other than the Underlying Prospectus for the Pooled FNMA 252-CL/2 Certificates)
state that such Pooled Certificates are REMIC Regular Interests or beneficial
ownership of REMIC Regular Interests (a MACR class). The Underlying Prospectus
for the Pooled FNMA 252-CL/2 Certificates states that such Pooled Certificates
are stripped bonds or stripped coupons. A general discussion of the tax
consequences to a holder of REMIC Regular Interests can be found in "Certain
Federal Income Tax Consequences" in the Prospectus.
TAXABLE MORTGAGE POOLS
Entities classified as "taxable mortgage pools" are subject to corporate
level tax on their net income. A "taxable mortgage pool" is generally defined as
an entity or a portion of an entity that meets the following requirements: (i)
the entity is not a REMIC, (ii) substantially all of the assets of the entity
are debt obligations, and more than 50 percent of such debt obligations consist
of real estate mortgages (or interests therein), (iii) the entity is the obligor
under debt obligations with two or more maturities, and (iv) payments on the
debt obligations on which the entity is the obligor bear a relationship to the
payments on the debt obligations which the entity holds as assets. With respect
to requirement (iii), the Code authorizes the IRS to provide by regulations that
equity interests may be treated as debt for purposes of determining whether
there are two or more maturities. If the Certificates were treated as
obligations of a taxable mortgage pool, the Trust would be ineligible to file
consolidated returns with any other corporation and could be liable for
corporate tax.
The legislative history of the taxable mortgage pool provisions states that
entities treated as grantor trusts will not be considered to be taxable mortgage
pools. Based in part on the legislative history, Tax Counsel is of the opinion
that the Trust is not a taxable mortgage pool taxable as a corporation.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impossible to predict
the income tax consequences to the Certificateholders in all of the state taxing
jurisdictions in which they are subject to tax. Certificateholders are urged to
consult their own advisors with respect to state income and franchise taxes.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA should
consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the Certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor, or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively,
"Plan(s)"), should consult with their legal counsel to determine whether an
investment in the Certificates will cause the assets of the Trust ("Trust
Assets") to be considered plan assets pursuant to the plan asset regulations set
forth at 29 C.F.R. ' 2510.3-101 (the "Plan Asset Regulations"), thereby
subjecting the Plan to the prohibited transaction rules with respect to the
Trust Assets and the Trustee to the fiduciary investments standards of ERISA, or
cause the excise tax provisions of Section 4975 of the Code to apply to the
Trust Assets, unless an exemption granted by the Department of Labor applies to
the purchase, sale, transfer or holding of the Certificates and the operation
and management of the Trust and its assets. In particular, investors that are
insurance companies should consult with their legal counsel with respect to the
United States Supreme Court case John Hancock Mutual Life Insurance Co. v.
Harris Trust and Savings Bank, 114 S. Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be plan assets under certain circumstances. Investors should
analyze whether that decision or federal legislation recently enacted affecting
insurance company general accounts (see Section 1460 of the Small Business Job
Protection Act of 1996) may have an impact with respect to purchases of
Certificates.
Prohibited Transaction Exemption 90-30 ("PTE 90-30") may be applicable to
the purchase, sale or transfer of the Certificates and the operation and
management of the Trust and its assets. The definition of an allowable "Trust"
under PTE 90-30 requires that the corpus of the Trust contain only three
categories of obligations: certain direct obligations (not here applicable),
"guaranteed governmental mortgage pool certificates" as defined in the Plan
Asset Regulations and fractional, undivided interests in either of the above
types of obligations. Both the Prospectuses pursuant to which the Pooled FNMA
Certificates were offered and the Offering Circulars relating to the Pooled
FHLMC Certificates state that FNMA and FHLMC, respectively, had been advised by
their respective counsel that each such respective class of Pooled Certificates
should qualify as "guaranteed governmental mortgage pool certificates" within
the meaning of the Plan Asset Regulations. Accordingly, such Pooled Certificates
should qualify as an allowable type of Trust obligation under PTE 90- 30.
However, any Plan fiduciary which proposes to cause a Plan to purchase
Certificates should consult with its own counsel and should make its own
determination as to the availability of exemptive relief under PTE 90-30, both
with respect to whether the Pooled Certificates qualify as "guaranteed
governmental mortgage pool certificates" and whether all of the specific and
general conditions of PTE 90-30 are satisfied with respect to any potential
prohibited transaction relating to the purchase, sale and transfer of the
Certificates and the operation and management of the Trust and its assets.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such governmental plan may be subject to
Federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for the availability of any exemptive relief under any Similar Law.
LEGAL INVESTMENT
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may be
subject to restrictions on investment in the Certificates. Any such institution
should consult its legal advisors in determining whether and to what extent
there may be restrictions on its ability to invest in the Certificates. The
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Certificates are being purchased from BSMSI by the Underwriter,
an affiliate of BSMSI, upon issuance. Distribution of such Certificates will be
made from time to time in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. In connection with the purchase and sale
of the Certificates, the Underwriter may be deemed to have received compensation
from BSMSI in the form of underwriting discounts. BSMSI will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
1933 Act, or will contribute to payments the Underwriter may be required to make
in respect thereof. BSMSI will acquire the Pooled Certificates from the
Underwriter.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
BSMSI and the Underwriter by Stroock & Stroock & Lavan LLP, New York, New York.
CERTIFICATE RATING
As a condition to their issuance, the Certificates will be rated "Aaa" by
Moody's and "AAA" by Fitch.
The rating assigned by Moody's to the Certificates address the likelihood
of the receipt by Certificateholders of all distributions to which such
Certificateholders are entitled. The rating is based principally on the
guarantees of FNMA and FHLMC on the Pooled Certificates. Moody's ratings do not
represent any assessment of the likelihood that prepayments will be made by
borrowers or the degree to which such prepayments will differ from that
originally anticipated. The rating does not address the possibility that, as a
result of prepayments, Certificateholders may suffer a lower than anticipated
yield on the Certificates.
The rating by Fitch on the Certificates addresses the likelihood of the
receipt by Certificateholders of all distributions to which such
Certificateholders are entitled. Fitch takes into consideration the credit
quality of the Mortgage Loans, structural and legal aspects associated with the
Certificates and the extent to which the payment stream on the Pooled
Certificates is adequate to make payments required under the Certificates. The
rating of Fitch does not constitute a statement regarding frequency of
prepayments on the Mortgage Loans or the corresponding effects on yield to
investors, and does not represent any assessment of the likelihood or rate of
prepayments.
The yield of the certificates is sensitive to principal prepayments on the
mortgage loans backing underlying interest-only securities, which the rating on
the certificates does not address. If prepayments are faster than anticipated,
investors may fail to receive interest payments on certain payment dates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Certificates are subsequently lowered for any reason, no person or entity is
obligated to provide any additional credit support or credit enhancement with
respect to the Certificates.
BSMSI has not requested a rating of the Certificates by any rating agency
other than Moody's and Fitch. However, there can be no assurance as to whether
any other rating agency will rate the Certificates or, in such event, what
rating would be assigned to the Certificates by such other rating agency. The
rating assigned by such other rating agency to the Certificates may be lower
than the rating assigned by or Moody's or Fitch.
GLOSSARY
The abbreviations used for each Pooled Certificate are set forth under
"Description of the Pooled Certificates -- General"
Agreement......................................................S-4
Assumed Final Distribution Date................................S-24
Available Funds................................................S-14
BSMSI..........................................................S-1
Business Day ..................................................S-2
Cede...........................................................S-13
Certificates...................................................S-1
Certificate Account............................................S-14
Certificate Register...........................................S-13
Class Balance..................................................S-15
Closing Date...................................................S-7
Code...........................................................S-12
Depositor......................................................S-4
Determination Time.............................................S-7
Distribution Date..............................................S-2
DTC............................................................S-4
ERISA..........................................................S-11
Escrow Amount .................................................S-14
FHA............................................................S-5
FHLMC..........................................................S-2
FHLMC Pooled Certificate Distribution Date.....................S-5
FHLMC Mortgages................................................S-2
Fitch..........................................................S-1
FMV Opinion....................................................S-31
FNMA...........................................................S-2
FNMA Mortgages.................................................S-2
FNMA Pooled Certificate Distribution Date......................S-5
FNMA REMIC Certificates........................................S-4
FNMA SMBS......................................................S-2
FNMA Trust.....................................................S-2
GNMA...........................................................S-5
GNMA Certificates..............................................S-2
Gold Giant PC's................................................S-5
Gold PC's......................................................S-2
Interest Accrual Period........................................S-7
Interest Deficiency............................................S-19
LIBOR..........................................................S-2
IRS............................................................S-34
MACRs..........................................................S-2
Majority Certificateholders....................................S-33
MBS............................................................S-2
Moody's........................................................S-1
Mortgage Loans.................................................S-2
Mortgage Pool..................................................S-3
Original Principal Balance.....................................S-7
Permitted Investments..........................................S-32
Plan/s.........................................................S-11
Plan Asset Regulations.........................................S-35
Pooled Certificates............................................S-2
Pooled Certificate Distribution Date...........................S-5
Pooled Certificate Principal Balance...........................S-4
Pooled FHLMC Certificates......................................S-2
Pooled FNMA Certificates.......................................S-2
Pooled Fixed Rate Certificates.................................S-2
Pooled Floating Rate Certificates..............................S-2
Pooled Inverse Floating Rate Certificates.....................S-2
Prospectus.....................................................S-4
PTE 90-30......................................................S-35
Rating Agencies................................................S-12
Record Date....................................................S-7
Related Certificate............................................S-10
REMIC..........................................................S-3
Similar Law....................................................S-36
SMMEA..........................................................S-12
SPA............................................................S-24
Supplemental Distribution Date.................................S-4
Support Classes................................................S-18
Tax Counsel....................................................S-34
Trust..........................................................S-2
Trust Assets...................................................S-11
Trustee........................................................S-4
Trustee Fee....................................................S-14
Trustee Fee Escrow Account.....................................S-14
Underlying Agreement...........................................S-5
Underlying FHLMC Offering Circular ............................S-6
Underlying FHLMC Series........................................S-2
Underlying FNMA Prospectus Information ........................S-6
Underlying FNMA Series.........................................S-2
Underlying FNMA Trusts.........................................S-2
Underlying Mortgage Loans......................................S-3
Underlying Prospectuses........................................S-6
Underlying Series..............................................S-2
Underwriter....................................................S-1
VA.............................................................S-5
1933 Act.......................................................S-3
1934 Act.......................................................S-3
Z Classes......................................................S-2
<PAGE>
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<PAGE>
ANNEX 1
POOLED CERTIFICATE CURRENT INFORMATION
The table in this Annex 1 sets forth information for each of the Pooled
Certificates concerning such Pooled Certificates and the related Mortgage Loans.
The table and the descriptions of the Pooled Certificates herein are subject to
and qualified by reference to the information with respect to the provisions of
the Underlying Agreements and Underlying Prospectuses and the other prospectuses
related to the Pooled Certificates. The information set forth in the table and
elsewhere herein has been derived from information provided by FNMA and FHLMC,
but such information has not been independently verified by the Depositor or the
Underwriter. This information comprises all material information on the subject
that the Depositor and the Underwriter possess or can acquire without
unreasonable expense or effort.
"Weighted average" numbers are calculated based on the loan balances as of
March 1, 1997.
The issue dates for the Pooled FNMA Certificates 1992-45/Z, 252-CL-2,
1993-246/F and 1997-GS/Z were April 30, 1992, November 1, 1993, November 30,
1993 and February 28, 1997, respectively. The issue dates for the Pooled FHLMC
Certificates G003/SA, 1505/QB, 1603/SB, 1723/SB, 1869/TG, 1933/SA and 1933/SG
were November 30, 1992, May 28, 1993, October 29, 1993, May 27, 1994, August 30,
1996, February 28, 1997 and February 28, 1997, respectively.
The following is a description of each item reported in the following
table. The table should be read in conjunction with these descriptions and the
additional information contained in Annex 2.
1. ISSUER AND SERIES/CLASS. These first two columns indicate,
collectively, and the "issuer" name and series designation of
each Underling Series. For the full name of each Pooled
Certificate, see "Description of the Pooled Certificates -
General".
2. CERTIFICATE TYPE. NTL/INV indicates that the Pooled
Certificates have a notional principal balance and
bear interest at rates that are based on an index (in
this case, LIBOR) and that vary inversely with changes
in the index. FLT indicates that the Pooled
Certificates bear interest at rates that are based on
an index (in this case, LIBOR) and that vary directly
with changes in the index. FIX indicates that the
Pooled Certificates bear interest at a fixed rate. Z
indicates that the Pooled Certificates accrete the
amount of accrual interest otherwise distributable on
such Pooled Certificates, which amount will be added as
principal to the principal balance of such Pooled Certificates
on each applicable distribution date. Such accretion will
continue until some specified event has occurred or until such
Pooled Certificates are retired.
3. CURRENT COUPON. This column indicates the interest rates
applicable to the April 1997 distribution on the
Pooled Certificates.
4. CLASS ORIGINAL PRINCIPAL OR NOTIONAL PRINCIPAL BALANCE.
This column lists the original principal balance of
the Pooled Certificates.
5. CLASS % IN TRUST. This is the percentage which the
respective Pooled Certificates constitute of its class.
6. CLASS CURRENT PRINCIPAL OR NOTIONAL PRINCIPAL BALANCE.
This column shows the principal balance of the Pooled
Certificates after the distribution made in March 1997.
7. ORIGINAL MORTGAGE LOAN BALANCE. This is the original
aggregate scheduled principal balance of the Mortgage
Loans underlying each Pooled Certificate.
8. CURRENT MORTGAGE LOAN BALANCE. This is the aggregate
scheduled principal balance of the Mortgage Loans
underlying each Pooled Certificate as of March 1, 1997.
9. WAC. Under this heading is the current weighted average
of the note rates on the Mortgage Loans underlying
each Pooled Certificate.
10. CNWAC. Under this heading is the current weighted
average of the net rates (that is, note rate less any
servicing fee and any other administrative fees) on the
Mortgage Loans underlying each Pooled Certificate.
11. WAM. Under this heading is the current weighted
average of the remaining terms to maturity of the
Mortgage Loans underlying each Pooled Certificate (in
months).
12. WALA/CAGE. Under this heading is the weighted average
months since origination for the Mortgage
Loans underlying each Pooled Certificate.
<PAGE>
<TABLE>
<CAPTION>
CLASS CLASS ORIGINAL
ORIGINAL CURRENT MORTGAGE CURRENT
PRINCIPAL CLASS % PRINCIPAL OR LOAN MORTGAGE WALA/
CURRENT OR NOTIONAL IN TRUST NOTIONAL BALANCE LOAN BALANCE WAC CNWAC WAM CAGE
ISSUER SERIES/ CERTIFICATE COUPON PRINCIPAL PRINCIPAL
CLASS TYPE BALANCE IN BALANCE
TRUST
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA 1992-45/Z FIX/Z 6.000 6,000,000 35.29412% 7,893,773 244,864,334 101,328,790 8.500 8.000 230 120
FNMA 252-CL/2 NTL/FIX 7.500 6,000,000 0.30380% 4,314,176 2,085,043,178 1,420,082,766 7.936 7.500 304 47
FNMA 1993-246/F FLT 7.406 52,725,397 48.89887% 38,190,967 107,825,397(1) 78,101,948(1) 7.599(2) 7.121(2)307(2) 44(2)
FNMA 1997-G2/Z FIX/Z 8.500 3,000,000 13.95868% 2,809,532 358,381,687 347,098,583 9.000 8.500 354 5
FHLMC G003/SA INV 12.250 1,800,000 42.45283% 958,958 440,267,407 181,260,001 8.500 8.000 231 120
FHLMC 1505/QB INV 7.933 2,280,000 23.60248% 2,280,000 500,084,848 365,220,468 7.647 7.000 299 47
FHLMC 1603/SB INV 9.450 3,000,000 36.37387% 2,104,653 1,899,879,250 1,470,936,106 7.538 7.000 306 43
FHLMC 1723/SB INV 5.250 440,000 20.53333% 434,470 605,141,713 286,508,376 8.540 8.000 293 53
FHLMC 1869/TG(3) NTL/FIX 8.000 11,000,000 47.05265% 10,548,406 408,708,768 385,024,956 8.505 8.000 346 10
FHLMC 1933/SA(3) NTL/INV 1.500 44,233,880 100.00000% 43,803,029 583,508,423 579,987,433 8.107 7.500 356 3
FHLMC 1933/SG(3) NTL/INV 2.000 22,000,000 10.44466% 21,927,728 1,218,400,197 1,191,499,392 8.515 8.000 355 4
- -------------------------
(1) Based on original and current principal balances of the underlying
securities, respectively, rather than the balance of the Mortgage
Loans underlying such securities.
(2) The weighted average calculations are based on the current principal
balance (excluding notional balances) of each of the underlying
securities as of the March distribution date.
(3) In cases where the Pooled Certificates receive payment from a
specified collateral group, only the characteristics of the group
relating to the Pooled Certificates has been used in calculating the
above information.
</TABLE>
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Annex 2
Pooled Certificate Information
<PAGE>
Annex 2(a)
Prospectus Supplement
dated February 7, 1992
to
Prospectus dated January 4, 1990
relating to
Federal National Mortgage Association
Guaranteed REMIC Pass-Through Certificates
Fannie Mae REMIC Trust 1992-45
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JANUARY 4, 1990
$675,100,000
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(LOGO)
GUARANTEED REMIC PASS-THROUGH CERTIFICATES
FANNIE MAE REMIC TRUST 1992-45
The Guaranteed REMIC Pass-Through Certificates offered hereby (the "REMIC
Certificates") represent beneficial ownership interests in one of two trust
funds. The REMIC Certificates, other than the Class 45-RL REMIC Certificates,
represent beneficial ownership interests in Fannie Mae REMIC Trust 1992-45 (the
"Trust"). The assets of the Trust consist of the "regular interests" in a
separate trust fund (the "Lower Tier REMIC"). The assets of the Lower Tier REMIC
consist of Fannie Mae Guaranteed Mortgage Pass-Through Certificates (the "MBS
Certificates"), each of which represents a beneficial interest in a pool (the
"Pool") of first lien, single-family, fixed-rate residential mortgage loans (the
"Mortgage Loans") having the characteristics described herein. The REMIC
Certificates are to be issued and guaranteed as to timely distribution of
principal and interest by Fannie Mae and are offered by Fannie Mae pursuant to
its Prospectus for Guaranteed Mortgage Pass-Through Certificates (the "MBS
Prospectus"), available as described herein, and its Prospectus for Guaranteed
REMIC Pass-Through Certificates (the "REMIC Prospectus") attached hereto.
Goldman, Sachs & Co. ("Goldman Sachs") are to receive the REMIC Certificates in
exchange for the MBS Certificates pursuant to a Fannie Mae commitment and will
sell them to the public as described below and under "Plan of Distribution"
herein. Elections will be made to treat the Lower Tier REMIC and the Trust as
"real estate mortgage investment conduits" ("REMICs") pursuant to the Internal
Revenue Code of 1986, as amended (the "Code"). The REMIC Certificates (other
than the Class 45-R and Class 45-RL REMIC Certificates) will be designated as
the "regular interests," and the Class 45-R REMIC Certificates will be
designated as the "residual interest," in the REMIC constituted by the Trust.
The interests in the Lower Tier REMIC other than the Class 45-RL REMIC
Certificates (the "Lower Tier Regular Interests") will be designated as the
"regular interests," and the Class 45-RL REMIC Certificates will be designated
as the "residual interest," in the Lower Tier REMIC. See "Certain Additional
Federal Income Tax Consequences" herein and "Certain Federal Income Tax
Consequences" in the REMIC Prospectus. (Cover continued on next page)
- ------------------------
THE OBLIGATIONS OF FANNIE MAE UNDER ITS GUARANTY OF THE REMIC CERTIFICATES ARE
OBLIGATIONS OF FANNIE MAE ONLY AND ARE NOT BACKED BY THE FULL FAITH AND
CREDIT OF THE UNITED STATES. THE REMIC CERTIFICATES ARE EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933 AND ARE "EXEMPTED SECURITIES" WITHIN THE MEANING
OF THE SECURITIES EXCHANGE ACT OF 1934.
------------------------
ORIGINAL FINAL
PRINCIPAL INTEREST DISTRIBUTION
BALANCE RATE DATE
------------ -------- ---------------
Class 45-A .............. $305,046,000 7.25% March 2015
Class 45-B .............. 202,500 1137.80% March 2015
Class 45-C .............. 120,271,500 8.00% February 2018
Class 45-D .............. 113,710,500 8.00% April 2020
Class 45-E .............. 5,355,000 8.00% April 1997
Class 45-G .............. 8,050,000 8.00% April 2002
Class 45-H .............. 10,769,500 8.00% November 2006
Class 45-F .............. 80,456,000 (1) April 2022
Class 45-S .............. 20,114,000 (1) April 2022
Class 45-Z .............. 11,025,000 8.00% April 2022
Class 45-R .............. 90,000 8.00% April 2022
Class 45-RL.............. 10,000 8.00% April 2022
- ---------------
(1) The interest rate is subject to monthly adjustment by reference to the
average level of the 7-Year Treasury Index (the "Treasury Index") as
described herein under "Description of the REMIC
Certificates -- Distributions of Interest."
------------------------
The REMIC Certificates are being offered by Goldman Sachs from time to time
in negotiated transactions at varying prices to be determined at the time of
sale.
The REMIC Certificates are offered by Goldman Sachs, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or in
part. It is expected that the REMIC Certificates, except for the Class 45-R and
Class 45-RL REMIC Certificates, will be available through the book-entry system
of the Federal Reserve Banks on or about April 30, 1992. It is expected that the
delivery of the Class 45-R and Class 45-RL REMIC Certificates in registered,
certificated form will be made at the offices of Goldman Sachs, New York, New
York, on or about April 30, 1992.
GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus Supplement is February 7, 1992
<PAGE>
(Cover continued from previous page)
Interest on each Class of REMIC Certificates at the applicable per annum
interest rate set forth on the cover or described herein will be distributed on
the 25th day of each month (or, if such 25th day is not a business day, on the
first business day next succeeding such 25th day), commencing in May 1992 (each,
a "Distribution Date"), except for interest distributions on the Class 45-Z
REMIC Certificates, which are Accrual Certificates. Interest will accrue on the
Accrual Certificates as described under "Description of the REMIC
Certificates--Distributions of Interest" herein.
The principal distribution on the REMIC Certificates on each Distribution
Date will be in an amount equal to the sum of the aggregate distributions of
principal concurrently made on the MBS Certificates and interest that accrues
and is unpaid on the Accrual Certificates. On each Distribution Date,
distributions of principal of the REMIC Certificates will be allocated among the
Classes of REMIC Certificates in accordance with the priorities described under
"Description of the REMIC Certificates--Distributions of Principal" herein. Both
the Trust and the Lower Tier REMIC are subject to early termination only under
the limited circumstances described in the REMIC Prospectus under "The Trust
Agreement--Termination."
THE YIELD TO INVESTORS IN EACH CLASS OF REMIC CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE MORTGAGE LOANS, WHICH GENERALLY CAN BE PREPAID AT ANY TIME.
IN ADDITION, THE YIELD TO MATURITY ON A CLASS OF REMIC CERTIFICATES MAY VARY
DEPENDING ON THE EXTENT TO WHICH SUCH CLASS IS PURCHASED AT A DISCOUNT OR
PREMIUM. HOLDERS OF THE REMIC CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY
REMIC CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN
ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS
LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY REMIC CERTIFICATES
PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD. IN ADDITION, THE YIELD ON ANY CLASS THAT BEARS AN INTEREST
RATE THAT FLUCTUATES IN RESPONSE TO CHANGES IN THE TREASURY INDEX WILL BE
SENSITIVE TO THE LEVEL OF SUCH INDEX, AND THE YIELD ON ANY CLASS THAT BEARS AN
INTEREST RATE THAT FLUCTUATES AS A MULTIPLE OF THE TREASURY INDEX WILL BE VERY
SENSITIVE TO THE LEVEL OF SUCH INDEX. SEE "DESCRIPTION OF THE REMIC
CERTIFICATES--YIELD CONSIDERATIONS" HEREIN.
The Class 45-R and Class 45-RL REMIC Certificates will be subject to
certain transfer restrictions. In addition, any transferee of a Class 45-R or
Class 45-RL REMIC Certificate will be required to execute and deliver an
affidavit as provided in the REMIC Prospectus. See "Description of the REMIC
Certificates--Characteristics of the Class 45-R and Class 45-RL REMIC
Certificates" herein and "Description of the REMIC Certificates--Additional
Characteristics of Residual Certificates" and "Certain Federal Income Tax
Consequences--Sales of Certificates--Residual Certificates Transferred to or
Held by Disqualified Organizations" in the REMIC Prospectus.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this Prospectus Supplement, the REMIC
Prospectus or the MBS Prospectus. Any representation to the contrary is a
criminal offense.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
REMIC CERTIFICATES. INVESTORS SHOULD PURCHASE REMIC CERTIFICATES ONLY AFTER
READING THIS PROSPECTUS SUPPLEMENT, THE REMIC PROSPECTUS, THE MBS PROSPECTUS
DATED JANUARY 1, 1992 AND THE FANNIE MAE INFORMATION STATEMENT DATED NOVEMBER
21, 1991 AND ANY SUPPLEMENTS THERETO (THE "INFORMATION STATEMENT"). THE MBS
PROSPECTUS AND THE INFORMATION STATEMENT ARE INCORPORATED HEREIN BY REFERENCE
AND MAY BE OBTAINED FROM FANNIE MAE BY WRITING OR CALLING ITS REMIC PROSPECTUS
DEPARTMENT AT 3900 WISCONSIN AVENUE, N.W., AREA 2H-3S, WASHINGTON, D.C. 20016
(TELEPHONE 202-752-7585). SUCH DOCUMENTS MAY ALSO BE OBTAINED FROM GOLDMAN SACHS
BY WRITING OR CALLING THEIR REGISTRATION DEPARTMENT AT 85 BROAD STREET, NEW
YORK, NEW YORK 10004 (TELEPHONE 212-902-6685).
<PAGE>
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE REMIC
CERTIFICATES........................ S- 4
General............................. S- 4
Structure........................ S- 4
MBS Distributions................ S- 4
Fannie Mae Guaranty.............. S- 4
Characteristics of REMIC
Certificates................... S- 4
Authorized Denominations......... S- 5
Record Date...................... S- 5
REMIC Trust Factors.............. S- 5
The MBS Certificates................ S- 5
Prepayment Considerations and
Risks............................ S- 6
Distributions of Interest........... S- 7
General.......................... S- 7
Accrual Certificates............. S- 7
Floating Rate Certificates....... S- 7
Calculation of the Treasury Index... S- 7
Distributions of Principal.......... S- 8
Assumptions Relating to Tables...... S- 9
Characteristics of the Class 45-R
and Class 45-RL REMIC
Certificates..................... S- 9
Yield Considerations................ S-10
General.......................... S-10
The Class 45-B REMIC
Certificates................... S-11
The Class 45-S REMIC
Certificates................... S-11
Final Distribution Dates............ S-12
Reinvestment Risk................... S-12
Weighted Average Lives of the REMIC
Certificates..................... S-12
Decrement Tables.................... S-14
CERTAIN ADDITIONAL FEDERAL INCOME TAX
CONSEQUENCES........................ S-16
REMIC Elections and Special Tax
Attributes....................... S-16
Taxation of Beneficial Owners of
Regular Certificates............. S-16
Taxation of Beneficial Owners of
Residual Certificates............ S-17
LEGAL INVESTMENT CONSIDERATIONS....... S-18
General............................. S-18
Liquid Assets....................... S-18
PLAN OF DISTRIBUTION.................. S-18
General.......................... S-18
Increase in REMIC Certificates... S-18
LEGAL MATTERS......................... S-18
<PAGE>
DESCRIPTION OF THE REMIC CERTIFICATES
The following summaries describing certain provisions of the REMIC
Certificates do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, the REMIC Prospectus, the MBS Prospectus and
the provisions of the Trust Agreement (defined below). Capitalized terms used
and not otherwise defined in this Prospectus Supplement have the respective
meanings assigned to such terms in the REMIC Prospectus, the MBS Prospectus or
the Trust Agreement (as the context may require).
GENERAL
Structure. The REMIC Certificates will be issued and guaranteed by the
Federal National Mortgage Association ("Fannie Mae"), a corporation organized
and existing under the laws of the United States, under the authority contained
in Section 304(d) of the Federal National Mortgage Association Charter Act (12
U.S.C. 1716 et seq.). A description of Fannie Mae and its business, together
with certain financial statements and other financial information are contained
in the Information Statement. The REMIC Certificates in the Classes and
aggregate original principal balances set forth on the cover page hereof will be
issued pursuant to a trust agreement dated as of April 1, 1992 (the "Trust
Agreement"), executed by Fannie Mae in its corporate capacity and in its
capacity as Trustee. The Trust and the Lower Tier REMIC will be created pursuant
to the Trust Agreement, and elections will be made to treat each of the Trust
and the Lower Tier REMIC as a REMIC for federal income tax purposes.
The assets of the Trust will consist of the Lower Tier Regular Interests.
The entire beneficial ownership interest in the Trust will be evidenced by the
REMIC Certificates, other than the Class 45-RL REMIC Certificates, as described
herein.
The assets of the Lower Tier REMIC will consist of the MBS Certificates.
The Lower Tier Regular Interests and the Class 45-RL REMIC Certificates, in the
aggregate (the "Lower Tier Interests"), will evidence the entire beneficial
ownership interest in the distributions of principal and interest on the MBS
Certificates. Each of the Lower Tier Regular Interests will be designated as a
"regular interest" in the Lower Tier REMIC. The Class 45-RL REMIC Certificates
will be designated as the "residual interest" in the Lower Tier REMIC and will
have the characteristics described herein.
MBS Distributions. The MBS Certificates will provide that principal and
interest on the underlying Mortgage Loans will be passed through monthly,
commencing on the 25th day of the month following the month of the initial
issuance of the MBS Certificates.
Fannie Mae Guaranty. Pursuant to its guaranty of the MBS Certificates,
Fannie Mae will guaranty the timely payment of scheduled installments of
principal of and interest on the underlying Mortgage Loans, whether or not
received, together with the full principal balance of any foreclosed Mortgage
Loan, whether or not any such balance is actually recovered. In addition, Fannie
Mae will be obligated to distribute on a timely basis to the Holders of REMIC
Certificates required installments of principal and interest and to distribute
the principal balance of each Class of REMIC Certificates in full no later than
the applicable Final Distribution Date, whether or not sufficient funds are
available in the Certificate Account. If Fannie Mae were unable to perform these
guaranty obligations, distributions to Certificateholders would consist solely
of payments and other recoveries on the Mortgage Loans and, accordingly,
delinquencies and defaults on the Mortgage Loans would affect distributions to
Certificateholders. The guaranties of Fannie Mae are not backed by the full
faith and credit of the United States. See "Description of the REMIC
Certificates--Fannie Mae's Guaranty" in the REMIC Prospectus and "Description of
Certificates--The Corporation's Guaranty" in the MBS Prospectus.
Characteristics of REMIC Certificates. The REMIC Certificates, other than
the Class 45-R and Class 45-RL REMIC Certificates, will be issued and maintained
and may be transferred by Holders only on the book-entry system of the Federal
Reserve Banks. Book-entry REMIC Certificates may be held of record only by
entities eligible to maintain book-entry accounts with a Federal Reserve Bank.
Such entities whose names appear on the book-entry records of a Federal Reserve
Bank as the entities for whose accounts such REMIC Certificates have been
deposited are herein referred to as "Holders" or "Certificateholders." A Holder
is not necessarily the beneficial owner of a book-entry REMIC Certificate.
Beneficial owners ordinarily will hold book-entry REMIC Certificates through one
or more financial intermediaries, such as banks, brokerage firms and securities
clearing organizations and must depend on such intermediaries for the
enforcement of their rights. See "Description of the REMIC
Certificates--Denominations, Book-Entry Form" in the REMIC Prospectus.
The Class 45-R and Class 45-RL REMIC Certificates will not be issued in
book-entry form but will be issued in fully registered, certificated form. As to
the Class 45-R or Class 45-RL REMIC Certificates, "Holder" or
"Certificateholder" refers to the registered owner thereof. The Class 45-R and
Class 45-RL REMIC Certificates will be transferable and exchangeable at the
corporate trust office of the Transfer Agent, or at the agency of the Transfer
Agent in New York, New York. The Transfer Agent initially will be State Street
Bank and Trust Company in Boston, Massachusetts ("State Street"). A service
charge may be imposed for any exchange or registration of transfer of the Class
45-R or Class 45-RL REMIC Certificates and Fannie Mae may require payment of a
sum sufficient to cover any tax or other governmental charge. See
"Characteristics of the Class 45-R and Class 45-RL REMIC Certificates" herein.
Distributions on the Class 45-R and Class 45-RL REMIC Certificates will be
made by check mailed by the Paying Agent (initially State Street) to the address
of each person entitled thereto as it appears on the Certificate Register
maintained by the Certificate Registrar (initially State Street) not later than
each Distribution Date; provided, however, that the distribution to Holders of
the Class 45-R and Class 45-RL REMIC Certificates of the proceeds of any
remaining assets of the Trust and the Lower Tier REMIC, respectively, will be
made only upon presentation and surrender of the respective REMIC Certificates
at the office of the Paying Agent.
Authorized Denominations. The REMIC Certificates, other than the Class 45-R
and Class 45-RL REMIC Certificates, will be issued in minimum denominations of
$1,000 and integral multiples of $1 in excess thereof. The Class 45-R and Class
45-RL REMIC Certificates will be issued in minimum denominations of $1,000 and
integral multiples of $100 in excess thereof.
Record Date. Each monthly distribution on the REMIC Certificates will be
made to Holders of record on the last day of the preceding month.
REMIC Trust Factors. As soon as practicable following the eleventh calendar
day of each month, Fannie Mae will publish or otherwise make available for each
Class of REMIC Certificates the factor (carried to eight decimal places) which,
when multiplied by the original principal balance of a REMIC Certificate of such
Class, will equal the amount of principal remaining to be distributed with
respect to such REMIC Certificate after giving effect to the distribution of
principal to be made on the following Distribution Date and any interest to be
added to the principal balance of the Accrual Certificates on such Distribution
Date.
THE MBS CERTIFICATES
The MBS Certificates underlying the REMIC Certificates are Fannie Mae
Guaranteed Mortgage Pass-Through Certificates, which will have an aggregate
unpaid principal balance of $675,100,000, Pass-Through Rates of 8.00% and the
general characteristics described in the MBS Prospectus. The Mortgage Loans that
underlie the MBS Certificates are conventional Level Payment Mortgage Loans,
each secured by a first mortgage or deed of trust on a one- to four-family
("single-family") residential property, and all of which have an original
maturity of up to 30 years, as described under "The Mortgage Pools" and "Yield
Considerations" in the MBS Prospectus. The weighted average coupon of the
Mortgage Loans in each Pool ("WAC") at the issue date of the related MBS
Certificate or the current WAC as of April 1, 1992 (the "REMIC Issue Date"), if
available, will be within the range of 8.25% to 10.50% per annum. The weighted
average remaining term to maturity, in months, of the Mortgage Loans in each
Pool ("WAM") at the issue date of the related MBS Certificate, less the number
of months elapsed from such issue date through the REMIC Issue Date ("Adjusted
WAM"), or the current WAM as of the REMIC Issue Date, if available, will not be
less than 180 or greater than 360. The weighted average of the current WAMs (or
Adjusted WAMs, to the extent the current WAMs are not available) of all the MBS
Certificates underlying the REMIC Certificates is expected to be approximately
356 months. The weighted average calculated loan age of the Mortgage Loans in
each Pool ("CAGE") is determined by subtracting the original WAM for such Pool
from 360 months, and adding thereto the number of months elapsed since the issue
date of the related MBS Certificate. The weighted average of the CAGEs of the
Pools at the REMIC Issue Date is expected to be approximately 3 months.
Following the issuance of the REMIC Certificates, Fannie Mae will prepare a
Final Data Statement setting forth the Pool number, the current WAC (or original
WAC, if the current WAC is not available) and the current WAM (or Adjusted WAM,
if the current WAM is not available) of each MBS Certificate underlying the
REMIC Certificates, along with the weighted average of all the current or
original WACs and the weighted average of all the current or Adjusted WAMs,
based on the current unpaid principal balances of the MBS Certificates as of the
REMIC Issue Date. The Final Data Statement will not accompany this Prospectus
Supplement but will be made available by Fannie Mae. To request the Final Data
Statement, telephone Fannie Mae at (202) 752- 7585. The contents of the Final
Data Statement and other data specific to the REMIC Certificates are available
in electronic form by calling Fannie Mae at (202) 752-6000.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments of the MBS Certificates, and therefore of
distributions on the REMIC Certificates, is related directly to the rate of
payments of principal of the underlying Mortgage Loans, which may be in the form
of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments and liquidations resulting from default,
casualty or condemnation and payments made pursuant to any guaranty of payment
by, or option to repurchase of, Fannie Mae). In general, when the level of
prevailing interest rates declines sufficiently relative to the interest rates
on fixed-rate mortgage loans, the rate of prepayment is likely to increase,
although the prepayment rate is influenced by a number of other factors,
including general economic conditions and homeowner mobility. See "Maturity and
Prepayment Assumptions" in the MBS Prospectus.
Acceleration of mortgage payments as a result of transfers of the mortgaged
property is another factor affecting prepayment rates. The Mortgage Loans
underlying the MBS Certificates will generally provide by their terms that, in
the event of the transfer or prospective transfer of title to the underlying
mortgaged property, the full unpaid principal balance of the Mortgage Loan is
due and payable at the option of the holder. As set forth under "Description of
Certificates--Collection and Other Servicing Procedures" in the MBS Prospectus,
Fannie Mae is required to exercise its right to accelerate the maturity of
Mortgage Loans containing enforceable "due-on-sale" provisions upon certain
transfers of the mortgaged property.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Public Securities Association's standard prepayment model ("PSA"), represents an
assumed rate of prepayment each month of the then outstanding principal balance
of a pool of new mortgage loans. PSA does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans underlying the MBS Certificates backing the REMIC
Certificates. 100% PSA assumes prepayment rates of 0.2% per annum of the then
unpaid principal balance of such pool of mortgage loans in the first month of
the life of such mortgage loans and an additional 0.2% per annum in each month
thereafter (for example, 0.4% per annum in the second month) until the 30th
month. Beginning in the 30th month and in each month thereafter during the life
of such mortgage loans, 100% PSA assumes a constant prepayment rate of 6% per
annum. Multiples will be calculated from this prepayment rate series; for
example, 160% PSA assumes prepayment rates will be 0.32% per annum in month one,
0.64% per annum in month two, reaching 9.6% per annum in month 30 and remaining
constant at 9.6% per annum thereafter. 0% PSA assumes no prepayments.
DISTRIBUTIONS OF INTEREST
General. The REMIC Certificates will bear interest at the respective per
annum interest rates set forth on the cover or described herein. Interest on the
REMIC Certificates is calculated on the basis of a 360-day year consisting of
twelve 30-day months and is distributable monthly on each Distribution Date,
commencing (except with respect to the Accrual Certificates) in May 1992.
Interest to be distributed or added to principal on each REMIC Certificate on a
Distribution Date will consist of one month's interest on the outstanding
principal balance of such REMIC Certificate immediately prior to such
Distribution Date. Interest to be distributed or added to principal on a
Distribution Date will accrue on the REMIC Certificates, other than the Class
45-F and Class 45-S REMIC Certificates, during the calendar month preceding the
month in which such Distribution Date occurs; in the case of the Class 45-F and
Class 45-S REMIC Certificates, interest will accrue on such REMIC Certificates
during the one-month period beginning on the 25th day of such preceding month
and ending on the 24th day of the month of such Distribution Date (each, an
"Interest Accrual Period"). The effective yield on the REMIC Certificates, other
than the Class 45-F and Class 45-S REMIC Certificates, will be reduced below the
yield otherwise produced because principal and interest payable with respect to
an Interest Accrual Period will not be distributed until the 25th day following
the end of such Interest Accrual Period and will not bear interest during such
delay.
Accrual Certificates. The Class 45-Z REMIC Certificates are Accrual
Certificates. Interest will accrue on the Accrual Certificates at the per annum
rate set forth on the cover hereof. However, such interest will not be
distributed on the Accrual Certificates until the Distribution Date following
the Distribution Date on which the principal balance of the Class 45-H REMIC
Certificates has been reduced to zero. Interest so accrued and unpaid will be
added to the principal balance of the Accrual Certificates on each Distribution
Date. Distributions of principal of the Accrual Certificates will be distributed
as described herein.
Floating Rate Certificates. The Class 45-F and Class 45-S REMIC
Certificates will bear interest for their initial Interest Accrual Period at the
respective Initial Interest Rates set forth below, and will bear interest for
each Interest Accrual Period thereafter at their respective rates determined as
described below:
INITIAL MAXIMUM MINIMUM FORMULA FOR
INTEREST INTEREST INTEREST CALCULATION OF
CLASS RATE RATE RATE INTEREST RATE
- --------------------- ------- ------- ------- -------------------------
45-F................. 6.79% 10.00% 0.00% Treasury Index
45-S................. 12.84% 40.00% 0.00% 40.00%-(4.0 X Treasury Index)
The yields with respect to the Class 45-F and Class 45-S REMIC Certificates
will be affected by changes in the Treasury Index, which changes may not
correlate with changes in mortgage interest rates. It is possible that lower
mortgage interest rates could occur concurrently with an increase in the level
of the Treasury Index. Conversely, higher mortgage interest rates could occur
concurrently with a decrease in the level of the Treasury Index.
CALCULATION OF THE TREASURY INDEX
The Treasury Index for each Interest Accrual Period following the initial
Interest Accrual Period will be determined two business days prior to the first
day of such Interest Accrual Period (the "Treasury Index Determination Date").
Commencing in May 1992 and thereafter on each Treasury Index Determination Date
until the payment in full of the Class 45-F and Class 45-S REMIC Certificates,
State Street will ascertain the average level of the 7-Year Treasury Index in
effect for the week ending on the last Friday immediately preceding the Treasury
Index Determination Date (the "Treasury Index"). The Treasury Index for any
period means the average of the yield for each business day during such period,
expressed as a per annum percentage rate, on U.S. Treasury securities adjusted
to a constant maturity of seven years, as published by the Federal Reserve Board
in its Statistical Release No. H.15 (519). Statistical Release No. H.15 (519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551 (202) 452-3244. If
State Street has not yet received Statistical Release No. 15 (519) for such
week, then State Street will use such Statistical Release from the immediately
preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, Fannie Mae will designate a new index based upon comparable data and
methodology. State Street's determination of the Treasury Index, in the absence
of manifest error, will be final and binding.
DISTRIBUTIONS OF PRINCIPAL
Principal will be distributed monthly on the Lower Tier Regular Interests
and the Class 45-RL REMIC Certificates in an amount equal to the aggregate
distributions of principal concurrently made on the MBS Certificates (the "Cash
Flow Distribution Amount"). On each Distribution Date, the Class 45-RL REMIC
Certificates will receive 0.0014812620% of the Cash Flow Distribution Amount,
which percentage is equal to the proportion that the original principal balance
of such Class of REMIC Certificates bears to the original principal balance of
the Lower Tier Interests. The balance of the Cash Flow Distribution Amount (the
"Adjusted Cash Flow Distribution Amount") will be distributed as principal of
the Lower Tier Regular Interests held by the Trust.
The principal distribution on the REMIC Certificates, other than the Class
45-RL REMIC Certificates, on each Distribution Date will be in an amount equal
to the sum of (i) the Adjusted Cash Flow Distribution Amount and (ii) any
interest accrued and added on such Distribution Date to the principal balance of
the Accrual Certificates. On each Distribution Date, the Class 45-R REMIC
Certificates will receive from the Adjusted Cash Flow Distribution Amount a
percentage (0.0133313583%) of the Cash Flow Distribution Amount equal to the
proportion that the original principal balance of such Class of REMIC
Certificates bears to the original principal balance of all the REMIC
Certificates. The balance of the Adjusted Cash Flow Distribution Amount is
referred to as the "Net Adjusted Cash Flow Distribution Amount."
On each Distribution Date, the interest, if any, accrued and added to the
principal balance of the Class 45-Z REMIC Certificates will be applied,
sequentially, to the distribution of principal of the Class 45-E, Class 45-G and
Class 45-H REMIC Certificates, in that order, until the respective principal
balances thereof have been reduced to zero, and then to the Class 45-Z REMIC
Certificates.
On each Distribution Date, the Net Adjusted Cash Flow Distribution Amount
will be applied to the distribution of principal of the REMIC Certificates in
the following order of priority:
(i) concurrently, to the Class 45-A and Class 45-B REMIC Certificates,
in the proportions of 99.9336606077% and 0.0663393923%, respectively, until
the principal balances thereof have been reduced to zero;
(ii) sequentially, to the Class 45-C and Class 45-D REMIC
Certificates, in alphabetical order, until the respective principal
balances thereof have been reduced to zero;
(iii) concurrently, to the Class 45-F, Class 45-S and Class 45-E REMIC
Certificates, in such proportions as the original principal balances of the
Class 45-F, Class 45-S and the aggregate original principal balances of the
Class 45-E, Class 45-G, Class 45-H and Class 45-Z REMIC Certificates bear
to one another (or 59.2592592593%, 14.8148148148% and 25.9259259259%,
respectively), until the principal balance of the Class 45-E REMIC
Certificates has been reduced to zero;
(iv) concurrently, to the Class 45-F, Class 45-S and Class 45-G REMIC
Certificates, in the proportions set forth in clause (iii) above, until the
principal balance of the Class 45-G REMIC Certificates has been reduced to
zero;
(v) concurrently, to the Class 45-F, Class 45-S and Class 45-H REMIC
Certificates, in the proportions set forth in clause (iii) above, until the
principal balance of the Class 45-H REMIC Certificates has been reduced to
zero; and
(vi) concurrently, to the Class 45-F, Class 45-S and Class 45-Z REMIC
Certificates, in the proportions set forth in clause (iii) above, until the
principal balances thereof have been reduced to zero.
ASSUMPTIONS RELATING TO TABLES
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following
assumptions (the "Pricing Assumptions"): (i) each Mortgage Loan has an original
term to maturity of 360 months, bears interest at a rate per annum of 8.65%, and
has a CAGE of 3 months and a remaining term to maturity of 356 months; (ii) the
Mortgage Loans prepay at the specified constant percentage of PSA specified in
the related table; (iv) the closing date for the sale of the REMIC Certificates
is April 30, 1992; and (v) the first distribution on the REMIC Certificates is
made in May 1992.
CHARACTERISTICS OF THE CLASS 45-R AND CLASS 45-RL REMIC CERTIFICATES
In addition to distributions of principal and interest, the Holders of the
Class 45-R REMIC Certificates will be entitled to receive the proceeds of the
remaining assets of the Trust, if any, after the principal balances of all
Classes of REMIC Certificates (other than the Class 45-RL REMIC Certificates)
have been reduced to zero, and the Holders of the Class 45-RL REMIC Certificates
will be entitled to receive the proceeds of the remaining assets of the Lower
Tier REMIC, if any, after the principal balances of the Lower Tier Interests
have been reduced to zero. It is not anticipated that there will be any material
assets remaining in either such circumstance.
The Class 45-R and Class 45-RL REMIC Certificates will be subject to
certain transfer restrictions. No transfer of record or beneficial ownership in
a Class 45-R or Class 45-RL REMIC Certificate (whether pursuant to a purchase, a
default under a secured lending agreement or otherwise) will be allowed to a
"disqualified organization," which term includes governmental entities (other
than certain taxable instrumentalities) and tax-exempt entities not subject to
tax on unrelated business income. Any transferee of a Class 45-R or Class 45-RL
REMIC Certificate must execute and deliver (i) an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring a
Class 45-R or Class 45-RL REMIC Certificate is a disqualified organization, as
provided in the REMIC Prospectus, and (ii) an Internal Revenue Service Form W-9
on which the transferee provides its taxpayer identification number. In
addition, a pass-through entity (including a nominee) that holds a Class 45-R or
Class 45-RL REMIC Certificate may be subject to additional taxes if a
disqualified organization is a record holder therein. The Tax Simplification Act
of 1991 (H.R. 2777 and S. 1394), introduced on June 26, 1991, provides that each
partner in a "large partnership" holding a residual interest in a REMIC shall be
treated as a disqualified organization for purposes of the tax imposed on a
pass-through entity. A "large partnership" would be defined as any partnership
in which there are at least 250 partners in a taxable year. The legislation also
would disallow 70% of any large partnership's miscellaneous itemized deductions,
including deductions for MBS servicing and guaranty fees and any expenses of the
REMIC, although the remaining deductions would not be subject to the 2% floor
applicable to individual partners. These provisions are proposed to be effective
for taxable years ending on or after December 31, 1992. No prediction can be
made regarding whether such legislation will be enacted or, if so, what the
ultimate effective date will be. See "Description of the REMIC
Certificates--Additional Characteristics of Residual Certificates" and "Certain
Federal Income Tax Consequences--Sales of Certificates--Residual Certificates
Transferred to or Held by Disqualified Organizations" in the REMIC Prospectus.
In addition, no transfer of record or beneficial ownership in a Class 45-R
or Class 45-RL REMIC Certificate (whether pursuant to a purchase, a default
under a secured lending agreement or otherwise) will be allowed to any person
that is not a "U.S. Person" without the written consent of Fannie Mae. The term
"U.S. Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
Under the Proposed Regulations (as defined below under the heading "Certain
Additional Federal Income Tax Consequences"), a transfer of a "noneconomic
residual interest" to a U.S. Person would be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. The Class 45-R or Class 45-RL REMIC
Certificates would be treated as constituting a noneconomic residual interest
unless, at the time of the transfer, (i) the present value of the expected
future distributions on any Class 45-R or Class 45-RL REMIC Certificate is no
less than the product of the present value of the "anticipated excess
inclusions" with respect to such Certificate and the highest rate of tax
specified in section 11(b)(1) of the Code for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the Trust, in the case of a transfer of a Class 45-R
REMIC Certificate, or from the Lower Tier REMIC, in the case of a transfer of a
Class 45-RL REMIC Certificate, in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a Class 45-R or Class 45-RL REMIC Certificate,
determined as of the date such Certificate is transferred and based on events
that have occurred as of that date and on the Prepayment Assumption. See
"Certain Federal Income Tax Consequences--Taxation of Beneficial Owners of
Regular Certificates--Original Issue Discount" and "--Taxation of Beneficial
Owners of Residual Certificates--Excess Inclusions" in the REMIC Prospectus.
Each transferee of a Class 45-R or Class 45-RL REMIC Certificate must also
affirm in the affidavit relating to disqualified organizations discussed above
that no purpose of the transfer is to avoid or impede the assessment or
collection of tax.
The Holders of the Class 45-R REMIC Certificates will be considered to be
the holders of the residual interest in the REMIC constituted by the Trust, and
the Holders of the Class 45-RL REMIC Certificates will be considered to be the
holders of the residual interest in the REMIC constituted by the Lower Tier
REMIC. See "Certain Federal Income Tax Consequences" in the REMIC Prospectus.
Pursuant to the Trust Agreement, Fannie Mae will be obligated to provide to such
Holders (i) such information as is necessary to enable them to prepare their
federal income tax returns and (ii) any reports regarding the REMIC Certificates
that may be required under the Code.
YIELD CONSIDERATIONS
General. There can be no assurance that the Mortgage Loans will have the
characteristics assumed herein or will prepay at any of the rates assumed herein
or at any other particular rate, that the pre-tax yields on the REMIC
Certificates will correspond to any of the pre-tax yields shown herein or that
the aggregate purchase prices of the REMIC Certificates will be as assumed. In
addition, there can be no assurance that the Treasury Index will correspond with
the levels shown herein. Because the rate of distributions of principal of the
REMIC Certificates will be directly related to the actual amortization
(including prepayments) of the Mortgage Loans, which will likely include
Mortgage Loans that have remaining terms to maturity shorter or longer than
those assumed and interest rates higher or lower than those assumed, the
distributions on the REMIC Certificates are likely to differ from those assumed,
even if all the Mortgage Loans prepay at the indicated constant percentages of
PSA. In addition, it is not likely that the Mortgage Loans will prepay at a
constant rate until maturity, that all of such Mortgage Loans will prepay at the
same rate or that the level of the Treasury Index will remain constant. The
timing of changes in the rate of prepayments or the level of the Treasury Index
may significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments or the average level of the Treasury Index
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans or change in the level of the
Treasury Index, the greater the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal prepayments or the level
of the Treasury Index occurring at a rate or level higher (or lower) than the
rate or level anticipated by the investor during the period immediately
following the issuance of the REMIC Certificates will not be offset by a
subsequent like reduction (or increase) in the rate of principal prepayments or
level of the Treasury Index, as the case may be. Investors must make their own
decisions as to the appropriate assumptions, including prepayment assumptions,
to be used in deciding whether to purchase the REMIC Certificates.
The tables below indicate the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of certain Classes of REMIC Certificates to
various constant prepayment rates and, in certain cases, to changes in the
Treasury Index. The yields set forth in the tables were calculated by
determining the monthly discount rates that, when applied to the assumed stream
of cash flows to be paid on the applicable Classes of REMIC Certificates, would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed aggregate purchase prices of such Classes of REMIC Certificates and
converting such monthly rates to corporate bond equivalent rates. Such
calculations do not take into account variations that may occur in the interest
rates at which investors may be able to reinvest funds received by them as
distributions on the REMIC Certificates and consequently do not purport to
reflect the return on any investment in the REMIC Certificates when such
reinvestment rates are considered.
The Class 45-B REMIC Certificates. THE YIELD TO INVESTORS IN THE CLASS 45-B
REMIC CERTIFICATES WILL BE VERY SENSITIVE TO HIGH RATES OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS, WHICH GENERALLY CAN BE PREPAID AT
ANY TIME. ON THE BASIS OF THE ASSUMPTIONS DESCRIBED BELOW, THE YIELD TO MATURITY
ON THE CLASS 45-B REMIC CERTIFICATES WOULD BE 0% IF PREPAYMENTS WERE TO OCCUR AT
A CONSTANT RATE OF APPROXIMATELY 206% PSA. IF THE ACTUAL PREPAYMENT RATE OF THE
MORTGAGE LOANS WERE TO EXCEED THE FOREGOING LEVEL FOR AS LITTLE AS ONE MONTH
WHILE EQUALING SUCH LEVEL FOR THE REMAINING MONTHS, THE INVESTORS IN THE CLASS
45-B REMIC CERTIFICATES WOULD NOT FULLY RECOUP THEIR INITIAL INVESTMENTS.
The information set forth in the following table has been prepared on the
basis of the Pricing Assumptions and on the assumption that the aggregate
purchase price of the Class 45-B REMIC Certificates (including accrued interest)
is $6,735,854.
<TABLE>
<CAPTION>
SENSITIVITY OF THE CLASS 45-B REMIC CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<S> <C> <C> <C> <C> <C>
PSA Percentages....................................... 50% 100% 160% 300% 500%
----- ----- ---- ------ -------
Class 45-B............................................ 27.5% 19.1% 8.2% (15.6)% (42.3)%
</TABLE>
The Class 45-S REMIC Certificates. THE YIELD TO INVESTORS IN THE CLASS 45-S
REMIC CERTIFICATES WILL BE VERY SENSITIVE TO THE LEVEL OF THE TREASURY INDEX AND
SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE
MORTGAGE LOANS, WHICH GENERALLY CAN BE PREPAID AT ANY TIME. AS INDICATED IN THE
TABLE BELOW, A HIGH LEVEL OF THE TREASURY INDEX WILL HAVE A NEGATIVE EFFECT ON
THE YIELD TO INVESTORS IN THE CLASS 45-S REMIC CERTIFICATES.
Changes in the Treasury Index may not correlate with changes in prevailing
mortgage interest rates. It is possible that lower prevailing mortgage interest
rates, which might be expected to result in faster prepayments, could occur
concurrently with an increased level of the Treasury Index.
The information in the following table was prepared on the basis of the
Pricing Assumptions and on the assumptions that (i) on the Treasury Index
Determination Date in May 1992 and on each Treasury Index Determination Date
thereafter, the Treasury Index will be at the level shown and (ii) the aggregate
purchase price of the Class 45-S REMIC Certificates (including accrued interest)
is $15,608,129.
SENSITIVITY OF THE CLASS 45-S REMIC CERTIFICATES
TO PREPAYMENTS AND THE TREASURY INDEX
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PSA PREPAYMENT ASSUMPTION
TREASURY ------------------------------------------
INDEX 50% 100% 160% 300% 500%
--------------------------------------------------- ----- ----- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
4.79%............................................. 28.3% 28.3% 28.3% 28.7% 29.6%
6.79%............................................. 17.2% 17.3% 17.4% 18.0% 19.1%
8.79%............................................. 6.8% 6.9% 7.1% 7.9% 9.1%
10.00%............................................. 1.0% 1.1% 1.3% 2.1% 3.4%
</TABLE>
FINAL DISTRIBUTION DATES
The Final Distribution Date for REMIC Certificates of a particular Class is
the date by which the principal thereof is required to be fully paid and is
specified on the cover page. The Final Distribution Dates of the respective
Classes of REMIC Certificates have been determined so that distributions on the
underlying MBS Certificates will be sufficient to retire each such Class on or
before its Final Distribution Date without the necessity of any call on Fannie
Mae under its guaranty of the REMIC Certificates. However, because (i) some
prepayments of the Mortgage Loans are likely, and (ii) certain of the Mortgage
Loans have terms to maturity that are shorter than, and bear interest at rates
that are lower than, the term to maturity and interest rate assumed in
calculating the Final Distribution Dates, the actual final payment of any Class
of REMIC Certificates likely will occur earlier, and could occur significantly
earlier, than its Final Distribution Date. However, there can be no assurance
that the final distribution of principal of any Class of the REMIC Certificates
will be earlier than the Final Distribution Date for such Class.
REINVESTMENT RISK
Because the Mortgage Loans underlying the MBS Certificates may be prepaid
at any time, it is not possible to predict the rate at which distributions of
principal of the REMIC Certificates will be received. Accordingly, since
prevailing interest rates are subject to fluctuation, there can be no assurance
that investors in the REMIC Certificates will be able to reinvest the
distributions thereon at yields equaling or exceeding the yields on the REMIC
Certificates. It is possible that yields on any such reinvestments will be
lower, and may be significantly lower, than the yields on the REMIC
Certificates. Prospective investors in the REMIC Certificates should carefully
consider the related reinvestment risks in light of other investments that may
be available to such investors. See "Prepayment Considerations and Risks"
herein.
WEIGHTED AVERAGE LIVES OF THE REMIC CERTIFICATES
The weighted average life of a REMIC Certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the principal balance of
such REMIC Certificate from one Distribution Date to the next Distribution Date
by the number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate amount
of the net reductions in principal balance of such REMIC Certificate referred to
in clause (a).
The weighted average lives of the REMIC Certificates will be influenced by,
among other factors, the rate at which principal is paid on the Mortgage Loans.
In general, the weighted average lives of the REMIC Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives will depend upon a variety of
other factors, including the timing of changes in such rate of principal
payments and the priority sequence of distributions of principal of the REMIC
Certificates. The interaction of such factors may have different effects on the
various Classes of REMIC Certificates and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of REMIC Certificates.
Further, to the extent the prices of the REMIC Certificates represent discounts
or premiums to their respective original principal balances, variability in the
weighted average lives of such Classes of REMIC Certificates could result in
variability in the related yields to maturity. For an example of how the
weighted average lives of the REMIC Certificates are affected by the foregoing
factors at various constant rates of prepayments, see the Decrement Tables
below.
DECREMENT TABLES
The following tables indicate the percentages of the original principal
balances of the specified Classes of REMIC Certificates that would be
outstanding after each of the dates shown at various constant percentages of PSA
and the corresponding weighted average lives of such Classes of REMIC
Certificates. The tables have been prepared on the basis of the Pricing
Assumptions, except that with respect to the information set forth under 0% PSA
it has been assumed that each Mortgage Loan underlying the MBS Certificates
bears an interest rate of 10.50% per annum and has an original and remaining
term to maturity of 360 months. It is not likely that (i) all of the underlying
Mortgage Loans will have the interest rate, CAGE or remaining term to maturity
assumed or (ii) the underlying Mortgage Loans will prepay at a constant level of
PSA. In addition, the diverse remaining terms to maturity of the Mortgage Loans
(which will include recently originated Mortgage Loans) could produce slower or
faster principal distributions than indicated in the tables at the various
constant percentages of PSA specified, even if the weighted average remaining
term to maturity and the weighted average CAGE of the Mortgage Loans are
identical to the remaining term to maturity and CAGE specified in the Pricing
Assumptions.
PERCENT OF ORIGINAL PRINCIPAL BALANCES OUTSTANDING
CLASS 45-A AND CLASS 45-B
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 99 94 92 86 77
April 1994.......... 98 83 75 58 33
April 1995.......... 96 69 55 24 0
April 1996.......... 95 56 37 0 0
April 1997.......... 93 44 20 0 0
April 1998.......... 91 32 5 0 0
April 1999.......... 89 21 0 0 0
April 2000.......... 87 10 0 0 0
April 2001.......... 84 * 0 0 0
April 2002.......... 81 0 0 0 0
April 2003.......... 78 0 0 0 0
April 2004.......... 75 0 0 0 0
April 2005.......... 71 0 0 0 0
April 2006.......... 67 0 0 0 0
April 2007.......... 62 0 0 0 0
April 2008.......... 57 0 0 0 0
April 2009.......... 51 0 0 0 0
April 2010.......... 44 0 0 0 0
April 2011.......... 37 0 0 0 0
April 2012.......... 29 0 0 0 0
April 2013.......... 20 0 0 0 0
April 2014.......... 10 0 0 0 0
April 2015.......... 0 0 0 0 0
April 2016.......... 0 0 0 0 0
April 2017.......... 0 0 0 0 0
April 2018.......... 0 0 0 0 0
April 2019.......... 0 0 0 0 0
April 2020.......... 0 0 0 0 0
April 2021.......... 0 0 0 0 0
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 15.7 4.6 3.3 2.2 1.6
CLASS 45-C
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 100 100 100 100 100
April 1994.......... 100 100 100 100 100
April 1995.......... 100 100 100 100 65
April 1996.......... 100 100 100 92 0
April 1997.......... 100 100 100 36 0
April 1998.......... 100 100 100 0 0
April 1999.......... 100 100 77 0 0
April 2000.......... 100 100 46 0 0
April 2001.......... 100 100 18 0 0
April 2002.......... 100 77 0 0 0
April 2003.......... 100 54 0 0 0
April 2004.......... 100 33 0 0 0
April 2005.......... 100 13 0 0 0
April 2006.......... 100 0 0 0 0
April 2007.......... 100 0 0 0 0
April 2008.......... 100 0 0 0 0
April 2009.......... 100 0 0 0 0
April 2010.......... 100 0 0 0 0
April 2011.......... 100 0 0 0 0
April 2012.......... 100 0 0 0 0
April 2013.......... 100 0 0 0 0
April 2014.......... 100 0 0 0 0
April 2015.......... 97 0 0 0 0
April 2016.......... 66 0 0 0 0
April 2017.......... 31 0 0 0 0
April 2018.......... 0 0 0 0 0
April 2019.......... 0 0 0 0 0
April 2020.......... 0 0 0 0 0
April 2021.......... 0 0 0 0 0
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 24.5 11.3 7.9 4.8 3.2
CLASS 45-D
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 100 100 100 100 100
April 1994.......... 100 100 100 100 100
April 1995.......... 100 100 100 100 100
April 1996.......... 100 100 100 100 80
April 1997.......... 100 100 100 100 19
April 1998.......... 100 100 100 89 0
April 1999.......... 100 100 100 49 0
April 2000.......... 100 100 100 17 0
April 2001.......... 100 100 100 0 0
April 2002.......... 100 100 92 0 0
April 2003.......... 100 100 68 0 0
April 2004.......... 100 100 46 0 0
April 2005.......... 100 100 27 0 0
April 2006.......... 100 94 9 0 0
April 2007.......... 100 75 0 0 0
April 2008.......... 100 57 0 0 0
April 2009.......... 100 39 0 0 0
April 2010.......... 100 23 0 0 0
April 2011.......... 100 8 0 0 0
April 2012.......... 100 0 0 0 0
April 2013.......... 100 0 0 0 0
April 2014.......... 100 0 0 0 0
April 2015.......... 100 0 0 0 0
April 2016.......... 100 0 0 0 0
April 2017.......... 100 0 0 0 0
April 2018.......... 93 0 0 0 0
April 2019.......... 48 0 0 0 0
April 2020.......... 0 0 0 0 0
April 2021.......... 0 0 0 0 0
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 27.0 16.5 12.0 7.1 4.5
- ---------------
* Indicates an amount above zero and less than 0.5% of the original principal
balance is outstanding.
** The weighted average life of a REMIC Certificate is determined as specified
under "Weighted Average Lives of the REMIC Certificates" herein.
CLASS 45-E
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 83 83 83 83 83
April 1994.......... 64 64 64 64 64
April 1995.......... 44 44 44 44 44
April 1996.......... 23 23 23 23 23
April 1997.......... 0 0 0 0 0
April 1998.......... 0 0 0 0 0
April 1999.......... 0 0 0 0 0
April 2000.......... 0 0 0 0 0
April 2001.......... 0 0 0 0 0
April 2002.......... 0 0 0 0 0
April 2003.......... 0 0 0 0 0
April 2004.......... 0 0 0 0 0
April 2005.......... 0 0 0 0 0
April 2006.......... 0 0 0 0 0
April 2007.......... 0 0 0 0 0
April 2008.......... 0 0 0 0 0
April 2009.......... 0 0 0 0 0
April 2010.......... 0 0 0 0 0
April 2011.......... 0 0 0 0 0
April 2012.......... 0 0 0 0 0
April 2013.......... 0 0 0 0 0
April 2014.......... 0 0 0 0 0
April 2015.......... 0 0 0 0 0
April 2016.......... 0 0 0 0 0
April 2017.......... 0 0 0 0 0
April 2018.......... 0 0 0 0 0
April 2019.......... 0 0 0 0 0
April 2020.......... 0 0 0 0 0
April 2021.......... 0 0 0 0 0
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 2.7 2.7 2.7 2.7 2.7
CLASS 45-G
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 100 100 100 100 100
April 1994.......... 100 100 100 100 100
April 1995.......... 100 100 100 100 100
April 1996.......... 100 100 100 100 100
April 1997.......... 99 99 99 99 99
April 1998.......... 82 82 82 82 0
April 1999.......... 64 64 64 64 0
April 2000.......... 44 44 44 44 0
April 2001.......... 23 23 23 0 0
April 2002.......... 0 0 0 0 0
April 2003.......... 0 0 0 0 0
April 2004.......... 0 0 0 0 0
April 2005.......... 0 0 0 0 0
April 2006.......... 0 0 0 0 0
April 2007.......... 0 0 0 0 0
April 2008.......... 0 0 0 0 0
April 2009.......... 0 0 0 0 0
April 2010.......... 0 0 0 0 0
April 2011.......... 0 0 0 0 0
April 2012.......... 0 0 0 0 0
April 2013.......... 0 0 0 0 0
April 2014.......... 0 0 0 0 0
April 2015.......... 0 0 0 0 0
April 2016.......... 0 0 0 0 0
April 2017.......... 0 0 0 0 0
April 2018.......... 0 0 0 0 0
April 2019.......... 0 0 0 0 0
April 2020.......... 0 0 0 0 0
April 2021.......... 0 0 0 0 0
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 7.7 7.7 7.7 7.5 5.7
CLASS 45-H
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 100 100 100 100 100
April 1994.......... 100 100 100 100 100
April 1995.......... 100 100 100 100 100
April 1996.......... 100 100 100 100 100
April 1997.......... 100 100 100 100 100
April 1998.......... 100 100 100 100 97
April 1999.......... 100 100 100 100 2
April 2000.......... 100 100 100 100 0
April 2001.......... 100 100 100 91 0
April 2002.......... 100 100 100 15 0
April 2003.......... 81 81 81 0 0
April 2004.......... 60 60 60 0 0
April 2005.......... 38 38 38 0 0
April 2006.......... 14 14 14 0 0
April 2007.......... 0 0 0 0 0
April 2008.......... 0 0 0 0 0
April 2009.......... 0 0 0 0 0
April 2010.......... 0 0 0 0 0
April 2011.......... 0 0 0 0 0
April 2012.......... 0 0 0 0 0
April 2013.......... 0 0 0 0 0
April 2014.......... 0 0 0 0 0
April 2015.......... 0 0 0 0 0
April 2016.......... 0 0 0 0 0
April 2017.......... 0 0 0 0 0
April 2018.......... 0 0 0 0 0
April 2019.......... 0 0 0 0 0
April 2020.......... 0 0 0 0 0
April 2021.......... 0 0 0 0 0
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 12.4 12.4 12.4 9.6 6.5
CLASS 45-F AND CLASS 45-S
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 100 100 100 100 100
April 1994.......... 100 100 100 100 100
April 1995.......... 100 100 100 100 100
April 1996.......... 100 100 100 100 100
April 1997.......... 100 100 100 100 100
April 1998.......... 100 100 100 100 80
April 1999.......... 100 100 100 100 55
April 2000.......... 100 100 100 100 38
April 2001.......... 100 100 100 92 26
April 2002.......... 100 100 100 74 18
April 2003.......... 100 100 100 59 12
April 2004.......... 100 100 100 48 8
April 2005.......... 100 100 100 38 6
April 2006.......... 100 100 100 30 4
April 2007.......... 100 100 94 24 3
April 2008.......... 100 100 82 19 2
April 2009.......... 100 100 71 15 1
April 2010.......... 100 100 61 12 1
April 2011.......... 100 100 53 9 1
April 2012.......... 100 94 45 7 *
April 2013.......... 100 82 38 5 *
April 2014.......... 100 71 31 4 *
April 2015.......... 100 60 26 3 *
April 2016.......... 100 50 20 2 *
April 2017.......... 100 40 16 2 *
April 2018.......... 100 31 12 1 *
April 2019.......... 100 22 8 1 *
April 2020.......... 98 14 5 * *
April 2021.......... 52 5 2 * *
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 29.0 24.2 20.2 13.0 8.1
CLASS 45-Z
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 108 108 108 108 108
April 1994.......... 117 117 117 117 117
April 1995.......... 127 127 127 127 127
April 1996.......... 138 138 138 138 138
April 1997.......... 149 149 149 149 149
April 1998.......... 161 161 161 161 161
April 1999.......... 175 175 175 175 175
April 2000.......... 189 189 189 189 122
April 2001.......... 205 205 205 205 84
April 2002.......... 222 222 222 222 58
April 2003.......... 240 240 240 190 40
April 2004.......... 260 260 260 152 27
April 2005.......... 282 282 282 122 18
April 2006.......... 305 305 305 97 13
April 2007.......... 319 319 300 77 9
April 2008.......... 319 319 262 61 6
April 2009.......... 319 319 227 48 4
April 2010.......... 319 319 196 37 3
April 2011.......... 319 319 168 29 2
April 2012.......... 319 300 143 22 1
April 2013.......... 319 262 120 17 1
April 2014.......... 319 227 100 13 *
April 2015.......... 319 193 82 10 *
April 2016.......... 319 160 65 7 *
April 2017.......... 319 129 51 5 *
April 2018.......... 319 99 37 3 *
April 2019.......... 319 71 26 2 *
April 2020.......... 313 43 15 1 *
April 2021.......... 165 17 6 * *
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 29.0 24.2 20.2 14.5 9.7
CLASS 45-R AND CLASS 45-RL
----------------------------------
PSA PREPAYMENT
ASSUMPTION
----------------------------------
DATE 0% 100% 160% 300% 500%
- -------------------------- ------ ------ ------ ------
Initial Percent..... 100 100 100 100 100
April 1993.......... 99 97 96 94 90
April 1994.......... 99 92 89 81 70
April 1995.......... 98 86 80 66 49
April 1996.......... 98 80 71 53 34
April 1997.......... 97 74 64 43 23
April 1998.......... 96 69 57 35 16
April 1999.......... 95 64 51 28 11
April 2000.......... 94 59 45 23 8
April 2001.......... 93 55 40 18 5
April 2002.......... 92 51 36 15 4
April 2003.......... 90 47 32 12 2
April 2004.......... 89 43 28 10 2
April 2005.......... 87 39 25 8 1
April 2006.......... 85 36 22 6 1
April 2007.......... 83 33 19 5 1
April 2008.......... 80 30 17 4 *
April 2009.......... 78 27 14 3 *
April 2010.......... 75 24 12 2 *
April 2011.......... 71 21 11 2 *
April 2012.......... 68 19 9 1 *
April 2013.......... 64 17 8 1 *
April 2014.......... 59 14 6 1 *
April 2015.......... 54 12 5 1 *
April 2016.......... 49 10 4 * *
April 2017.......... 43 8 3 * *
April 2018.......... 36 6 2 * *
April 2019.......... 28 4 2 * *
April 2020.......... 20 3 1 * *
April 2021.......... 10 1 * * *
April 2022.......... 0 0 0 0 0
Weighted Average
Life (years)**..... 21.8 11.8 9.0 5.7 3.7
- ---------------
* Indicates an amount above zero and less than 0.5% of the original principal
balance is outstanding.
** The weighted average life of a REMIC Certificate is determined as specified
under "Weighted Average Lives of the REMIC Certificates" herein.
<PAGE>
CERTAIN ADDITIONAL FEDERAL INCOME TAX CONSEQUENCES
The following tax discussion, when read in conjunction with the discussion
of "Certain Federal Income Tax Consequences" in the REMIC Prospectus, describes
the current federal income tax treatment of investors in the REMIC Certificates.
These two tax discussions do not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the REMIC Certificates.
On September 27, 1991, the IRS issued proposed regulations (the "Proposed
Regulations") that provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of the
REMIC Certificates. Generally, the Proposed Regulations are proposed to be
effective for any REMIC the Closing Date of which is on or after November 12,
1991. While certain material provisions of the Proposed Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the Proposed Regulations in their specific
circumstances. No assurance can be given that final regulations will adopt the
provisions of the Proposed Regulations without amendment, nor can any prediction
be made as to when such final regulations will be adopted.
REMIC ELECTIONS AND SPECIAL TAX ATTRIBUTES
Elections will be made to treat the Lower Tier REMIC and the Trust as
REMICs for federal income tax purposes. The REMIC Certificates, other than the
Class 45-R and Class 45-RL REMIC Certificates, will be designated as the
"regular interests," and the Class 45-R REMIC Certificates will be designated as
the "residual interest," in the REMIC constituted by the Trust. The Lower Tier
Regular Interests will be designated as the "regular interests," and the Class
45-RL REMIC Certificates will be designated as the "residual interest," in the
Lower Tier REMIC.
As a consequence of the qualification of the Trust and the Lower Tier REMIC
as REMICs, the REMIC Certificates generally will be treated as "qualifying real
property loans" for mutual savings banks and domestic building and loan
associations, "regular or residual interests in a REMIC" for domestic building
and loan associations, "real estate assets" for real estate investment trusts,
and, except for the Class 45-R and Class 45-RL REMIC Certificates, as "qualified
mortgages" for other REMICs. See "Certain Federal Income Tax
Consequences--Special Tax Attributes" in the REMIC Prospectus.
TAXATION OF BENEFICIAL OWNERS OF REGULAR CERTIFICATES
The Class 45-S and Class 45-Z REMIC Certificates will be, and certain other
Classes of REMIC Certificates may be, issued with original issue discount for
federal income tax purposes, which generally will result in recognition of some
taxable income in advance of the receipt of the cash attributable to such
income. The Prepayment Assumption that will be used in determining the rate of
accrual of original issue discount will be 160% PSA. See "Certain Federal Income
Tax Consequences--Taxation of Beneficial Owners of Regular
Certificates--Original Issue Discount" in the REMIC Prospectus. No
representation is made as to whether the Mortgage Loans underlying the MBS
Certificates will prepay at that or any other rate. See "Description of the
REMIC Certificates-- Final Distribution Dates" and "--Weighted Average Lives of
the REMIC Certificates" herein. In addition, the Class 45-B REMIC Certificates
will be, and certain other Classes of REMIC Certificates may be, treated as
having been issued at a premium for federal income tax purposes. It is possible,
however, that the Class 45-B REMIC Certificates may be excluded from the rules
generally applicable to debt instruments issued at a premium because such REMIC
Certificates provide for relatively small distributions of principal. See
"Certain Federal Income Tax Consequences--Taxation of Beneficial Owners of
Regular Certificates--Certificates Purchased at a Premium" in the REMIC
Prospectus.
TAXATION OF BENEFICIAL OWNERS OF RESIDUAL CERTIFICATES
The Proposed Regulations provide that an organization to which section 593
of the Code applies and which is the beneficial owner of any Class 45-R or Class
45-RL REMIC Certificate may not use its allowable deductions to offset any
"excess inclusions" with respect to such Certificates if such Certificates do
not have "significant value." For this purpose, the Class 45-R REMIC
Certificates would have significant value under the Proposed Regulations if (i)
their aggregate issue price would be at least 2% of the aggregate issue prices
of all the REMIC Certificates (other than the Class 45-RL REMIC Certificates)
and (ii) their "anticipated weighted average life" would be at least 20% of the
"anticipated life" of the Trust. Similarly, the Class 45-RL REMIC Certificates
would have significant value if (i) their aggregate issue price would be at
least 2% of the aggregate issue prices of the Lower Tier Interests and (ii)
their anticipated weighted average life would be at least 20% of the anticipated
life of the Lower Tier REMIC. The anticipated weighted average lives of the
Class 45-R and Class 45-RL REMIC Certificates are based on the Prepayment
Assumption and are determined as described in "Description of the REMIC
Certificates--Weighted Average Lives of the REMIC Certificates" herein, and the
anticipated life of the Trust and the Lower Tier REMIC is the period of time
that the Trust and the Lower Tier REMIC are expected to be in existence, based
on the Prepayment Assumption. The aggregate issue prices of the Class 45-R and
Class 45-RL REMIC Certificates, respectively, will not satisfy the 2%
requirement, and the anticipated weighted average lives of such Certificates may
not satisfy the 20% requirement discussed above. Thus, under the Proposed
Regulations, neither the Class 45-R nor the Class 45-RL REMIC Certificates would
have significant value, the result of which would be to prevent an organization
to which section 593 of the Code applies and which is the beneficial owner of
any Class 45-R or Class 45-RL REMIC Certificate from using its allowable
deductions to offset any excess inclusions with respect to such Certificates.
See also "Certain Federal Income Tax Consequences--Taxation of Beneficial Owners
of Residual Certificates--Excess Inclusions" in the REMIC Prospectus.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of the Trust (or of the Lower Tier REMIC) as
excess inclusions if the Class 45-R (or Class 45-RL) REMIC Certificates do not
have "significant value." Although the Treasury Department did not exercise this
authority in the Proposed Regulations, future regulations may contain such a
rule. If such a rule were adopted, it is unclear whether the test for
significant value that is contained in the Proposed Regulations and discussed
above would be applicable. If no such rule is applicable, the rate that would be
used for purposes of computing the portion of the taxable income of the Trust
(or the Lower Tier REMIC) that will not be treated as excess inclusions is 120%
of the "federal long-term rate." The rate will be published on or about March
20, 1992. See "Certain Federal Income Tax Consequences--Taxation of Beneficial
Owners of Residual Certificates--Excess Inclusions" and "--Foreign
Investors--Residual Certificates" in the REMIC Prospectus. The federal income
tax consequences of any consideration paid to a transferee on the transfer of
any Class 45-R or Class 45-RL REMIC Certificate are unclear; any transferee
receiving such consideration should consult its own tax advisors.
The Treasury Department has adopted temporary regulations that clarify that
amounts distributed on the Class 45-R REMIC Certificates that do not constitute
an excess inclusion will qualify, subject to certain conditions, as "portfolio
interest" within the meaning of section 871(h) of the Code. The regulations
further clarify that such distributions on the Class 45-RL REMIC Certificates
also will qualify, subject to certain conditions, as portfolio interest, but
only to the extent that the Mortgage Loans were issued after July 18, 1984. See
"Certain Federal Income Tax Consequences-- Foreign Investors--Residual
Certificates" in the REMIC Prospectus.
Under the proposed IRS regulations relating to original issue discount, the
Lower Tier Regular Interests would be treated as a single debt instrument for
original issue discount purposes because they were issued to the Trust in a
single transaction. Although there can be no assurance that final regulations
will apply this aggregation rule to the Lower Tier Regular Interests, Fannie Mae
intends to calculate the taxable income (or net loss) of the Trust and of the
Lower Tier REMIC (and to report to the Class 45-R and Class 45-RL
Certificateholders) by treating the Lower Tier Regular Interests as a single
debt instrument. A failure of the Lower Tier Regular Interests to qualify as a
single debt instrument for original issue discount purposes could have a
material adverse impact on the beneficial owners of the Class 45-RL REMIC
Certificates.
LEGAL INVESTMENT CONSIDERATIONS
General. Institutions whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory authorities
may be subject to restrictions on investment in certain Classes of the REMIC
Certificates. Any financial institution that is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or other federal or state
agencies with similar authority should review any applicable rules, guidelines
and regulations prior to purchasing the REMIC Certificates. Financial
institutions should review and consider the applicability of the Federal
Financial Institutions Examination Council Supervisory Policy Statement on
Securities Activities (to the extent adopted by their respective federal
regulators), which, among other things, sets forth guidelines for investing in
certain types of mortgage related securities, including securities such as the
REMIC Certificates. Investors should consult their own legal advisors in
determining whether and to what extent the REMIC Certificates constitute legal
investments or are subject to restrictions on investment.
Liquid Assets. The Class 45-E REMIC Certificates are intended to qualify as
"liquid assets" for purposes of the liquidity requirements applicable to federal
savings associations, federal savings banks and state-chartered associations
whose deposits are insured by the Federal Deposit Insurance Corporation.
PLAN OF DISTRIBUTION
General. Goldman Sachs propose to offer the REMIC Certificates directly to
the public from time to time for sale in negotiated transactions at varying
prices to be determined at the time of sale. Goldman Sachs may effect such
transactions by selling the REMIC Certificates to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from any purchaser of such REMIC Certificates, for whom they may act
as agents.
Increase in REMIC Certificates. Fannie Mae and Goldman Sachs may agree to
offer hereby REMIC Certificates in addition to those contemplated as of the date
hereof. In such event, the MBS Certificates will be increased in principal
balance, but it is expected that all additional MBS Certificates will have the
same characteristics as described herein under "Description of the REMIC
Certificates--The MBS Certificates." The proportion that the original principal
balance of each Class of REMIC Certificates bears to the aggregate original
principal balance of all the REMIC Certificates will remain the same.
LEGAL MATTERS
Certain legal matters will be passed upon for Goldman Sachs by Cadwalader,
Wickersham & Taft, New York, New York.
<PAGE>
- ----------
Annex 2(b)
Prospectus Supplement
dated _______, 1992
to
Prospectus dated December 1, 1992
relating to
Federal National Mortgage Association
Stripped Mortgage Backed Securities
Trust Number 000252-CL
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Preliminary Data Statement to Prospectus Dated December 1, 1992
Federal National Mortgage Association
[FANNIEMAE LOGO]
Stripped Mortgage-Backed Securities
Trust Number 000252-CL
Set forth below is certain additional information with respect to the SMBS
Certificates of SMBS Trust Number 000252-CL. Capitalized terms used and not
otherwise defined in this Preliminary Data Statement have the respective
meanings assigned to them in the accompanying Prospectus. This SMBS Trust is
comprised of one Mega Certificate backed by MBS Certificates. The Mega Trust
Number is CL-190252.
SMBS Trust balance at settlement: $1,975,000,000
The SMBS Certificates issued and outstanding at settlement are as follows:
Original Outstanding
Annual Pass-Through Rate Principal Balance
------------------------ --------------------
Class 1 PO $1,975,000,000
Class 2 IO(1) (1)
-------------------------
(1) The Class 2 SMBS Certificates are interest only certificates that bear
interest at a rate of 7.5% per annum on their notional principal
balance (originally $1,975,000,000).
MBS Pass-Through Rate: 7.5%
SMBS Issue Date: November 1, 1993
SMBS Settlement Date: November 30, 1993
Each of the MBS Certificates underlying the Mega Certificate will conform to
the following parameters:
(a) The weighted average coupon of the Mortgage Loans in each Pool
underlying the Mega Certificate at the SMBS Issue Date or, if not available
at the SMBS Issue Date, the Issue Date of the related MBS Certificate was
no less than 7.75% and no greater than 9.00%.
(b) The weighted average remaining term to maturity, in months, of the
Mortgage Loans in each Pool underlying the Mega Certificate at the SMBS
Issue Date or, if not available at the SMBS Issue Date, the Issue Date of
the related MBS Certificate, less the number of months elapsed from such
Issue Date through the SMBS Issue Date, is no less than 336 and no greater
than 360.
Any Fannie Mae Guaranteed Mortgage Pass-Through Certificate conforming to
the parameters set forth in this Preliminary Data Statement and in the
Prospectus may be included in the pool underlying the Mega Certificate. See
"The MBS Certificates" in the Prospectus.
The yields on the SMBS Certificates will be extremely sensitive to
prepayment experience on the Mortgage Loans, and prospective investors should
fully consider the associated risks, including, for Class 2 SMBS Certificates,
the risk that such investors may not fully recover their initial investment.
(continued on reverse side)
------------------------
The date of this Preliminary Data Statement is October 28, 1993.
CL-Conventional Long Term level payment mortgages maturing in 20 to 30 years
Donaldson, Lufkin & Jenrette
Securities Corporation $ 425,000,000
Goldman, Sachs & Co. $ 300,000,000
Greenwich Capital
Markets, Inc. $ 250,000,000
Kidder, Peabody & Co. $ 250,000,000
Bear, Stearns & Co. Inc. $ 200,000,000
Lehman Brothers $ 150,000,000
CS First Boston $ 100,000,000
Merrill Lynch & Co. $ 100,000,000
Prudential Securities
Incorporated $ 100,000,000
Citicorp Securities, Inc. $ 50,000,000
The Nikko Securities Co.
International, Inc. $ 50,000,000
OTHER AUTHORIZED CLASSES OF SMBS CERTIFICATES--EXCHANGES.
In addition to the Class 1 through Class 2 SMBS Certificates, sixteen
additional Classes of SMBS Certificates will be authorized for issuance with
respect to the SMBS Trust. Certificates of such additional Classes will bear
interest at a rate of 0.5% per annum for Class 3 SMBS Certificates and at
respective increments of 1% to a rate of 15.5% for Class 18 SMBS Certificates as
shown below.
As contemplated in the Prospectus, SMBS Certificates of one or more Classes
will be exchangeable on the book-entry system of the Federal Reserve Banks for
one or more Mega Certificates (representing all or a portion of the Mega
Certificate originally included in the SMBS Trust) and/or SMBS Certificates of
one or more other Classes. The conditions for any such exchange vary somewhat
from those set forth in the Prospectus and are as follows:
For Mega Certificates: The SMBS Certificates surrendered for exchange
must, in the aggregate, provide for monthly distributions of interest in an
amount equivalent to interest at a rate of 7.5% per annum on the aggregate
principal balances (exclusive of the notional principal balances of any
Class 2 SMBS Certificates) of such SMBS Certificates so exchanged.
For other SMBS Certificates: The SMBS Certificates surrendered for
exchange must have aggregate principal balances (exclusive of the notional
principal balances of any Class 2 SMBS Certificates) and provide for annual
distributions of interest equal, after rounding to whole dollars, to the
aggregate principal balances (exclusive of the notional principal balances
of any Class 2 SMBS Certificates) and annual interest distributions of the
SMBS Certificates received in any such exchange.
Contrary to the Prospectus, SMBS Certificates and Mega Certificates
received on any exchange may be subsequently exchanged without limitation for
either new SMBS Certificates or Mega Certificates, subject only to the above
conditions.
The following three examples illustrate the practically infinite capability
for exchanges of SMBS Certificates. In each case, it is assumed that the
exchanging Holder's SMBS Certificates are as follows:
Outstanding Pass-Through Annual Interest
Principal Amount Class Rate Distribution
- ---------------- --------------- ------------ ---------------
$ 10,000,000 5 2.5% $ 250,000
$ 10,000,000 8 5.5% $ 550,000
$ 10,000,000 14 11.5% $ 1,150,000
- ---------------- ---------------
$ 30,000,000 $ 1,950,000
Example 1. Holder receives Class 4, Class 6, Class 12 and Class 14 SMBS
Certificates.
Outstanding Pass-Through Annual Interest
Principal Amount Class Rate Distribution
- ---------------- ------------------ ------------ ---------------
$ 10,000,000 4 1.5% $ 150,000
$ 5,000,000 6 3.5% $ 175,000
$ 5,000,000 12 9.5% $ 475,000
$ 10,000,000 14 11.5% $ 1,150,000
- ---------------- ---------------
$ 30,000,000 $ 1,950,000
Example 2. Holder receives new Class 1 and Class 2 SMBS Certificates.
Outstanding Pass-Through Annual Interest
Principal Amount Class Rate Distribution
- ---------------- ------------- ------------ ---------------
$ 30,000,000 1 0% 0
$ 26,000,000(notional) 2 7.5% $ 1,950,000
- ---------------- ---------------
$ 30,000,000 $ 1,950,000
Example 3. Holder receives Mega Certificates and Class 1, Class 12 and Class 15
SMBS Certificates.
Outstanding Pass-Through Annual Interest
Principal Amount Class Rate Distribution
- --------------- ---------------- ------------ ---------------
$ 15,000,000 Mega Certificates 7.5% $ 1,125,000
$ 7,263,158 1 0% 0
$ 4,736,842 12 9.5% $ 450,000
$ 3,000,000 15 12.5% $ 375,000
- ---------------- ---------------
$ 30,000,000 $ 1,950,000
The aggregate principal balances of SMBS Certificates of any particular
Class outstanding at any time may be expected to vary over the life of the SMBS
Trust and will depend upon any exchanges that occur. However, the aggregate
principal balances of all SMBS Certificates, regardless of Class, outstanding at
any particular time (exclusive of the notional principal balances of any Class 2
SMBS Certificates) will always be equal to the outstanding principal balance of
the Mega Certificate underlying such SMBS Certificates and the total
distributions of interest required thereon will always be equal to the required
distributions of interest on such underlying Mega Certificate.
Procedures and Fees
A Certificateholder wishing to exchange Mega or SMBS Certificates must
notify Fannie Mae at (202) 752-7875 not earlier than the fifth business day of
the month of the proposed exchange and not later than four business days before
the date listed as the settlement date for MBS Certificates with a 7.5%
pass-through rate in the then current PSA Mortgage Securities Newsletter (the
"PSA Settlement Date"). The notice must include the outstanding principal
amounts (or notional principal amounts) of both the SMBS Certificates and the
Mega Certificates to be received. All exchanges will take place three business
days before the PSA Settlement Date unless otherwise agreed by Fannie Mae. A
Certificateholder's notice of a proposed exchange may not be revoked on and
after the fourth business day preceding the PSA Settlement Date. Since exchanges
in any month will be effective subsequent to the record date for the
Distribution Date in that month, all distributions in the month of exchange will
be made in respect of the Mega or SMBS Certificates surrendered for exchange.
The first distribution in respect of the SMBS Certificates and/or Mega
Certificates received in any exchange will take place in the month following the
month of exchange.
If an exchange is for SMBS Certificates only, the fee will be $2,000 per
Class of SMBS Certificates surrendered for exchange (one or more exchanged Mega
Certificates constituting a Class for such purpose). If a Mega Certificate
constitutes all or a portion of the securities received in exchange, the fee
will instead be based on the aggregate of the principal balances of the Mega
Certificates and/or SMBS Certificates surrendered for exchange (.5/32 of 1% of
the aggregate balances for exchanges in December 1993 and January 1994 and 1/32
of 1% for all such exchanges thereafter). To illustrate, the fee for both
Example #1 and Example #2 above would be $6,000 since, in each case, only SMBS
Certificates are received in exchange and three Classes of SMBS Certificates are
surrendered for exchange. The fact that four Classes of SMBS Certificates are
received in the exchange in Example #1 and only two Classes are received in
Example #2 is ignored in the fee calculation. Since, in Example #3, a Mega
Certificate constitutes a portion of the securities received in the exchange,
the fee for that exchange would be equal to 1/32 of 1% (or, .5/32 of 1% for
exchanges in December 1993 and January 1994) of the aggregate principal balances
of the SMBS Certificates surrendered for exchange or $9,375 ($4,687.50 if the
exchange was in December 1993 or January 1994). The fee for the exchange of a
Mega Certificate for SMBS Certificates will be 1/32 of 1% of the principal
amount of the Mega Certificate surrendered for exchange.
Sensitivity to Prepayments
The following table indicates certain relationships between assumed
purchase prices of the SMBS Certificates, as stated below, and the yields to
maturity on the SMBS Certificates, stated on a corporate bond equivalent basis.
For purposes of this table it is assumed that (i) each Class of SMBS
Certificates was sold on the settlement date at the assumed price listed below,
which is the percentage of the original principal amount, or, if applicable, the
original notional principal amount, as applicable, plus accrued interest thereon
to the settlement date, (ii) the settlement date for such assumed sale is
November 30, 1993, (iii) all of the Mortgage Loans have a coupon of 7.98% and
(iv) all of the Mortgage Loans have a CAGE of 9 months and remaining terms to
maturity equal to 350 months and prepay according to the percentages of Public
Securities Association assumptions (PSA) indicated below.
<TABLE>
<CAPTION>
Annual
Pass-Through Assumed
Rate CUSIP Price
---------------- ------------ ------------
<S> <C> <C> <C> <C>
SMBS Class 1 Certificates PO 31364H F 5 1 82.62500%
SMBS Class 2 Certificates IO 31364H F 6 9 21.25000%
SMBS Class 3 Certificates 0.50% 31364H 3 A 3 84.04167%
SMBS Class 4 Certificates 1.50% 31364H 3 B 1 86.87500%
SMBS Class 5 Certificates 2.50% 31364H 3 C 9 89.70833%
SMBS Class 6 Certificates 3.50% 31364H 3 D 7 92.54167%
SMBS Class 7 Certificates 4.50% 31364H 3 E 5 95.37500%
SMBS Class 8 Certificates 5.50% 31364H 3 F 2 98.20833%
SMBS Class 9 Certificates 6.50% 31364H 3 G 0 101.04167%
SMBS Class 10 Certificates 7.50% 31364H 3 H 8 103.87500%
SMBS Class 11 Certificates 8.50% 31364H 3 J 4 106.70833%
SMBS Class 12 Certificates 9.50% 31364H 3 K 1 109.54167%
SMBS Class 13 Certificates 10.50% 31364H 3 L 9 112.37500%
SMBS Class 14 Certificates 11.50% 31364H 3 M 7 115.20833%
SMBS Class 15 Certificates 12.50% 31364H 3 N 5 118.04167%
SMBS Class 16 Certificates 13.50% 31364H 3 P 0 120.87500%
SMBS Class 17 Certificates 14.50% 31364H 3 Q 8 123.70833%
SMBS Class 18 Certificates 15.50% 31364H 3 R 6 126.54167%
PSA Percentages
150% 300% 400% 500% 700%
--------- --------- --------- --------- ---------
Yield to Maturity
SMBS Class 1 Certificates 2.3% 3.9% 5.1% 6.3% 8.6%
SMBS Class 2 Certificates 26.9% 17.8% 11.5% 5.0% (8.6)%
SMBS Class 3 Certificates 2.6% 4.1% 5.2% 6.2% 8.3%
SMBS Class 4 Certificates 3.3% 4.5% 5.4% 6.2% 7.9%
SMBS Class 5 Certificates 4.0% 4.9% 5.5% 6.2% 7.4%
SMBS Class 6 Certificates 4.6% 5.3% 5.7% 6.1% 7.0%
SMBS Class 7 Certificates 5.2% 5.6% 5.9% 6.1% 6.6%
SMBS Class 8 Certificates 5.8% 5.9% 6.0% 6.1% 6.2%
SMBS Class 9 Certificates 6.3% 6.2% 6.1% 6.1% 5.9%
SMBS Class 10 Certificates 6.9% 6.5% 6.3% 6.0% 5.5%
SMBS Class 11 Certificates 7.3% 6.8% 6.4% 6.0% 5.2%
SMBS Class 12 Certificates 7.8% 7.0% 6.5% 6.0% 4.9%
SMBS Class 13 Certificates 8.3% 7.3% 6.6% 6.0% 4.6%
SMBS Class 14 Certificates 8.7% 7.5% 6.7% 5.9% 4.3%
SMBS Class 15 Certificates 9.1% 7.7% 6.8% 5.9% 4.1%
SMBS Class 16 Certificates 9.5% 8.0% 6.9% 5.9% 3.8%
SMBS Class 17 Certificates 9.9% 8.2% 7.0% 5.9% 3.6%
SMBS Class 18 Certificates 10.2% 8.4% 7.1% 5.9% 3.3%
</TABLE>
Since the characteristics of the Mortgage Loans will not correspond exactly
to those assumed above, the actual yields to maturity are likely to vary from
those indicated even if the actual prepayments correspond to the PSA
percentages. Furthermore, since the calculations in the table are based upon
assumed constant percentages of PSA over the life of the SMBS Certificates,
higher or lower percentages at any particular time, even averaging the assumed
percentages, will produce different yields from the applicable yields set forth
in the table.
MBS Helpline
Copies of the Prospectus and listings of the MBS Certificates backing the
Mega Certificate may be obtained from Fannie Mae by writing or calling its MBS
Helpline at 3900 Wisconsin Avenue, N.W., Area 2H-2N, Washington, D.C. 20016
(telephone 1-800-BEST-MBS or 202-752-6549). Information may be obtained in
electronic form by calling 202-752-6000. Such documents may also be obtained
from the dealers listed on the cover page of this Preliminary Data Statement.
Certain Federal Income Tax Consequences
A beneficial owner of any Class of SMBS Certificates, other than the Class
10 SMBS Certificates, will own "stripped bonds" or "stripped coupons." See
"Certain Federal Income Tax Consequences" in the Prospectus for a discussion of
the consequences of the purchase, ownership and disposition of the SMBS
Certificates. For a discussion of the consequences of owning the Class 10 SMBS
Certificates, see "Certain Federal Income Tax Consequences" in the MBS
Prospectus.
A beneficial owner that surrenders a Class or Classes of SMBS Certificates
or one or more Mega Certificates (representing all or a portion of the Mega
Certificate originally included in the SMBS Trust) in exchange for one or more
other Classes of SMBS Certificates will not recognize gain or loss as a result
of such exchange. In addition, a beneficial owner that surrenders one or more
Classes of SMBS Certificates in exchange for a portion of the Mega Certificate
included in the Trust will not recognize gain or loss as a result of such
exchange.
<PAGE>
Annex 2(c)
Prospectus Supplement
dated November 12, 1993
to
Prospectus dated december 29, 1993
relating to
Federal National Mortgage association
Guaranteed REMIC Pass-Through Certificates
Fannie Mae REMIC Trust 1993-246
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Prospectus Supplement
(To Prospectus dated December 29, 1992)
$107,825,397
Federal National Mortgage Association
[FANNIEMAE LOGO]
Guaranteed REMIC Pass-Through Certificates
Fannie Mae REMIC Trust 1993-246
The Guaranteed REMIC Pass-Through Certificates offered hereby (the
"Certificates") will represent beneficial ownership interests in Fannie Mae
REMIC Trust 1993-246 (the "Trust"). The assets of the Trust will consist of (i)
a single "principal only" Fannie Mae Stripped Mortgage-Backed Security (the
"Trust SMBS") evidencing the beneficial ownership interests in certain principal
distributions made in respect of certain Fannie Mae Guaranteed Mortgage
Pass-Through Certificates ("MBS") held in the form of a Fannie Mae Guaranteed
MBS Pass-Through Certificate (a "Mega Certificate") and included in Fannie Mae
Stripped Mortgage-Backed Security Trust 000250-CL and (ii) certain of the Class
50-SA, Class 150-FQ, Class 21-SA, Class 216-D and Class 216-DA REMIC
Certificates (collectively, the "Underlying REMIC Certificates") evidencing
respective beneficial ownership interests in Fannie Mae REMIC Trust 1992-50,
Fannie Mae REMIC Trust 1992-150, Fannie Mae REMIC Trust 1993-21 and Fannie Mae
REMIC Trust 1993-216 ("Trust 1992-50," "Trust 1992-150," "Trust 1993-21" and
"Trust 1993-216," respectively, and collectively, the "Underlying REMIC
Trusts"). The assets of each Underlying REMIC Trust evidence the direct or
indirect beneficial ownership interest in certain MBS having the characteristics
described herein. Each MBS underlying the Trust SMBS and the Underlying REMIC
Certificates will represent a beneficial ownership interest in a pool (the
"Pool") of first lien, single-family, fixed-rate residential mortgage loans (the
"Mortgage Loans") having the characteristics described herein.
The Certificates will be issued and guaranteed as to timely distribution of
principal and, to the extent set forth herein, interest by Fannie Mae and
offered by Fannie Mae pursuant to its Prospectus for Guaranteed Mortgage
Pass-Through Certificates (the "MBS Prospectus"), its Prospectus for Stripped
Mortgage-Backed Securities (the "SMBS Prospectus") and its Prospectus for
Guaranteed MBS Pass-Through Certificates (the "Mega Prospectus"), each available
as described herein, and its Prospectus for Guaranteed REMIC Pass-Through
Certificates (the "REMIC Prospectus") and its Prospectus Supplements for Trust
1992-50, Trust 1992-150, Trust 1993-21 and Trust 1993-216 (the "1992-50
Prospectus Supplement," the "1992-150 Prospectus Supplement," the "1993-21
Prospectus Supplement" and the "1993-216 Prospectus Supplement," respectively,
and collectively the "Underlying Prospectuses") accompanying this Prospectus
Supplement.
THE CERTIFICATES MAY NOT BE SUITABLE INVESTMENTS FOR ALL INVESTORS. NO
INVESTOR SHOULD PURCHASE CERTIFICATES UNLESS SUCH INVESTOR UNDERSTANDS AND IS
ABLE TO BEAR THE PREPAYMENT, YIELD, LIQUIDITY AND OTHER RISKS ASSOCIATED WITH
SUCH CERTIFICATES. SEE "DESCRIPTION OF THE CERTIFICATES--PREPAYMENT
CONSIDERATIONS AND RISKS" AND "--YIELD CONSIDERATIONS" HEREIN.
An election will be made to treat the Trust as a "real estate mortgage
investment conduit" ("REMIC") pursuant to the Internal Revenue Code of 1986, as
amended (the "Code"). The R Class will be subject to transfer restrictions. See
"Description of the Certificates--Characteristics of the R Class" and "Certain
Additional Federal Income Tax Consequences" herein, and "Description of the
Certificates--Additional Characteristics of Residual Certificates" and "Certain
Federal Income Tax Consequences" in the REMIC Prospectus.
(Cover continued on next page)
------------------------
THE CERTIFICATES, TOGETHER WITH ANY INTEREST THEREON, ARE NOT GUARANTEED BY THE
UNITED STATES. THE OBLIGATIONS OF FANNIE MAE UNDER ITS GUARANTY OF THE
CERTIFICATES ARE OBLIGATIONS SOLELY OF FANNIE MAE AND DO NOT CONST-
ITUTE AN OBLIGATION OF THE UNITED STATES OR ANYAGENCY OR INSTRU-
MENTALITY THEREOF OTHER THAN FANNIE MAE. THE CERTIFICATES
ARE EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933 AND ARE "EXEMPTED SECURITIES"
WITHIN THE MEANING OF THE SECURITIES
EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
===========================================================================================================
Original Final
Principal Principal Interest Interest Distribution
Class Balance Type(1) Rate Type(1) Date
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F ....................... $107,825,397 (2) (3) FLT October 2023
- -----------------------------------------------------------------------------------------------------------
R(4)....................... 0 NPR 0 EXE October 2023
===========================================================================================================
(1) See "Description of the Certificates--Class Definitions and Abbreviations"
in the REMIC Prospectus and "Description of the Certificates--Distributions
of Interest" and "--Distributions of Principal" herein.
(2) The F Class will be entitled to receive the entire Principal Distribution
Amount on each Distribution Date until the principal balance thereof is
reduced to zero. See "Description of the Certificates--Distributions of
Principal" herein.
(3) The F Class will bear interest based on "LIBOR," as described under
"Description of the Certificates--Distributions of Interest" herein and
"Description of the Certificates--Indices Applicable to Floating Rate and
Inverse Floating Rate Classes" in the REMIC Prospectus and will be entitled
to receive the entire Interest Distribution Amount (as defined herein) on
each Distribution Date.
(4) The R Class will be entitled to receive the proceeds of the remaining assets
of the Trust, if any, after the principal balance of the F Class has been
reduced to zero and any unpaid carry forward interest deficiency (together
with any accrued and unpaid interest thereon) has been paid in full. See
"Description of the Certificates--Characteristics of the R Class" herein.
</TABLE>
------------------------
The Certificates will be offered by Kidder, Peabody & Co. Incorporated (the
"Dealer") from time to time in negotiated transactions, at varying prices to be
determined at the time of sale.
The Certificates will be offered by the Dealer, subject to issuance by
Fannie Mae and to prior sale or to withdrawal or modification of the offer
without notice, when, as and if delivered to and accepted by the Dealer, and
subject to approval of certain legal matters by counsel. It is expected that the
Certificates, except for the R Class, will be available through the book-entry
system of the Federal Reserve Banks on or about November 30, 1993 (the
"Settlement Date"). It is expected that the R Class in registered, certificated
form will be available for delivery at the offices of the Dealer, New York, New
York, on or about the Settlement Date.
------------------------
[KIDDER, PEABODY & COMPANY LOGO]
November 12, 1993
(Cover continued from previous page)
The yield to investors in each Class will be directly related to the level
of LIBOR and, among other things, the rate of distributions on the Trust SMBS
and the Underlying REMIC Certificates, which in turn will be sensitive in
varying degrees to the rate of principal payments of the Mortgage Loans, the
characteristics of the Mortgage Loans included in the related Pools and the
priority sequences affecting principal distributions on the Underlying REMIC
Certificates. Such yields will also be sensitive to the amount of Excess
Interest (as defined herein) available for distribution and the purchase price
paid for the related Class. Accordingly, investors should consider the following
risks:
- The Mortgage Loans generally may be prepaid at any time without
penalty, and, accordingly, the rate of principal payments thereon is
likely to vary considerably from time to time.
- Slight variations in Mortgage Loan characteristics could substantially
affect the weighted average lives and yields of either or both of the
Classes.
- In the case of any Certificates purchased at a discount to their
principal amounts, a slower than anticipated rate of principal
payments is likely to result in a lower than anticipated yield.
- In the case of any Certificates purchased at a premium to their
principal amounts, a faster than anticipated rate of principal
payments is likely to result in a lower than anticipated yield.
- The yield on the Certificates will be sensitive to the level of the
LIBOR. Under certain circumstances of increased LIBOR levels, the
Interest Distribution Amount may not be sufficient to pay the full
amount of interest accrued on the F Class at the LIBOR based formula
rate. Any such deficiency on a particular Distribution Date will be
carried forward, with interest, to subsequent Distribution Dates. If
an unpaid carry forward interest deficiency remains on the
Distribution Date upon which the principal balance of the F Class is
reduced to zero, all distributions on any Trust SMBS and Underlying
REMIC Certificates remaining in the Trust will thereafter be applied
to the payment of any such unpaid carry forward interest deficiency
(together with any accrued and unpaid interest thereon) before any
distributions are made to the R Class. Once the principal balance of
the Trust SMBS and the respective principal balances and notional
principal balance of the Underlying REMIC Certificates have been
reduced to zero, Holders of the F Class will have no future
entitlement to any unpaid carry forward interest deficiency or
interest thereon.
- The relationship among the various factors that affect the
availability of principal and interest distributions, and
correspondingly, the yield on the Certificates, is complex, and an
investment in the Certificates should only be made by persons familiar
with the analysis of mortgage loan prepayment rates and
mortgage-backed securities structures.
See "Description of the Certificates--Prepayment Considerations and Risks" and
"--Yield Considerations" herein.
In addition, investors should purchase Certificates only after considering
the following:
- The rate of distributions of the Certificates is uncertain and
investors may be unable to reinvest the distributions thereon at
yields equaling the yields on the Certificates. See "Description of
the Certificates--Reinvestment Risk" in the REMIC Prospectus.
- Each of the Class 50-SA, Class 150-FQ and Class 21-SA REMIC
Certificates included in the Trust is an "Interest Only" Certificate
with either a nominal or notional principal balance. Such nominal or
notional principal balances may be reduced to zero prior to (and
possibly substantially prior to) the reduction of the principal
balances of the Trust SMBS and the Class 216-D and Class 216-DA REMIC
Certificates to zero.
- The Class 216-D and Class 216-DA REMIC Certificates included in the
Trust are "Targeted Principal REMIC Certificates" and are not
scheduled to receive principal payments in accordance with their
Principal Balance Schedules until the Distribution Dates in March
1998 and October 1998, respectively.
- The actual final payment of the F Class will likely occur earlier, and
could occur much earlier, than the Final Distribution Date for such
Class specified on the cover page. See "Description of the
Certificates--Weighted Average Lives of the Certificates" herein and
"Description of the Certificates--Weighted Average Life and Final
Distribution Dates" in the REMIC Prospectus.
- Investors whose investment activities are subject to legal investment
laws and regulations or to review by regulatory authorities may be
subject to restrictions on investment in certain Classes of the
Certificates. Investors should consult their legal advisors to
determine whether and to what extent the Certificates constitute legal
investments or are subject to restrictions on investment. See "Legal
Investment Considerations" in the REMIC Prospectus.
The Dealer intends to make a market for the Certificates but is not
obligated to do so. There can be no assurance that such a secondary market will
develop or, if developed, that it will continue. Thus, investors may not be able
to sell their Certificates readily or at prices that will enable them to realize
their anticipated yield. No investor should purchase Certificates unless such
investor understands and is able to bear the risk that the value of the
Certificates will fluctuate over time and that the Certificates may not be
readily salable.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this Prospectus Supplement, the SMBS
Prospectus, the Mega Prospectus, the MBS Prospectus, the Underlying Prospectuses
or the REMIC Prospectus. Any representation to the contrary is a criminal
offense.
This Prospectus Supplement does not contain complete information about the
Certificates. Investors should purchase Certificates only after reading this
Prospectus Supplement, the REMIC Prospectus, the MBS Prospectus dated October 1,
1993, the SMBS Prospectus dated December 1, 1992, the Mega Prospectus dated
December 1, 1992, the Underlying Prospectuses and the Fannie Mae Information
Statement dated February 16, 1993 and any supplements thereto (the "Information
Statement"). The MBS Prospectus, the SMBS Prospectus, the Mega Prospectus and
the Information Statement are incorporated herein by reference and may be
obtained from Fannie Mae by writing or calling its MBS Helpline at 3900
Wisconsin Avenue, N.W., Area 2H-2N, Washington, D.C. 20016 (telephone
1-800-BEST-MBS or 202-752-6547). Such documents may also be obtained from Kidder
Peabody & Co. Incorporated by writing or calling its Prospectus Department at 60
Broad Street, 6th Floor, New York, New York 10006 (telephone 212-656-1584).
TABLE OF CONTENTS
Page
----
Description of the Certificates....... S- 4
General............................. S- 4
Structure........................ S- 4
SMBS Distributions............... S- 4
Fannie Mae Guaranty.............. S- 4
Characteristics of
Certificates................... S- 4
Authorized Denominations......... S- 5
Distribution Dates............... S- 5
Calculation of Distributions..... S- 5
Record Date...................... S- 6
REMIC Trust Factors.............. S- 6
Voting the Underlying REMIC
Trusts......................... S- 6
The Trust SMBS...................... S- 6
The Class 50-SA REMIC
Certificates..................... S- 6
The Class 150-FQ REMIC
Certificates..................... S- 7
The Class 21-SA REMIC
Certificates..................... S- 7
The Class 216-D and Class 216-DA
REMIC Certificates............... S- 8
Final Data Statement................ S- 8
Prepayment Considerations
and Risks........................ S- 8
Distributions of Interest........... S- 9
Categories of Classes............ S- 9
General.......................... S- 9
Interest Accrual Periods......... S-10
Floating Rate Class.............. S-10
Calculation of LIBOR................ S-11
Distributions of Principal.......... S-11
Categories of Classes............ S-11
Principal Distribution Amount.... S-11
Structuring Assumptions............. S-11
Pricing Assumptions.............. S-11
PSA Assumptions.................. S-11
Characteristics of the R Class...... S-12
Yield Considerations................ S-12
Weighted Average Lives of the
Certificates..................... S-13
Decrement Tables.................... S-14
Certain Additional Federal Income Tax
Consequences........................ S-16
REMIC Elections and Special Tax
Attributes....................... S-16
Taxation of Beneficial Owners of
Regular Certificates............. S-16
Taxation of Beneficial Owners of
Residual Certificates............ S-16
Plan of Distribution.................. S-17
Legal Matters......................... S-17
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the Certificates
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the REMIC Prospectus, the MBS Prospectus, the SMBS
Prospectus, the Mega Prospectus, the Underlying Prospectuses and the provisions
of the Trust Agreement (defined below). Capitalized terms used and not otherwise
defined in this Prospectus Supplement have the respective meanings assigned to
such terms in the REMIC Prospectus (including the Glossary contained therein),
the MBS Prospectus, the SMBS Prospectus, the Mega Prospectus, the Underlying
Prospectuses or the Trust Agreement (as the context may require).
General
Structure. The Trust will be created pursuant to a trust agreement dated as
of September 1, 1987, as supplemented by an issue supplement thereto dated as of
November 1, 1993 (together, the "Trust Agreement"), executed by the Federal
National Mortgage Association ("Fannie Mae") in its corporate capacity and in
its capacity as Trustee, and the Certificates in the Classes and aggregate
original principal balances set forth on the cover hereof will be issued by
Fannie Mae pursuant thereto. A description of Fannie Mae and its business,
together with certain financial statements and other financial information, is
contained in the Information Statement.
The F Class will be designated as the "regular interest" and the R Class
will be designated as the "residual interest," in the REMIC constituted by the
Trust.
The assets of the Trust will consist of the Trust SMBS and the Underlying
REMIC Certificates (which evidence direct or indirect beneficial ownership
interests in the Underlying REMIC Trusts).
SMBS Distributions. The Trust SMBS will provide that certain principal
payments on the underlying MBS will be passed through monthly, commencing on the
25th day of the month following the month of the initial issuance of the SMBS
(or, if such 25th day is not a business day, on the first business day next
succeeding such 25th day).
Fannie Mae Guaranty. Fannie Mae guarantees to the Holders of Certificates
(i) distribution on each Distribution Date of the Principal Distribution Amount
and the Interest Distribution Amount, in each case calculated as provided
herein, and (ii) distribution in full of the principal balance of the F Class no
later than the Final Distribution Date, whether or not sufficient funds are
available. Fannie Mae's guaranty does not cover the receipt of any unpaid carry
forward interest deficiency (or any interest accrued thereon) once the principal
balance of the Trust SMBS and the principal balances and notional principal
balance of the respective Underlying REMIC Certificates have been reduced to
zero. In such event, Holders of the F Class will have no future entitlement to
any such payments. See "Distributions of Interest" herein. Fannie Mae guarantees
to each holder of an MBS the timely payment of scheduled installments of
principal of and interest on the underlying Mortgage Loans, whether or not
received, together with the full principal balance of any foreclosed Mortgage
Loan, whether or not received. The guaranty obligations of Fannie Mae with
respect to the Trust SMBS and the related Mega Certificate are described in the
SMBS Prospectus and Mega Prospectus, respectively. The guaranty obligations of
Fannie Mae with respect to the Underlying REMIC Certificates are described in
the Underlying Prospectuses.
The guaranties of Fannie Mae are not backed by the full faith and credit of
the United States. See "Description of the Certificates--Fannie Mae's Guaranty"
in the REMIC Prospectus, "The SMBS Certificates--Fannie Mae Obligations" in the
SMBS Prospectus, "The Certificates--Fannie Mae's Guaranty" in the Mega
Prospectus, "Description of Certificates--The Corporation's Guaranty" in the MBS
Prospectus, "Description of the REMIC Certificates--General--Fannie Mae
Guaranty" in the 1992-50 and 1992-150 Prospectus Supplements and "Description of
the Certificates--General-- Fannie Mae Guaranty" in the 1993-21 and 1993-216
Prospectus Supplements.
Characteristics of Certificates. The F Certificates will be issued through
the book-entry system of the Federal Reserve Banks and shall be maintained in
that system for so long as they are eligible. In the event that the monthly
interest rate on the F Certificates exceeds the eligibility limits of that
system, they shall be maintained in another book-entry system or in certificated
form.
The F Certificates may be transferred by Holders only on the book-entry
system of the Federal Reserve Banks for so long as they are maintained on such
system. Such entities whose names appear on the book-entry records of a Federal
Reserve Bank as the entities for whose accounts the Certificates of such Class
have been deposited are herein referred to as "Holders" or "Certificateholders."
A Holder is not necessarily the beneficial owner of a book-entry Certificate.
Beneficial owners will ordinarily hold book-entry Certificates through one or
more financial intermediaries, such as banks, brokerage firms and securities
clearing organizations. See "Description of the Certificates--Denominations,
Book-Entry Form" in the REMIC Prospectus.
The R Certificates will not be issued in book-entry form but will be issued
in fully registered, certificated form. As to an R Certificate, "Holder" or
"Certificateholder" refers to the registered owner thereof. The R Certificates
will be transferable and, if applicable, exchangeable at the corporate trust
office of the Transfer Agent, or at the agency of the Transfer Agent in New
York, New York. The Transfer Agent initially will be State Street Bank and Trust
Company in Boston, Massachusetts ("State Street"). A service charge may be
imposed for any registration of transfer or, if applicable, exchange of the R
Certificates and Fannie Mae may require payment of a sum sufficient to cover any
tax or other governmental charge. See also "Characteristics of the R Class"
herein.
The distribution to the Holders of the R Certificates of the proceeds of
any remaining assets of the Trust will be made only upon presentation and
surrender of the respective Certificates at the office of the Paying Agent.
The Paying Agent initially will be State Street.
Authorized Denominations. The F Certificates will be issued in minimum
denominations of $1,000 and integral multiples of $1 in excess thereof. The R
Certificates will be issued in minimum percentage interests of 10% and integral
multiples of 1% percentage interests in excess thereof.
Distribution Dates. Distributions on the Certificates will be made on the
25th day of each month (or, if such 25th day is not a business day, on the first
business day next succeeding such 25th day), commencing in the month following
the Settlement Date.
Calculation of Distributions. Interest on the F Class is calculated on the
basis of a 360-day year consisting of twelve 30-day months and is distributable
monthly on each Distribution Date, commencing in the month after the Settlement
Date. Interest to be distributed on the F Class on a Distribution Date will be
in an amount (the "Interest Distribution Amount") equal to the lesser of (a) the
sum of (i) one month's interest on the outstanding principal balance of the F
Class immediately prior to such Distribution Date, (ii) any unpaid carry forward
interest deficiency (as defined herein) and (iii) interest, if any, accrued on a
compounded basis and unpaid on any such unpaid carry forward interest deficiency
and (b) the sum of (i) the aggregate distributions of interest concurrently made
on the Class 50-SA, Class 150-FQ and Class 21-SA REMIC Certificates and (ii) the
aggregate distributions of principal concurrently made on the Trust SMBS and the
Underlying REMIC Certificates following the reduction of the principal balance
of the F Class to zero. Interest will accrue on the F Class during the one month
periods set forth herein under "Distributions of Interest--Interest Accrual
Periods." In the event that the Interest Distribution Amount for any
Distribution Date is less than the interest accrued on the principal balance of
the F Class during the preceding Interest Accrual Period, such deficiency will
accrue interest during each Interest Accrual Period thereafter, at the per annum
interest rate applicable to the F Class from time to time, to the extent such
deficiency remains unpaid on a subsequent Distribution Date.
Principal on the F Class will be distributed on each Distribution Date in
an amount equal to the sum of (i) the aggregate distributions of principal
concurrently made on the Trust SMBS and the Underlying REMIC Certificates and
(ii) the amount by which the aggregate distributions of interest concurrently
made on the Class 50-SA, Class 150-FQ and Class 21-SA REMIC Certificates exceeds
the sum of (a) the interest accrued on the F Class during the preceding Interest
Accrual Period, (b) any unpaid carry forward interest deficiency and (c)
interest, if any, accrued on a compounded basis and unpaid on any such unpaid
carry forward interest deficiency (such excess, the "Excess Interest"). See
"Distributions of Principal" herein.
Record Date. Each monthly distribution on the Certificates will be made
to Holders of record on the last day of the preceding month.
REMIC Trust Factors. As soon as practicable following the eleventh calendar
day of each month, Fannie Mae will publish or otherwise make available for the F
Class the factor (carried to eight decimal places) which, when multiplied by the
original principal balance of a Certificate of such Class, will equal the
remaining principal balance of such Certificate after giving effect to the
distribution of principal to be made on the following Distribution Date.
Voting the Underlying REMIC Trusts. In the event any issue arises under the
trust agreement governing either of the Underlying REMIC Trusts that requires
the vote of holders of certificates outstanding thereunder, the Trustee will
vote the related Underlying REMIC Certificates in accordance with instructions
received from Holders of Certificates having principal balances aggregating not
less than 51% of the outstanding principal balance of the F Class. In the
absence of such instructions, the Trustee will vote in a manner consistent, in
its sole judgment, with the best interests of Certificateholders.
The Trust SMBS
The Trust SMBS will represent principal payments (and no interest payments)
on a principal amount of $96,000,000 of MBS having the general characteristics
described in the MBS Prospectus. The MBS underlying the Trust SMBS have a
pass-through rate of 7.0% and are held in the form of Mega Certificate
CL-190250, the general characteristics of which are described in the Mega
Prospectus.
The Mortgage Loans underlying the Trust SMBS will be conventional Level
Payment Mortgage Loans secured by a first mortgage or deed of trust on a one- to
four-family residential property having an original maturity of up to 30 years,
as described under "The Mortgage Pools" and "Yield Considerations" in the MBS
Prospectus. The characteristics of the Mortgage Loans underlying the Trust SMBS
as of November 1, 1993 are expected to be as follows:
Approximate Weighted Average WAC......................... 7.488%
Approximate Weighted Average WAM......................... 357 months
Approximate Weighted Average CAGE........................ 3 months
The Class 50-SA REMIC Certificates
The Class 50-SA REMIC Certificates, which are "Interest Only" certificates,
evidence certain of the beneficial ownership interests in Trust 1992-50, the
assets of which consist of certain MBS. As of November 1, 1993, the principal
balance of the Class 50-SA REMIC Certificates is expected to be $1,050,665, of
which a portion representing a $642,327 principal balance of the Class 50-SA
REMIC Certificates will be included in the Trust. The 50-SA REMIC Certificates
bear interest during each Interest Accrual Period, subject to a maximum rate of
1,178% per annum and a minimum rate of 0% per annum, at a rate per annum equal
to 1,178% - (124 X LIBOR). See the 1992-50 Prospectus Supplement for a
discussion of the general characteristics of the Class 50-SA REMIC Certificates.
The MBS included in Trust 1992-50 have the Pass-Through Rate set forth
below and the general characteristics set forth in the MBS Prospectus. The
Mortgage Loans underlying such MBS are conventional Level Payment Mortgage Loans
secured by a first mortgage or deed of trust on a one-to-four family residential
property having an original maturity of up to 15 years, as described under "The
Mortgage Pools" and "Yield Considerations" in the MBS Prospectus. The
characteristics of the MBS and the Mortgage Loans underlying Trust 1992-50 as of
November 1, 1993 are expected to be as follows:
Pass-Through Rate......................................... 8.0%
Approximate Weighted Average WAC.......................... 8.529%
Approximate Weighted Average WAM.......................... 155 months
Approximate Weighted Average CAGE......................... 21 months
The Class 150-FQ REMIC Certificates
The Class 150-FQ REMIC Certificates, which are "Interest Only"
certificates, evidence certain of the beneficial ownership interests in Trust
1992-150, the assets of which consist of certain MBS. As of November 1, 1993,
the principal balance of the Class 150-FQ REMIC Certificates is expected to be
$1,358,070. All of the Class 150-FQ REMIC Certificates will be included in the
Trust. The 150-FQ REMIC Certificates bear interest during each Interest Accrual
Period, subject to a maximum rate of 1,519.71428% per annum and a minimum rate
of 360.35552% per annum, at a rate per annum equal to 360.35552% + (130.26503 X
LIBOR). See the 1992-150 Prospectus Supplement for a discussion of the general
characteristics of the Class 150-FQ REMIC Certificates.
The MBS included in Trust 1992-150 will have the Pass-Through Rate set
forth below and the general characteristics set forth in the MBS Prospectus. The
Mortgage Loans underlying such MBS will be conventional Level Payment Mortgage
Loans secured by a first mortgage or deed of trust on a one- to four-family
residential property having an original maturity of up to 30 years, as described
under "The Mortgage Pools" and "Yield Considerations" in the MBS Prospectus. The
characteristics of the MBS and the Mortgage Loans underlying Trust 1992-150 as
of November 1, 1993 are expected to be as follows:
Pass-Through Rate........................................ 8.50%
Approximate Weighted Average WAC......................... 8.966%
Approximate Weighted Average WAM......................... 338 months
Approximate Weighted Average CAGE........................ 18 months
The Class 21-SA REMIC Certificates
The Class 21-SA REMIC Certificates, which are "Interest Only" certificates,
evidence certain of the beneficial ownership interests in Trust 1993-21, the
assets of which consist of certain MBS. The Class 21-SA REMIC Certificates have
no principal balance and bear interest on their notional principal balance. As
of November 1, 1993, the notional principal balance of the Class 21-SA REMIC
Certificates is expected to be $234,561,790. All of the Class 21-SA REMIC
Certificates will be included in the Trust. The 21-SA REMIC Certificates bear
interest during each Interest Accrual Period, subject to a maximum rate of 0.60%
per annum and a minimum rate of 0% per annum, at a rate per annum equal to 9.6%
- - LIBOR. See the 1993-21 Prospectus Supplement for a discussion of the general
characteristics of the Class 21-SA REMIC Certificates.
The MBS included in Trust 1993-21 will have the Pass-Through Rate set forth
below and the general characteristics set forth in the MBS Prospectus. The
Mortgage Loans underlying such MBS are conventional Level Payment Mortgage Loans
secured by a first mortgage or deed of trust on a one-to-four family residential
property having an original maturity of up to 30 years, as described under "The
Mortgage Pools" and "Yield Considerations" in the MBS Prospectus. The
characteristics of the MBS and the Mortgage Loans underlying Trust 1993-21 as of
November 1, 1993 are expected to be as follows:
Pass-Through Rate........................................ 8.0%
Approximate Weighted Average WAC......................... 8.415%
Approximate Weighted Average WAM......................... 346 months
Approximate Weighted Average CAGE........................ 12 months
The Class 216-D and Class 216-DA REMIC Certificates
The Class 216-D and Class 216-DA REMIC Certificates, which are "Principal
Only" certificates and "Targeted Principal REMIC Certificates," evidence certain
of the beneficial ownership interests in Trust 1993-216, the assets of which
consist of certain SMBS (the "1993-216 SMBS"). As of November 1, 1993, the
principal balances of the Class 216-D REMIC Certificates and the Class 216-DA
REMIC Certificates are expected to be $13,000,000 and $2,000,000, respectively.
$7,825,000 principal balance of the Class 216-D REMIC Certificates and all of
the Class 216-DA REMIC Certificates will be included in the Trust. See the
1993-216 Prospectus Supplement for a discussion of the general characteristics
of the Class 216-D and Class 216-DA REMIC Certificates.
The 1993-216 SMBS represent principal payments (and no interest payments)
on a principal amount of $382,460,269 of MBS having the general characteristics
described in the MBS Prospectus. The MBS underlying the 1993-216 SMBS have a
Pass-Through Rate of 8.0% and are held in the form of Mega Certificates
CL-190203 and CL-190237, the general characteristics of which are described in
the Mega Prospectus.
The Mortgage Loans underlying the 1993-216 SMBS are conventional Level
Payment Mortgage Loans secured by a first mortgage or deed of trust on a one- to
four-family residential property having an original maturity of up to 30 years,
as described under "The Mortgage Pools" and "Yield Considerations" in the MBS
Prospectus. The characteristics of the MBS and the Mortgage Loans underlying the
1993-216 SMBS as of November 1, 1993 are expected to be as follows:
SMBS Trust 000203-CL
Aggregate Unpaid Principal Balance................... $172,978,703
Approximate Weighted Average WAC..................... 8.458%
Approximate Weighted Average WAM..................... 345 months
Approximate Weighted Average CAGE.................... 12 months
SMBS Trust 000237-CL
Aggregate Unpaid Principal Balance................... $209,481,566
Approximate Weighted Average WAC..................... 8.480%
Approximate Weighted Average WAM..................... 344 months
Approximate Weighted Average CAGE.................... 14 months
Final Data Statement
Following the issuance of the Certificates, Fannie Mae will prepare a Final
Data Statement setting forth, among other things, the current principal balance
of the Trust SMBS as of the Issue Date and the current principal balance or
notional principal balance, as the case may be, of each of the Underlying REMIC
Certificates as of the Issue Date. The Final Data Statement will not accompany
this Prospectus Supplement but will be made available by Fannie Mae. To request
the Final Data Statement or further information regarding the Trust SMBS and the
Underlying REMIC Certificates, telephone Fannie Mae at 1-800-BEST-MBS or
202-752-6547. The contents of the Final Data Statement and other data specific
to the Certificates are available in electronic form by calling Fannie Mae at
1-800-752-6440 or 202-752-6000. It should be noted that there may have been
material changes in facts and circumstances since the dates the SMBS Prospectus
and the Underlying Prospectuses were prepared, including, but not limited to,
changes in prepayment speeds and prevailing interest rates and other economic
factors, which may limit the usefulness of the assumptions used in preparing the
information set forth in such documents.
Prepayment Considerations and Risks
The rate of distributions of principal of the F Class will be directly
related to the rate of principal distributions on the Trust SMBS and the
Underlying REMIC Certificates and to Excess Interest, which in turn will be very
sensitive to the rate of payments of principal of the underlying Mortgage Loans.
As described in the 1993-216 Prospectus Supplement, the Class 216-D and Class
216-DA REMIC Certificates are subordinate in priority of principal distributions
to certain other classes of certificates evidencing beneficial ownership
interests in Trust 1993-216 and, accordingly, distributions of principal of the
Mortgage Loans underlying Trust 1993-216 may have an exaggerated effect upon
distributions of principal of the Class 216-D and Class 216-DA REMIC
Certificates. In addition, under certain prepayment scenarios, all principal
distributions will be applied to the distribution of principal of certain
classes of certificates having priority over the Class 216-D and Class 216-DA
REMIC Certificates for an extended period, and, accordingly, distributions of
principal in respect of the F Class during such period would be reduced. In
addition, as described in the 1993-216 Prospectus Supplement, the Class 216-D
and Class 216-DA REMIC Certificates, which are "Targeted Principal REMIC
Certificates," are not scheduled to receive principal payments in accordance
with their Principal Balance Schedules until the Distribution Dates in March
1998 and October 1998, respectively, and, accordingly, under certain prepayment
scenarios, distributions of principal in respect of the F Class prior to such
dates would be reduced.
The amount available for distributions of interest on the F Class will be
directly related to the amount of interest distributed on the Class 50-SA, Class
150-FQ and Class 21-SA REMIC Certificates, which in turn will be very sensitive
to the rate of payments of principal of the related underlying Mortgage Loans.
Each of the Class 50-SA, Class 150-FQ and Class 21-SA REMIC Certificates is an
"Interest Only" certificate with either a nominal or notional principal balance.
It is possible that such nominal or notional principal balances may be reduced
to zero prior to (and possibly substantially prior to) the reduction of the
principal balances of the Trust SMBS and Class 216-D and Class 216-DA REMIC
Certificates to zero. In such event, the F Class would receive no distributions
of interest until the date on which the principal balance thereof is reduced to
zero. At such time, any remaining distributions of principal on the Trust SMBS
and the Class 216-D and Class 216-DA REMIC Certificates will be applied to any
unpaid carry forward interest deficiency (and any accrued and unpaid interest
thereon).
Distributions of Interest
Categories of Classes
For the purpose of payments of interest, the Classes will be categorized as
follows:
Interest Type* Classes
- -------------------- -------
Floating Rate F
Excess R
- -----------------------
* See "Description of the Certificates--Class Definitions and Abbreviations"
in the REMIC Prospectus.
General. The F Class will bear interest at the per annum interest rate
described herein. Interest on the F Class is calculated on the basis of a
360-day year consisting of twelve 30-day months and is distributable monthly on
each Distribution Date, commencing in the month after the Settlement Date.
Interest to be distributed on the F Class on a Distribution Date will be in an
amount (the "Interest Distribution Amount") equal to the lesser of (a) the sum
of (i) one month's interest on the outstanding principal balance of the F Class
immediately prior to such Distribution Date, (ii) any unpaid carry forward
interest deficiency (as defined below) and (iii) interest, if any, accrued on a
compounded basis and unpaid on any such unpaid carry forward interest deficiency
and (b) the sum of (i) the aggregate distributions of interest concurrently made
on the Class 50-SA, Class 150-FQ and Class 21-SA REMIC Certificates and (ii) the
aggregate distributions of principal concurrently made on the Trust SMBS and the
Underlying REMIC Certificates following the reduction of the principal balance
of the F Class to zero.
On each Distribution Date, the Interest Distribution Amount will be applied
to the distribution of interest on the F Class as follows:
(i) an amount equal to the interest accrued on the principal balance
of the F Class during the immediately preceding Interest Accrual Period;
(ii) an amount equal to the interest, if any, accrued and unpaid on
the principal balance of the F Class prior to the immediately preceding
Interest Accrual Period that has not been previously paid (a "carry forward
interest deficiency"); and
(iii) an amount equal to the interest, if any, accrued on a compounded
basis and unpaid on any unpaid carry forward interest deficiency during
each Interest Accrual Period as to which such carry forward interest
deficiency remained unpaid to the Distribution Date on which such carry
forward interest deficiency is paid, at the per annum rate in effect from
time to time with respect to the F Class.
Interest Accrual Periods. Interest to be distributed on a Distribution Date
will accrue on the F Class during the one-month periods set forth below (an
"Interest Accrual Period").
Class Interest Accrual Period
----------------------------- -----------------------------
F One month period beginning on
the 25th day of the month
preceding the month of the
Distribution Date and ending on
the 24th day of the month of the
Distribution Date
Floating Rate Class. The F Class will bear interest during its initial
Interest Accrual Period at the Initial Interest Rate set forth below, and will
bear interest during each Interest Accrual Period thereafter, subject to the
applicable Maximum and Minimum Interest Rates, at the rate determined as
described below:
Initial Maximum Minimum Formula for
Interest Interest Interest Calculation of
Class Rate Rate Rate Interest Rate
- -------------------- -------- ------- ------- -----------------------
F................... 4.9375% 11.00% 1.75% LIBOR + 175 basis points
The yield with respect to such Class will be affected by changes in LIBOR,
which changes may not correlate with changes in mortgage interest rates. It is
possible that lower mortgage interest rates could occur concurrently with an
increase in the level of LIBOR. Conversely, higher mortgage interest rates could
occur concurrently with a decrease in the level of LIBOR. Under certain
circumstances of increased LIBOR levels, the Interest Distribution Amount may
not be sufficient to pay the full amount of interest accrued on the F Class at
the LIBOR based formula rate. Any such unpaid carry forward interest deficiency
on a particular Distribution Date will be carried forward, with interest, to
subsequent Distribution Dates. If an unpaid carry forward interest deficiency
remains on the Distribution Date upon which the principal balance of the F Class
is reduced to zero, all distributions on any Trust SMBS and Underlying REMIC
Certificates remaining in the Trust will be applied to the payment of any such
unpaid carry forward interest deficiency (together with any accrued and unpaid
interest thereon) on such date and each Distribution Date thereafter before any
distributions are made to the R Class. Once the principal balance of the Trust
SMBS and the respective principal balances and notional principal balance of the
Underlying REMIC Certificates have been reduced to zero, Holders of the F Class
will have no future entitlement to any unpaid carry forward interest deficiency
(or any accrued and unpaid interest thereon).
Each LIBOR value will be established as described herein by Fannie Mae two
business days prior to the commencement of the related Interest Accrual Period.
The establishment of each LIBOR value by Fannie Mae and Fannie Mae's
determination of the rate of interest for the F Class for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Each such rate of interest may be obtained by telephoning Fannie Mae at
1-800-BEST-MBS or 202-752-6547.
Calculation of LIBOR
On each LIBOR Determination Date, Fannie Mae will establish LIBOR for the
related Interest Accrual Period in the manner described in the REMIC Prospectus
under "Description of the Certificates--Indices Applicable to Floating Rate and
Inverse Floating Rate Classes--LIBOR."
If on the initial LIBOR Determination Date, Fannie Mae is unable to
determine LIBOR in the manner specified in the REMIC Prospectus, LIBOR for the
next succeeding Interest Accrual Period will be 3.1875%.
Distributions of Principal
Categories of Classes
For the purpose of payments of principal, the Classes will be categorized
as follows:
Principal Type Classes
- ----------------------- ----
(1) F
No Payment Residual(2) R
- -------------------------------
(1) The F Class will be entitled to receive the entire Principal Distribution
Amount on each Distribution Date until the principal balance thereof is
reduced to zero.
(2) See "Description of the Certificates--Class Definitions and
Abbreviations" in the REMIC Prospectus.
Principal Distribution Amount
Principal will be distributed monthly on the F Class in an amount (the
"Principal Distribution Amount") equal to the sum of (i) the aggregate
distributions of principal concurrently made on the Trust SMBS and the
Underlying REMIC Certificates and (ii) the amount by which the aggregate
distributions of interest concurrently made on the Class 50-SA, Class 150-FQ and
Class 21-SA REMIC Certificates exceeds the sum of (x) the interest accrued on
the F Class during the preceding Interest Accrual Period, (y) any unpaid carry
forward interest deficiency and (z) interest, if any, accrued on a compounded
basis and unpaid on any such unpaid carry forward interest deficiency (such
excess, the "Excess Interest").
On each Distribution Date, the Principal Distribution Amount will be
distributed as principal of the F Class until the principal balance thereof is
reduced to zero.
Structuring Assumptions
Pricing Assumptions. Unless otherwise specified, the information in the
tables in this Prospectus Supplement has been prepared on the basis of the
actual characteristics of the Mortgage Loans underlying the Trust SMBS and the
Underlying REMIC Certificates and the priority sequences affecting the principal
distributions on the Underlying REMIC Certificates and the following assumptions
(the "Pricing Assumptions"):
- the Mortgage Loans prepay at the constant percentages of PSA
specified in the related table;
- the closing date for the sale of the Certificates is the Settlement
Date; and
- the first Distribution Date for the Certificates occurs in the month
following the Settlement Date.
PSA Assumptions. Prepayments of mortgage loans commonly are measured
relative to a prepayment standard or model. The model used in this Prospectus
Supplement is the Public Securities Association's standard prepayment model
("PSA"). To assume a specified rate of PSA (for example, 500% PSA) is to assume
a specified rate of prepayment each month of the then outstanding principal
balance of a pool of new mortgage loans computed as described under
"Description of the Certificates--Prepayment Considerations and Risks" in the
REMIC Prospectus. There is no assurance that prepayments will occur at any PSA
rate or at any other constant rate.
Characteristics of the R Class
The R Certificates will not have principal balances and will not bear
interest. The Holders of the R Class will be entitled to receive the proceeds of
the remaining assets of the Trust, if any, after (i) the principal balance of
the F Class has been reduced to zero and (ii) any unpaid carry forward interest
deficiency and accrued and unpaid interest thereon have been paid in full.
The R Class will be subject to certain transfer restrictions. No transfer
of record or beneficial ownership of an R Certificate will be allowed to a
"disqualified organization." In addition, no transfer of record or beneficial
ownership of an R Certificate will be allowed to any person that is not a "U.S.
Person" without the written consent of Fannie Mae. Under regulations issued by
the Treasury Department on December 23, 1992 (the "Regulations"), a transfer of
a "noneconomic residual interest" to a U.S. Person will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. Any transferee of an R Certificate must
execute and deliver an affidavit and an Internal Revenue Service Form W-9 on
which the transferee provides its taxpayer identification number. See
"Description of the Certificates-- Additional Characteristics of Residual
Certificates" and "Certain Federal Income Tax Consequences--Taxation of
Beneficial Owners of Residual Certificates" in the REMIC Prospectus. Transferors
of an R Certificate should consult with their own tax advisors for further
information regarding such transfers.
The Holders of the R Class will be considered to be the holders of the
"residual interest" in the REMIC constituted by the Trust. See "Certain Federal
Income Tax Consequences" in the REMIC Prospectus. Pursuant to the Trust
Agreement, Fannie Mae will be obligated to provide to such Holders (i) such
information as is necessary to enable them to prepare their federal income tax
returns and (ii) any reports regarding the Certificates that may be required
under the Code.
Yield Considerations
There can be no assurance that the Mortgage Loans will have the
characteristics assumed herein or will prepay at any of the rates assumed herein
or at any other particular rate, that the pre-tax yields on the F Class will
correspond to any of the pre-tax yields shown herein or that the aggregate
purchase price of the F Class will be as assumed. In addition, there can be no
assurance that LIBOR will correspond to the levels shown herein. The rate of
distributions of principal of the F Class will be directly related to the rate
of principal distributions on the Trust SMBS and the Underlying REMIC
Certificates and the amount of Excess Interest, which in turn will be related to
the amortization (including prepayments) of the Mortgage Loans underlying the
Pools and the priority sequences affecting principal distributions on the
Underlying REMIC Certificates. Because the Class 216-D and Class 216-DA REMIC
Certificates are subordinate in priority of principal distributions to certain
other classes of certificates evidencing beneficial ownership interests in Trust
1993-216, it is possible under certain prepayment scenarios that the Class 216-D
and Class 216-DA REMIC Certificates will receive no principal distributions for
an extended period. Furthermore, the Class 216-D and Class 216-DA REMIC
Certificates, which are "Targeted Principal REMIC Certificates," are not
scheduled to receive principal payments in accordance with their Principal
Balance Schedules until the Distribution Dates in March 1998 and October 1998,
respectively. It is not likely that the Mortgage Loans will prepay at a constant
PSA rate until maturity, that all of such Mortgage Loans will prepay at the same
rate or that the level of LIBOR will remain constant.
The yield on the Certificates will be sensitive to the level of LIBOR.
Under certain circumstances of increased LIBOR levels, the Interest Distribution
Amount may not be sufficient to pay the full amount of interest accrued on the F
Class at the LIBOR based formula rate. Although any such deficiency will be
carried forward, with interest, to subsequent Distribution Dates, the effective
yield on the F Class may be reduced below the yield otherwise produced because
interest payable on a Distribution Date will not be distributed until and unless
funds become available.
The timing of changes in the rate of prepayments or the level of LIBOR may
significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments or the average level of LIBOR is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans or change in the level of LIBOR, the
greater the effect on an investor's yield to maturity. As a result, the effect
on an investor's yield of principal prepayments or the level of LIBOR occurring
at a rate or level higher (or lower) than the rate or level anticipated by the
investor during the period immediately following the issuance of the
Certificates may not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments or level of LIBOR.
The table below indicates the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of the F Class to various constant percentages of
PSA and to changes in LIBOR. The yields set forth in the table were calculated
by determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the F Class, would cause the discounted
present value of such assumed streams of cash flows to equal the assumed
aggregate purchase price of such Class and converting such monthly rates to
corporate bond equivalent rates. Such calculations do not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as distributions on the Certificates and
consequently do not purport to reflect the return on any investment in the
Certificates when such reinvestment rates are considered.
The yield to investors in the F Class will be sensitive to the level of
LIBOR and to the rate of principal payments (including prepayments) of the
Mortgage Loans, which generally can be prepaid at any time.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased level of LIBOR.
The information in the following table was prepared on the basis of the
Pricing Assumptions and the assumptions that (i) the interest rates applicable
to the F Class for each Interest Accrual Period subsequent to the initial
Interest Accrual Period will be based on the indicated level of LIBOR and (ii)
the aggregate purchase price of the F Class (expressed as a percentage of
original principal balance) is 100% plus accrued interest.
Sensitivity of the F Class to Prepayments and LIBOR
(Pre-Tax Yields to Maturity)
PSA Prepayment Assumption
-------------------------------------------
LIBOR 100% 300% 500% 600% 800%
- ------------------------------ ----- ----- ----- ---- ----
1.1875%....................... 3.0% 3.0% 3.0% 3.0% 3.0%
3.1875%....................... 5.0% 5.0% 5.0% 5.0% 5.0%
5.1875%....................... 7.0% 7.0% 7.0% 7.0% 7.0%
7.1875%....................... 9.0% 9.0% 9.0% 9.0% 8.1%
9.2500%....................... 11.1% 11.1% 10.0% 9.4% 7.9%
Weighted Average Lives of the Certificates
The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the Settlement Date to the second such Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate amount of the
reductions in principal balance of such Certificate referred to in clause (a).
The weighted average life of a Certificate will be influenced by the level of
LIBOR, the rate of prepayments of principal of the underlying Mortgage Loans and
other factors. See "Description of the Certificates--Weighted Average Life and
Final Distribution Dates" in the REMIC Prospectus.
In general, the weighted average lives of the Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives will depend upon a variety of
other factors, including the level of LIBOR, the timing of changes in the rate
of principal payments, the amount of Excess Interest available for distribution
on each Distribution Date and the priority sequences of principal distributions
on the Underlying REMIC Certificates. See "Distributions of Principal" herein.
The interaction of the foregoing factors may have varying effects at
different times during the life of the F Class. Accordingly, no assurance can be
given as to the weighted average life of the F Class. Further, to the extent the
prices of the Certificates represent discounts or premiums to their respective
original principal balances, variability in the weighted average lives of such
Certificates could result in variability in the related yields to maturity. For
an example of how the weighted average life of the F Class may be affected at
various constant prepayment rates and levels of LIBOR, see the Decrement Tables
below.
Decrement Tables
The following decrement tables indicate the percentages of original
principal balance of the F Class that would be outstanding after each of the
dates shown at various constant PSA levels and LIBOR levels and the
corresponding weighted average life of such Class. Such tables have been
prepared on the basis of (i) the Pricing Assumptions and (ii) the assumption
that the interest rates applicable to the F Class for each Interest Accrual
Period subsequent to the initial Interest Accrual Period will be calculated
based on the indicated level of LIBOR, except that with respect to the
information set forth under 0% PSA it has been assumed that the following
principal amounts of Mortgage Loans underlying the Trust SMBS and the respective
Underlying REMIC Certificates bear the interest rates and have the original and
remaining terms to maturity set forth as follows:
<TABLE>
<CAPTION>
Principal Interest Original Term Remaining Term
Amount Rate to Maturity to Maturity
------------ -------- ------------- ---------------
<S> <C> <C> <C> <C>
Trust SMBS.................... $ 96,000,000 9.5% 360 months 359 months
Trust 1992-50................. 642,327 10.5% 180 months 161 months
Trust 1992-150................ 1,358,070 11.0% 360 months 346 months
Trust 1993-21................. 234,561,790(*) 10.5% 360 months 352 months
Trust 1993-216:
SMBS Trust 000203-CL........ 4,443,640 10.5% 360 months 351 months
SMBS Trust 000237-CL........ 5,381,360 10.5% 360 months 357 months
---------------
* Notional Principal Amount.
</TABLE>
It is not likely that (i) all of the underlying Mortgage Loans will have the
interest rates, CAGEs or remaining terms to maturity assumed or (ii) the
underlying Mortgage Loans will prepay at a constant PSA level. In addition, the
diverse remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the table at the specified
constant PSA levels, even if the distributions of the weighted average remaining
terms to maturity and CAGEs of the Mortgage Loans are identical to the
distributions of the remaining terms to maturity and CAGEs specified in the
Pricing Assumptions.
<TABLE>
<CAPTION>
Percent of Original Principal Balance of F Class Outstanding
LIBOR = 1.1875% LIBOR = 3.1875%
------------------------------------------------ ------------------------------------------------
PSA Prepayment PSA Prepayment
Assumption Assumption
------------------------------------------------ ------------------------------------------------
Date 0% 100% 300% 500% 600% 800% 0% 100% 300% 500% 600% 800%
- -------------------- --- ---- ---- ---- ---- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent..... 100 100 100 100 100 100 100 100 100 100 100 100
November 1994....... 88 87 84 81 79 77 88 87 84 81 80 77
November 1995....... 77 73 65 57 54 47 77 73 66 59 55 49
November 1996....... 65 59 46 35 31 23 64 59 48 38 33 25
November 1997....... 53 46 31 20 16 10 52 46 33 23 19 13
November 1998....... 42 34 19 7 3 4 39 35 22 10 7 6
November 1999....... 30 24 9 0 0 0 26 24 12 0 0 *
November 2000....... 18 14 2 0 0 0 13 14 5 0 0 0
November 2001....... 7 5 0 0 0 0 0 5 0 0 0 0
November 2002....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2003....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2004....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2005....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2006....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2007....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2008....... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (years)**..... 4.3 3.9 3.1 2.5 2.4 2.1 4.1 4.0 3.2 2.6 2.5 2.2
</TABLE>
<TABLE>
<CAPTION>
LIBOR = 5.1875% LIBOR = 7.1875%
------------------------------------------------ ------------------------------------------------
PSA Prepayment PSA Prepayment
Assumption Assumption
------------------------------------------------ ------------------------------------------------
Date 0% 100% 300% 500% 600% 800% 0% 100% 300% 500% 600% 800%
- -------------------- --- ---- ---- ---- ---- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent..... 100 100 100 100 100 100 100 100 100 100 100 100
November 1994....... 89 87 85 82 81 78 89 87 85 82 81 79
November 1995....... 77 73 67 60 57 51 76 74 68 62 59 52
November 1996....... 64 60 50 40 36 27 63 60 52 43 38 29
November 1997....... 51 47 36 26 22 15 49 48 39 29 24 16
November 1998....... 37 35 25 14 10 8 34 36 28 17 12 10
November 1999....... 22 25 16 2 0 2 18 25 20 4 1 3
November 2000....... 7 15 9 0 0 0 1 15 13 0 0 0
November 2001....... 0 5 3 0 0 0 0 5 8 0 0 0
November 2002....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2003....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2004....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2005....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2006....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2007....... 0 0 0 0 0 0 0 0 0 0 0 0
November 2008....... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (years)**..... 4.0 4.0 3.4 2.8 2.6 2.3 3.8 4.0 3.7 2.9 2.7 2.4
</TABLE>
LIBOR = 9.2500%
------------------------------------------------
PSA Prepayment
Assumption
------------------------------------------------
Date 0% 100% 300% 500% 600% 800%
- -------------------- --- ---- ---- ---- ---- ----
Initial Percent..... 100 100 100 100 100 100
November 1994....... 90 88 86 84 83 80
November 1995....... 79 76 71 65 62 54
November 1996....... 67 64 57 46 41 30
November 1997....... 53 53 45 33 27 18
November 1998....... 39 42 36 20 15 11
November 1999....... 23 32 28 8 4 5
November 2000....... 5 23 22 3 1 1
November 2001....... 0 14 18 * 0 0
November 2002....... 0 4 8 0 0 0
November 2003....... 0 0 1 0 0 0
November 2004....... 0 0 0 0 0 0
November 2005....... 0 0 0 0 0 0
November 2006....... 0 0 0 0 0 0
November 2007....... 0 0 0 0 0 0
November 2008....... 0 0 0 0 0 0
Weighted Average
Life (years)**..... 4.1 4.5 4.2 3.1 2.8 2.5
- ---------------
* Indicates an outstanding balance greater than 0% and less than 0.5% of the
original principal balance.
** Determined as specified under "Weighted Average Lives of the Certificates"
herein.
CERTAIN ADDITIONAL FEDERAL INCOME TAX CONSEQUENCES
The following tax discussion, when read in conjunction with the discussion
of "Certain Federal Income Tax Consequences" in the REMIC Prospectus, describes
the current federal income tax treatment of investors in the Certificates. These
two tax discussions do not purport to deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors should consult their own tax advisors in determining
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Certificates.
REMIC Elections and Special Tax Attributes
An election will be made to treat the Trust as a REMIC for federal income
tax purposes. The F Class will be designated as the "regular interest," and the
R Class will be designated as the "residual interest," in the REMIC constituted
by the Trust.
As a consequence of the qualification of the Trust as a REMIC, the
Certificates generally will be treated as "qualifying real property loans" for
mutual savings banks and domestic building and loan associations, "regular or
residual interests in a REMIC" for domestic building and loan associations,
"real estate assets" for real estate investment trusts, and, except for the R
Class, as "qualified mortgages" for other REMICs. See "Certain Federal Income
Tax Consequences--Special Tax Attributes" in the REMIC Prospectus.
Taxation of Beneficial Owners of Regular Certificates
The F Class will be issued with original issue discount for federal income
tax purposes, which generally will result in recognition of some taxable income
in advance of the receipt of the cash attributable to such income. The
Prepayment Assumption that will be used in determining the rate of accrual of
original issue discount will be 500% PSA. See "Certain Federal Income Tax
Consequences--Taxation of Beneficial Owners of Regular Certificates--Original
Issue Discount" in the REMIC Prospectus. No representation is made as to whether
the Mortgage Loans underlying the Trust SMBS or the Underlying REMIC
Certificates will prepay at that or any other rate. See "Description of the
Certificates--Weighted Average Lives of the Certificates" herein and
"Description of the Certificates--Weighted Average Life and Final Distribution
Dates" in the REMIC Prospectus.
The F Class will qualify as a regular interest under the Regulations
because it will receive interest at a variable rate subject to a
"funds-available cap." The funds-available cap will limit the amount of interest
to be paid on the F Class to the sum of (i) the aggregate distributions of
interest concurrently made on the Class 50-SA, Class 150-FQ and Class 21-SA
REMIC Certificates and (ii) the aggregate distributions of principal
concurrently made on the Underlying REMIC Certificates following the reduction
of the principal balance of the F Class to zero. The F Class, however, will be
issued with original issue discount because under certain circumstances all or a
portion of the interest that has accrued at the variable rate may not be paid
currently.
Taxation of Beneficial Owners of Residual Certificates
Under the Regulations, the R Class will not have significant value. As a
result, an organization to which section 593 of the Code applies and which is
the beneficial owner of an R Certificate may not use its allowable deductions to
offset any "excess inclusions" with respect to such Certificate. See "Certain
Federal Income Tax Consequences--Taxation of Beneficial Owners of Residual
Certificates--Excess Inclusions" in the REMIC Prospectus.
For purposes of determining the portion of the taxable income of the
Trust that generally will not be treated as excess inclusions, the rate to be
used is 6.85% (which is 120% of the "federal long-term rate"). See "Certain
Federal Income Tax Consequences--Taxation of Beneficial Owners of Residual
Certificates--Excess Inclusions" and "--Foreign Investors--Residual
Certificates" in the REMIC Prospectus. The federal income tax consequences of
any consideration paid to a transferee on the transfer of an R Certificate are
unclear; any transferee receiving such consideration should consult its own tax
advisors.
PLAN OF DISTRIBUTION
The Dealer will receive the Certificates in exchange for the Trust SMBS and
the Underlying REMIC Certificates pursuant to a Fannie Mae commitment. The
Dealer proposes to offer the Certificates directly to the public from time to
time in negotiated transactions at varying prices to be determined at the time
of sale. The Dealer may effect such transactions to or through dealers.
LEGAL MATTERS
Certain legal matters will be passed upon for the Dealer by Cleary,
Gottlieb, Steen & Hamilton.
No dealer, salesman or other person has been authorized to give any information
or to make any representations in connection with this offering other than those
contained in this Prospectus Supplement, the REMIC Prospectus, the MBS
Prospectus, the SMBS Prospectus, the MEGA Prospectus, the Underlying
Prospectuses and the Information Statement and, if given or made, such
information or representations must not be relied upon as having been
authorized. This Prospectus Supplement and the aforementioned documents do not
constitute an offer to sell or a solicitation of an offer to buy any of the
Certificates offered hereby in any state to any person to whom it is unlawful to
make such offer or solicitation in such state. The delivery of this Prospectus
Supplement and the aforementioned documents at any time does not imply that the
information contained herein or therein is correct as of any time subsequent to
the date hereof or thereof.
<PAGE>
Annex 2(d)
Cover Page and Reference Sheet
for
Prospectus Supplement
dated January 16, 1997
to
Prospectus dated June 14, 1996
relating to
Federal National Mortgage Association
Guaranteed REMIC Pass-Through Certificates
fannie Mae REMIC Trust 1997-G2
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Prospectus Supplement
(To Prospectus dated June 14, 1996)
$357,753,754
FANNIEMAE
Guaranteed REMIC Pass-Through Certificates
Fannie Mae REMIC Trust 1997-G2
The Guaranteed REMIC Pass-Through Certificates offered hereby (the
"Certificates") will represent beneficial ownership interests in one of two
trust funds. the certificates, other than the RL Class, will represent
beneficial ownership interest in Fannie Mae REMIC Trust 1997-G2 (the "Trust").
The assets of the Trust will consist of the "regular interests" in a separate
trust fund (the "Lower Tier REMIC"). The assets of the Lower Tier REMIC will
consist of (i) certain "fully modified pass-through" mortgage-backed securities
(the "Trust GNMA certificates") guaranteed as to timely payment of principal and
interest by the Government National Mortgage Association ("GNMA") and (ii)
certain previously issued REMIC certificates specified herein (the "Underlying
REMIC Certificates") evidencing beneficial ownership interests in the related
Fannie Mae REMIC Trusts (the "Underlying REMIC Trusts") as further described in
Exhibit A hereto. The assets of the Underlying REMIC Trusts evidence direct or
indirect beneficial ownership interest in (i) certain "fully modified
pass-through" mortgage-backed securities (together with the Trust GNMA
Certificates, the "GNMA Certificates") guaranteed as to timely payment of
principal and interest by GNMA and (ii) certain Fannie Mae Guaranteed Mortgage
Pass-Through Certificates (the "MBS"). Each GNMA Certificate is based on and
backed by a pool of mortgage loans which are either insured or guaranteed by the
Federal Housing Administration ("FHA"), the Department of Veterans Affairs
("VA") or the Rural Housing service ("FmHA"). Each MBS represents a beneficial
ownership interest in a pool of first lien, single-family, fixed-rate
residential mortgage loans (together with the pools and mortgage loans
underlying the GNMA Certificates, the "Pools" and "Mortgage Loans,
"respectively) having the characteristics described herein. The Certificates
will be issued and guaranteed as to timely distribution of principal and
interest by Fannie Mae.
Investors should not purchase the Certificates before reading this
Prospectus Supplement and the additional Disclosure Documents listed at the
bottom of page S-2.
SEE "ADDITIONAL RISK FACTORS" ON PAGE S-7 HEREOF AND "RISK FACTORS"
BEGINNING ON PAGE 8 OF THE GNMA PROSPECTUS ATTACHED HERETO FOR A DISCUSSION OF
CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
CERTIFICATES.
THE CERTIFICATES MAY NOT BE SUITABLE INVESTMENTS FOR ALL INVESTORS. NO
INVESTOR SHOULD PURCHASE CERTIFICATES UNLESS SUCH INVESTOR UNDERSTANDS AND IS
ABLE TO BEAR THE PREPAYMENT, YIELD, LIQUIDITY AND OTHER RISKS ASSOCIATED WITH
SUCH CERTIFICATES.
THE CERTIFICATES, TOGETHER WITH ANY INTEREST THEREOF, ARE NOT GUARANTEED BY
THE UNITED STATES. THE OBLIGATIONS OF FANNIE MAE UNDER ITS GUARANTY OF THE
CERTIFICATES ARE OBLIGATIONS SOLELY OF OBLIGATIONS OF FANNIE MAE UNDER ITS
GUARANTY OF THE CERTIFICATES ARE OBLIGATIONS SOLELY OF FANNIE MAE AND DO NOT
CONSTITUTE AN OBLIGATION OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY
THEREOF OTHER THAN FANNIE MAE. THE CERTIFICATES ARE EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE "EXEMPTED SECURITIES" WITHIN
THE MEANING OF THE SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
Original Final
Principal Principal Interest Interest CUSIP Distribution
Class Balance Type(1) Rate Type (1) Number Date
<S> <C> <C> <C> <C> <C> <C>
F......................... $257,500,000 SCH (2) FLT 31359NSG7 January 2021
S......................... (3) NTL (2) INV/IO 31359NSHS January 2021
Z......................... 21,492,000 TAC 8.50% FIX/Z 31359NSJI April 2021
FA........................ 51,216,000 SEQ/AD (2) FLT 31359NSK8 March 2012
ZA........................ 19,792,000 SEQ 8.50 FIX/Z 31359NSL6 February 2027
PA........................ 7,753,754 SC/PT (4) PO 31359NSM4 April 2022
SA........................ (3) NTL (2) INV/IO 31359NSN2 April 2022
SB........................ (3) NTL (2) INV/IO 31359NSP7 March 2024
SC........................ (3) NTL (2) INV/IO 31359NSQ5 March 2024
R......................... 0 NPR 0 NPR 31359NSR3 February 2027
RL........................ 0 NPR 0 NPR 31359NSS1 February 2027
- ----------------------------------------------------------------------------------------------------------
(1) See "Description of the Certificates-Class Definitions and Abbreviations" in the
GNMA Prospectus and "Description of the Certificates- Distributions of
Interest" and "__ Distributions of Principal" herein.
(2) The F, S, FA, SA, SB and SC Classes will bear interest based on "LIBOR" as
described under "description of the Certificates-Distributions of Interest"
herein and "Description of the Certificates-Indices Applicable to Floating
Rates and Inverse Floating Rate Classes" in the GNMA Prospectus.
(3) The S, SA, SB and SC Classes will be Notional Classes, will not have
principal balances and will bear interest on their notional principal
balances (initially, $308,716,000, $7,753,505 and $144,358,505, respectively).
The notional principal balances of the Notional Classes will be calculated
as specified herein. See "Description of the Certificates-Distributions of
Interest-Notional Classes" herein.
(4) this Class will be a Principal Only Class and will bear no interest.
</TABLE>
The certificates will be offered by Bear, Stearns & Co. Inc. (the "Dealer")
from time to time in negotiated transactions, at varying prices to be determined
at the time of sale.
The Certificates will be offered by the Dealer, subject to issuance by
Fannie Mae, to prior sale or to withdrawal or modification of the offer without
notice, when, as and if delivered to and accepted by the Dealer, and subject to
approval of certain legal matters by counsel. It is expected that the F, S, Z,
Fa and ZA Classes will be available through the book-entry facilities of The
Depository Trust Company and that the PA, SA, SB and SC Classes will be
available through the book-entry system of the Federal Reserve Banks on or about
February 28, 1997 (the "Settlement Date"). It is expected that the R and RL
Classes in registered, certficated form will be available for delivery at the
offices of the Dealer, 245 Park Avenue, New York, New York 10167, on or about
the Settlement Date.
BEAR, STEARNS & CO. INC.
JANUARY 16, 1997
The yields to investors in the F, S, FA AND ZA Classes will be sensitive in
varing degrees to, among other things, the rates of principal distributions on
the Trust GNMA Certificates, which in turn will be determined by the rates of
principal payments of the related Mortgage Loans and the characteristics of such
Mortgage Loans. The yields to investors in the PA, SA, SB and SC Classes will be
sensitive in varying degrees to, among other things, the rate of principal
distributions or notional balance reductions on the related Underlying REMIC
Certificates, which in turn will be sensitive in varying degrees to the rate of
principal payments of the related Mortgage Loans, the characteristics of the
Mortgage Loans included in the related Pools and the priority sequences
affecting principal distributions for the Underlying REMIC Trusts. The yield to
investors in each Class will also be sensitive to the purchase price paid for
such Class and, in the case of any Floating Rate or Inverse Floating Rate Class,
fluctuations in the level of the Index (as defined herein). Accordingly,
investors should consider the following risks:
. The Mortgage Loans generally may be prepaid at any time without
penalty, and, accordingly, the rate of principal payments thereon
is likely to vary considerably from time to time.
. Slight variations in Mortgage Loan characteristics could
substantially affect the weighted average lives and yields of some
or all of the Classes.
. In the case of any Certificates purchased at a discount to their
principal amounts (including the Principal Only Class), a slower
than anticipated rate of principal payments is likely to result
in a lower than anticipated yield.
. In the case of any Certificates purchased at a premium to their
principal amounts, a faster than anticipated rate of principal
payments is likely to result in a lower than anticipated yield.
. In the case of any Interest Only Class, a faster than anticipated
rate of principal payments is likely to result in a lower than
anticipated yield and, in certain cases, an actual loss on the
investment.
. The yield on any Floating Rate or Inverse Floating Rate Class will
be sensitive to the level of the Index. See "Description of the
Certificates-Distributions of Interest-Floating Rate and Inverse
Floating Rate Classes" herein.
See "Risk Factors-Yield Considerations" in the REMIC Prospectus and
"Additional Risk Factors-Additional Yield and Prepayment Considerations" and
"Yield Tables" herein.
In addition, investors should purchase Certificates only after considering
the following:
. One of the Underlying REMIC Certificates is subordinate in priority
of principal distributions to certain other classes
of certificates evidencing beneficial ownership interests in the
related Underlying REMIC Trust and, accordingly, there is no
assurance that principal distributions will be made on such
Underlying REMIC Certificate on any particular Distribution Date.
The other Underlying REMIC Certificate has a notional principal
balance that is based on the principal balances of certain
classes in the related Underlying REMIC Trust which themselves are
subordinate in priority of principal distributions. Prepayments on
the related Mortgage Loans may have occurred at a rate faster
or slower than that initially assumed. Additional information may
be obtained by performing an analysis of current Fannie Mae
principal factors in the context of applicable information
contained in the related Underlying REMIC Disclosure Documents (as
defined below), which may be obtained from Fannie Mae as described
below.
. The actual final payment of any Class will likely occur earlier,
and could occur much earlier, than the Final Distribution Date for
such Class specified on the cover page. See "Description of the
Certificates-Weighted Average Lives of the Certificates" herein
and "Description of the Certificates-Weighted Average Life and
Final Distribution Dates" in the GNMA Prospectus.
. The rate of principal distributions of the Certificates is
uncertain and investors may be unable to reinvest the distributions
thereon at yields equaling the yields on the Certificates. See
"Risk Factors-Suitability and Reinvestment Considerations" in the
GNMA Prospectus.
. Investors whose investment activities are subject to legal
investment laws and regulations or to review by regulatory
authorities may be subject to restrictions on investment in
certain Classes of the Certificates. Investors should consult their
legal advisors to determine whether and to what extent the
Certificates constitute legal investments or are subject to
restrictions on investment. See "Legal Investment Considerations"
in the GNMA Prospectus.
. The Dealer intends to make a market for the Certificates but is not
obligated to do so. There can be no assurance that such a
secondary market will develop or, if developed, that it will
continue. Thus, investors may not be able to sell their
Certificates readily or at prices that will enable them to realize
their anticipated yield. No investor should purchase Certificates
unless such investor understands and is able to bear the risk that
the value of the Certificates will fluctuate over time and that
the Certificates may not be readily salable.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this Prospectus Supplement, the GNMA
Prospectus, the REMIC Prospectus, the MBS Prospectus or the Underlying REMIC
Disclosure Documents (each as defined below). Any representation to the contrary
is a criminal offense.
Elections will be made to treat the Lower Tier REMIC and the Trust as "real
estate mortgage investment conduits" ("REMICs") pursuant to the Internal Revenue
Code of 1986, as amended (the "Code"). The R and RL Classes will be subject to
transfer restrictions. See "Description of the Certificates-Characteristics of
the R and RL Classes" and "Certain Additional Federal Income Tax Consequences"
herein, and "Description of the Certificates-Additional Characteristics of
Residual Certificates" and "Certain Federal Income Tax Consequences" in the GNMA
Prospectus.
Investors should purchase the Certificates only if they have read and
understood this Prospectus Supplement and the following documents (collectively,
the "Disclosure Documents");
. Fannie Mae's Prospectus for Guaranteed REMIC Pass-Through
Certificates (backed by GNMA Certificates) dated June 14, 1996 (the
"GNMA Prospectus"), which is attached to this Prospectus Supplement;
. Fannie Mae's Prospectus for Guaranteed REMIC Pass-Through
Certificates dated June 14, 1996 (the "REMIC Prospectus");
. Fannie Mae's Prospectus for Guaranteed Mortgage Pass-Through
Certificates dated January 1, 1997 (the "MBS Prospectus");
. The Prospectus and Prospectus Supplements for the Underlying REMIC
Certificates (collectively, the "Underlying REMIC Disclosure
Documents"); and
. Fannie Mae's Information Statement dated February 22, 1996 and any
supplements thereto (collectively, the "Information Statement").
The MBS Prospectus, the REMIC Prospectus and the Information Statement are
incorporated herein by reference and, together with the Underlying REMIC
Disclosure Documents, may be obtained from Fannie Mae by writing or calling its
MBS Helpline at 3900 Wisconsin Avenue, N.W., Area 2H-3S, Washington, D.C. 20016
(telephone 1-800-BEST-MBS or 202-752-6547). Such documents, other than the
Underlying REMIC Disclosure Documents, may also be obtained from Bear, Stearns &
Co. Inc. by writing or calling its Prospectus Department at One MetroTech Center
North, Brooklyn, New York 11201 (telephone 718-272-1581).
<PAGE>
[Page S-3 Intentiionally Omitted]
REFERENCE SHEET
This reference sheet is not a summary of the REMIC transaction and it
does not contain complete information about the Certificates. Investors should
purchase the Certificates only after reading this Prospectus Supplement and each
of the additional Disclosure Documents described herein in their entirety.
Assumed Characteristics of the Mortgage Loans Underlying the Trust GNMA
Certificates (as of February 1, 1997)
Unpaid Aggregate Original Term WARM WALA
Principal Balance to Maturity (in months) (in months) WAC
(in months)
$350,000,000 360 352 7 9.00%
The actual remaining terms to maturity, calculated loan ages and
interest rates of most of the related Mortgage Loans will differ from the
weighted averages shown above, perhaps significantly. See "Description of the
Certificates-Structuring Assumptions-Pricing Assumptions" herein.
Characteristics of the Underlying REMIC Certificates
The table contained in Exhibit A hereto sets forth information with
respect to the Underlying REMIC Certificates, including certain information
regarding the underlying Mortgage Loans. Certain additional information as to
the Underlying REMIC Certificates may be obtained by performing an analysis of
current Fannie Mae principal factors in the context of applicable information
contained in the related Underlying REMIC Disclosure Documents, which may be
obtained from Fannie Mae as described herein.
See "Description of the Certificates-The Underlying REMIC Certificates"
herein.
Interest Rates
The Fixed Rate Classes will bear interest at the applicable per annum
interest rates set forth on the cover.
The Floating Rate and Inverse Floating Rate Classes will bear interest
during the initial Interest Accrual Period at initial interest rates determined
as described below, and will bear interest during each Interest Accrual Period
thereafter, subject to the applicable maximum and minimum interest rates, at
rates determined as described below:
<PAGE>
<TABLE>
<CAPTION>
Class Initial Maximum Minimum Formula for
Interest Interest Interest Calculation of
Rate Rate Rate Interest Rate
<S> <C> <C> <C> <C>
F 6.05000% 8.5000% 0.55% LIBOR + 55 basis points
S 2.45000% 7.9500% 0.00% 7.95% - LIBOR
FA 6.05000% 8.5000% 0.55% LIBOR + 55 basis points
SA 7.50801%(1)17.8212% 0.00% 17.8212% -(1.88584 X LIBOR)
SB 2.03125%(1) 7.5000% 0.00% 7.5% - LIBOR
SC 1.00000%(1) 1.0000% 0.00% 8.5% - LIBOR
(1) These initial interest rates are assumed rates. The actual interest rates
will be calculated on the basis of the applicable formulas for the calculation
of such interest rates on the Index Determination Date occurring on February 21,
1997.
</TABLE>
See "Description of the Certificates-Distributions of Interest-Floating Rate
and Inverse Floating Rate Classes" herein.
Notional Classes
The notional principal balance of each Notional Class will be equal to the
indicated percentage of the outstanding principal balance or notional principal
balance of the Class or Underlying REMIC Certificate specified below, as
applicable, immediately prior to the related Distribution Date:
Class Percentage of
Principal Balance or Notional
Principal Balance
S 100% of F and FA Classes
SA 100% of PA Class
SB 100% of Class 1994-40-S REMIC Certificate
SC 100% of Class 1994-40-S REMIC Certificate
See "Description of the Certificates-Distributions of Interest-Notional
Classes" and "-Yield Tables-The Inverse Floating Rate Classes" herein.
Distributions of Principal
The portion of the Principal Distribution Amount allocated to each Class of
Certificates will be determined by distributions of principal of the Trust GNMA
Certificates or the related Underlying REMIC Certificate and, in the case of the
Group 1 Classes (as described herein), the accrued and unpaid interest on the
Accrual Classes. For such purposes, the Principal Distribution Amount will be
allocated among the Group 1 and Group 2 Principal Distribution Amounts as
described herein under "Description of the Certificates-Distributions of
Principal-Principal Distribution Amount".
Group 1 Principal Distribution Amount
ZA Class Accrual Amount
To the FA Class, to zero.
Group 1 Remaining Principal Distribution Amount
1. To the F Class, to its Maximum Scheduled Balance.
2. To the Z Class, to its Targeted Balance.
3. To the F Class, to its Minimum Scheduled Balance.
4. To the Z Class, to zero.
5. To the F Class, to zero.
6. To the FA and ZA Classes, in that order, to zero.
Group 2 Principal Distribution Amount
To the PA Class, to zero.
Weighted Average Lives (years)*
PSA Prepayment Assumption
Class 0% 100% 225% 300% 500%
F 13.4 6.4 4.5 3.5 2.4
S 12.7 6.8 5.1 4.1 2.9
Z 22.2 15.5 4.5 4.3 0.6
FA 9.1 9.1 8.4 7.4 5.3
ZA 27.3 22.9 17.3 14.5 9.6
PSA Prepayment Assumption
Class 0% 50% 100% 300% 500%
PA and SA 21.3 14.5 12.0 6.2 3.8
SB and SC 16.3 10.0 7.5 4.2 2.7
* Determined as specified under "Description of the Certificates-Weighted
Average Lives of the Certificates" herein.
<PAGE>
Annex 2(e)
Cover Page and Terms sheet
for
Offering Circular Supplement
dated October 21, 1992
to
Offering circular
dated September 1, 1992
relating to
Federal Home Loan Corporation
Multiclass Mortgage Securities, Series G003
<PAGE>
[This page Intentionally Left Blank]
<PAGE>
OFFERING CIRCULAR SUPPLEMENT (LOGO)
(TO OFFERING CIRCULAR DATED SEPTEMBER 1, 1992)
$350,000,000
FEDERAL HOME LOAN MORTGAGE CORPORATION
MULTICLASS MORTGAGE SECURITIES, SERIES G003
The Federal Home Loan Mortgage Corporation ('Freddie Mac') is offering its
Multiclass Mortgage Securities, Series G003 (the 'Multiclass Securities'). The
Multiclass Securities will consist of the various 'Classes' listed below. The
Classes will receive principal and interest payments, in differing proportions
and at differing times, from the cash flows provided by (i) 'fully modified
pass-through' mortgage-backed securities ('GNMA Certificates') guaranteed as to
timely payment of principal and interest by the Government National Mortgage
Association ('GNMA') and/or (ii) Freddie Mac Giant GNMA-Backed Securities
('Giant Securities' and, together with the GNMA Certificates, 'GNMA-Related
Securities'), with interest rates of 8% per annum. The GNMA Certificates
represent ownership interests in pools of first lien, single family residential
mortgages (the 'Mortgages') that are either insured by the Federal Housing
Administration or partially guaranteed by the Department of Veterans Affairs.
See 'General Information -- Structure of Transaction' in this Supplement. The
obligations of GNMA under its guarantees of the GNMA Certificates are backed by
the full faith and credit of the United States.
Freddie Mac guarantees to each 'Holder' of a Multiclass Security (i) the timely
payment of interest at the applicable 'Class Coupon' and (ii) the payment of the
principal amount of the Holder's Multiclass Security as described in this
Supplement.
Freddie Mac will make interest and principal payments on each monthly 'Payment
Date,' beginning December 25, 1992, on the Classes entitled to such payments.
See 'Payments' in this Supplement.
This Series will involve the creation of an 'Upper-Tier REMIC Pool' and a
'Lower-Tier REMIC Pool.' Elections will be made to treat both REMIC Pools as
'real estate mortgage investment conduits' ('REMICs') pursuant to the Internal
Revenue Code. The R and RS Classes will be 'Residual Classes' and, for federal
income tax purposes, will be the residual interests in the Upper-Tier and
Lower-Tier REMIC Pools, respectively. The other Classes will be 'Regular
Classes' and, for federal income tax purposes, will be the regular interests in
the Upper-Tier REMIC Pool. The Residual Classes will be subject to transfer
restrictions. See 'Certain Federal Income Tax Consequences' in this Supplement
and in the Multiclass Securities Offering Circular.
INVESTORS SHOULD READ THIS SUPPLEMENT IN CONJUNCTION WITH THE DOCUMENTS LISTED
AT THE BOTTOM OF PAGE S-2.
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF THE MULTICLASS SECURITIES
ARE OBLIGATIONS OF FREDDIE MAC ONLY. THE MULTICLASS SECURITIES, INCLUDING ANY
INTEREST THEREON, ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT CONSTITUTE
DEBTS OR OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF
THE UNITED STATES OTHER THAN FREDDIE MAC. INCOME ON THE MULTICLASS SECURITIES
HAS NO EXEMPTION UNDER FEDERAL LAW FROM FEDERAL, STATE OR LOCAL TAXATION. THE
MULTICLASS SECURITIES ARE EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933 AND ARE 'EXEMPTED SECURITIES' WITHIN THE MEANING OF THE
SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
WEIGHTED
ORIGINAL AVERAGE
CLASS PRINCIPAL PRINCIPAL CLASS INTEREST CUSIP FINAL PAYMENT LIFE AT 155%
G003- AMOUNT(1) TYPE(2) COUPON TYPE(2) NUMBER DATE(3) PSA(4)
<S> <C> <C> <C> <C> <C> <C> <C>
A ..... $20,183,334 PAC I 4.50% FIX 312913GJ9 February 25, 2009 1.2 Yrs
B ..... 17,850,000 PAC I 5.75 FIX 312913GK6 October 25, 2013 3.4
C ..... 30,916,667 PAC I 6.60 FIX 312913GL4 January 25, 2018 5.8
D ..... 14,053,030 PAC I 7.25 FIX 312913GM2 April 25, 2019 7.9
E ..... 50,866,667 PAC I 7.50 FIX 312913GN0 November 25, 2021 10.9
F ..... 82,313,635 PAC I (5) FLT 312913GP5 April 25, 2019 3.4
FA .... 16,960,000 SUP (5) FLT 312913GQ3 November 25, 2022 18.3
FB .... 13,760,687 CPT/SCH (5) FLT/DLY 312913GR1 September 25, 2022 3.0
FC .... 9,600,000 SUP (5) FLT/DLY 312913GS9 April 25, 2021 1.7
G ..... 6,533,333 PAC I 7.75 FIX 312913GT7 March 25, 2022 14.9
H ..... 16,333,334 PAC I 8.00 FIX 312913GU4 November 25, 2022 18.8
JA .... (6) CPT/NTL 8.00 FIX/IO 312913GV2 March 25, 2022 --
K ..... 17,692,343 PAC II 7.00 FIX 312913GW0 September 25, 2022 3.4
L ..... $ 5,600,000 PAC II 8.00% FIX 312913GX8 November 25, 2022 10.9 Yrs
M ..... 5,000,000 SCH 7.00 FIX 312913GY6 March 25, 2021 1.6
MA..... 4,613,637 SCH 7.00 FIX 312913GZ3 April 25, 2021 3.4
MB..... 3,166,666 SUP 8.00 FIX 312913HA7 June 25, 2021 5.2
N ..... 9,916,667 SUP 8.00 FIX 312913HB5 September 25, 2021 10.9
O ..... 18,000,000 SUP 8.00 FIX 312913HC3 November 25, 2022 18.3
S ..... (6) NTL (5) INV/IO 312913HD1 April 25, 2019 --
SA .... 4,240,000 SUP (5) INV 312913HE9 November 25, 2022 18.3
SB .... (6) CPT/NTL (5) W/INV/IO/DLY 312913HF6 September 25, 2022 --
SC .... 2,400,000 SUP (5) INV/DLY 312913HG4 April 25, 2021 1.7
R ..... 0 NPR 0 NPR 312913HH2 November 25, 2022 --
RS .... 0 NPR 0 NPR 312913HJ8 November 25, 2022 --
- -------
</TABLE>
(1) Subject to proportionate increase as described under 'Increase in Size' in
this Supplement.
(2) See 'Description of Multiclass Securities -- Standard Definitions and
Abbreviations for Classes' on pages 7-9 of the Multiclass Securities Offering
Circular.
(3) Determined as described under 'Final Payment Dates' in this Supplement.
(4) Determined as described under 'Prepayment and Yield Analysis' in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at the assumed rate of 155% PSA or any
other constant rate, and the actual weighted average lives of many Classes
are likely to differ from those shown, perhaps significantly.
(5) The F, FA, S and SA Classes will bear interest based on 'LIBOR,' the FB and
SB Classes will bear interest based on the 'Seven-Year Treasury Index' and
the FC and SC Classes will bear interest based on 'COFI,' as described under
'Payments -- Interest' in this Supplement.
(6) The JA, S and SB Classes will not receive principal payments, will have
original notional principal amounts of approximately $3,383,333, $82,313,635
and $13,760,687, respectively, and will bear interest on their respective
notional principal amounts as described under 'Payments -- Interest' in this
Supplement. The notional principal amounts of these Classes will be reduced
with reductions in the principal amounts of certain of the PAC and Scheduled
Classes, as described under 'Payments -- Interest' in this Supplement.
The Multiclass Securities are offered by Salomon Brothers Inc (the
'Underwriter') from time to time for sale in negotiated transactions at varying
prices to be determined at the time of sale, plus accrued interest from November
1, 1992 on the Fixed Rate, FB, FC, SB and SC Classes and from November 25, 1992
on the F, FA, S and SA Classes. The Multiclass Securities are offered by the
Underwriter, subject to sale by Freddie Mac and receipt and acceptance by the
Underwriter and subject to the Underwriter's right to reject any order in whole
or in part. It is expected that the Regular Classes (in book-entry form) will be
available for deposit at any Federal Reserve Bank, and that delivery of the
Residual Classes (in certificated form) will be made at the offices of the
Underwriter, Seven World Trade Center, New York, New York 10048, on or about
November 30, 1992 (the 'Closing Date').
-------------------------------------------------
SALOMON BROTHERS INC
-------------------------------------------------
The date of this Offering Circular Supplement is October 21, 1992.
MULTICLASS SECURITIES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE MULTICLASS SECURITIES OF ANY CLASS
UNLESS THE INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD AND
LIQUIDITY RISKS ASSOCIATED WITH THAT CLASS.
------------------------
THE YIELD OF EACH CLASS WILL DEPEND UPON ITS PURCHASE PRICE, ITS
SENSITIVITY TO THE RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGES, THE ACTUAL
CHARACTERISTICS OF THE MORTGAGES AND, IN THE CASE OF EACH FLOATING RATE OR
INVERSE FLOATING RATE CLASS, ITS SENSITIVITY TO THE LEVEL OF LIBOR, THE
SEVEN-YEAR TREASURY INDEX OR COFI (EACH, AN 'INDEX'). THE MORTGAGES ARE SUBJECT
TO PREPAYMENT AT ANY TIME WITHOUT PENALTY. MORTGAGE PREPAYMENT RATES ARE LIKELY
TO FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME, AS IS THE LEVEL OF EACH INDEX.
INVESTORS SHOULD CONSIDER THE ASSOCIATED RISKS, INCLUDING:
- FAST MORTGAGE PREPAYMENT RATES CAN REDUCE THE YIELDS OF THE JA, S AND
SB CLASSES, WHICH ARE INTEREST ONLY CLASSES, AND OF ANY OTHER CLASSES
PURCHASED AT A PREMIUM OVER THEIR PRINCIPAL AMOUNTS. UNDER CERTAIN
PREPAYMENT SCENARIOS, INVESTORS IN THE INTEREST ONLY CLASSES COULD
FAIL TO FULLY RECOVER THEIR INVESTMENTS.
- SLOW MORTGAGE PREPAYMENT RATES CAN INCREASE THE WEIGHTED AVERAGE LIVES
AND, THUS, REDUCE THE YIELDS OF ANY CLASSES PURCHASED AT A DISCOUNT TO
THEIR PRINCIPAL AMOUNTS.
- SMALL DIFFERENCES IN THE CHARACTERISTICS OF THE MORTGAGES CAN HAVE A
SIGNIFICANT EFFECT ON THE WEIGHTED AVERAGE LIVES AND YIELDS OF THE
CLASSES.
- LOW LEVELS OF THE APPLICABLE INDEX CAN REDUCE THE YIELDS OF THE F, FA,
FB AND FC CLASSES. CONVERSELY, HIGH LEVELS OF THE APPLICABLE INDEX CAN
SIGNIFICANTLY REDUCE THE YIELDS OF THE S, SA, SB AND SC CLASSES AND
(ESPECIALLY IN COMBINATION WITH FAST MORTGAGE PREPAYMENT RATES) MAY
RESULT IN THE FAILURE OF INVESTORS IN THE S, SB AND SC CLASSES TO
FULLY RECOVER THEIR INVESTMENTS.
- IN GENERAL, PRINCIPAL PAYMENT RATES ON THE FA, FC, MB, N, O, SA AND SC
CLASSES, WHICH ARE SUPPORT CLASSES, ARE LIKELY TO EXHIBIT A HIGHER
SENSITIVITY TO MORTGAGE PREPAYMENTS THAN ARE PRINCIPAL PAYMENT RATES
ON THE PAC AND SCHEDULED CLASSES.
- IN GENERAL, PRINCIPAL PAYMENT RATES ON THE SCHEDULED CLASSES ARE
LIKELY TO EXHIBIT A HIGHER SENSITIVITY TO MORTGAGE PREPAYMENTS THAN
ARE PRINCIPAL PAYMENT RATES ON THE PAC CLASSES AND PRINCIPAL PAYMENT
RATES ON THE TYPE II PAC CLASSES ARE LIKELY TO EXHIBIT A HIGHER
SENSITIVITY TO MORTGAGE PREPAYMENTS THAN ARE PRINCIPAL PAYMENT RATES
ON THE TYPE I PAC CLASSES.
SEE 'PREPAYMENT AND YIELD ANALYSIS' IN THIS SUPPLEMENT.
------------------------
THE UNDERWRITER INTENDS TO MAKE A MARKET FOR THE PURCHASE AND SALE OF THE
MULTICLASS SECURITIES AFTER THEIR INITIAL ISSUANCE BUT HAS NO OBLIGATION TO DO
SO. THERE IS NO ASSURANCE THAT SUCH A SECONDARY MARKET WILL DEVELOP OR, IF IT
DEVELOPS, THAT IT WILL CONTINUE. CONSEQUENTLY, INVESTORS MAY NOT BE ABLE TO SELL
THEIR MULTICLASS SECURITIES READILY OR AT PRICES THAT WILL ENABLE THEM TO
REALIZE THEIR DESIRED YIELD.
------------------------
Investors should purchase Multiclass Securities only if they have read and
understand this Supplement and the following documents:
- Freddie Mac's Multiclass Mortgage Securities Offering Circular dated
September 1, 1992 (the 'Multiclass Securities Offering Circular'),
which is attached to this Supplement;
- Freddie Mac's Giant GNMA-Backed Securities Offering Circular dated
September 1, 1992 (the 'Giant Securities Offering Circular'); and
- Freddie Mac's Information Statement dated March 19, 1992, its
Information Statement Supplements dated April 28, 1992, July 30, 1992
and November 13, 1992 and any other Information Statement Supplements
published by Freddie Mac through the time of purchase (collectively,
the 'Information Statement').
This Supplement incorporates by reference the Giant Securities Offering
Circular and the Information Statement. Investors can order those documents:
from Freddie Mac, by writing or calling its Investor Inquiry Department at 8200
Jones Branch Drive, McLean, Virginia 22102 (outside Washington, D.C.
metropolitan area, phone 800/336-FMPC; within Washington, D.C. metropolitan
area, phone 703/759-8160); or from the Underwriter, by writing or calling its
Prospectus Department at 140 58th Street, Brooklyn Army Terminal, Brooklyn, New
York 11220 (phone 212/783-1400).
Investors can obtain additional information regarding the GNMA-Related
Securities from the sources described under 'General Information -- Additional
Information' in this Supplement.
<PAGE>
SERIES G003 TERMS SHEET
THIS TERMS SHEET CONTAINS SELECTED INFORMATION FOR QUICK REFERENCE ONLY. IT
IS NOT A SUMMARY OF THE TRANSACTION. INVESTORS SHOULD REFER TO THE REMAINDER OF
THIS SUPPLEMENT FOR FURTHER INFORMATION.
CLASS COUPONS
The Fixed Rate Classes will bear interest at the Class Coupons shown on the
cover page of this Supplement.
The Floating Rate and Inverse Floating Rate Classes and Components will
bear interest as follows:
<TABLE>
<CAPTION>
CLASS OR COMPONENT
COUPON SUBJECT TO
CLASS OR ---------------------------
COMPONENT INITIAL RATE CLASS OR COMPONENT COUPON MINIMUM RATE MAXIMUM RATE
----------------- ------------ --------------------------------------- ------------ ------------
<S> <C> <C> <C> <C>
F ............ 4.4500%** LIBOR + 0.45% 0.45% 10.000000%
FA ............. 4.5625 LIBOR + 1.25% 1.25 10.000000
FB* ............. 6.0500 Seven-Year Treasury Index - 0.25% 0 9.200000
FC* ............. 6.3740 COFI + 1.5% 1.5 10.000000
S ............ 5.5500** 9.55% - LIBOR 0 9.550000
SA ............. 21.7500 35.0% - (LIBOR X 4) 0 35.000000
SB-1*............ 4.2705 10.570513% - Seven-Year Treasury Index 1.120513 10.320513
SB-2*............ 3.5166 9.816666% - Seven-Year Treasury Index 0.366666 9.566666
SC* ............. 14.5040 34.0% - (COFI X 4) 0 34.000000
</TABLE>
-------------------
* Delay Classes and Components.
** Rate in effect until November 25, 1993; Class Coupon adjusts monthly
thereafter.
See 'Payments -- Interest' in this Supplement.
ALLOCATION OF PRINCIPAL
1. Type I PAC Classes to their Targeted Balances (structured at 90%-250%
PSA), allocated:
A and F, in the ratio of 4 to 7
B and F, in the ratio of 8 to 9
C and F, in the ratio of 10 to 7
D and F, in the ratio of 8 to 3
E, G and H, in that order
2. Type II PAC Classes and Component to their Targeted Balances (structured
at 115%-200% PSA), allocated:
K and FB-1, pro rata
L
3. M, MA and FB-2 to their Targeted Balances (structured at 135%-155% PSA),
allocated:
43.5992607710% to M, 17.4397043084% to MA and 38.9610349206% to FB-2,
while M is outstanding
FB-2 and MA, pro rata (based on their then outstanding principal
amounts)
4. FC and SC, pro rata, until retired
5. MB until retired
6. M, MA and FB-2 as in step 3 until retired
7. N until retired
8. FA, O and SA, pro rata, until retired
9. Type II PAC Classes and Component as in step 2 until retired
10. Type I PAC Classes as in step 1 until retired
See 'Payments -- Principal' in this Supplement.
<PAGE>
WEIGHTED AVERAGE LIVES (IN YEARS)*
<TABLE>
<CAPTION>
PSA PREPAYMENT ASSUMPTION
------------------------------------
CLASSES 0% 90% 155% 250% 450%
------------------------------------------------ ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
A ............................................. 8.1 1.2 1.2 1.2 1.2
B ............................................. 15.7 3.4 3.4 3.4 2.3
C ............................................. 19.8 5.8 5.8 5.8 3.3
D ............................................. 22.2 7.9 7.9 7.9 4.4
E ............................................. 24.1 10.9 10.9 10.9 6.1
F ............................................. 13.9 3.4 3.4 3.4 2.2
FA, O and SA.................................... 29.4 22.0 18.3 2.8 0.9
FB ............................................. 27.2 13.3 3.0 2.0 0.8
FC and SC....................................... 28.2 17.3 1.7 0.3 0.1
G ............................................. 25.5 14.9 14.9 14.9 8.7
H ............................................. 25.9 18.8 18.8 18.8 11.9
K ............................................. 26.8 11.5 3.4 2.9 1.2
L ............................................. 27.4 14.1 10.9 6.4 1.7
M .............................................. 27.7 15.3 1.6 0.7 0.3
MA.............................................. 27.8 15.8 3.4 0.9 0.3
MB ............................................. 28.5 18.2 5.2 0.6 0.2
N ............................................. 28.7 19.0 10.9 1.4 0.5
Underlying GNMA-Related Securities.............. 21.3 10.2 7.6 5.4 3.0
</TABLE>
-----------------------
* Determined as described under 'Prepayment and Yield Analysis'
in this Supplement, and subject to the assumptions and
qualifications in that section. Prepayments will not occur at
any assumed rate shown or any other constant rate, and the
actual weighted average lives of the Classes and of the
GNMA-Related Securities are likely to differ from those shown,
perhaps significantly.
ASSUMED MORTGAGE CHARACTERISTICS (AS OF NOVEMBER 1, 1992)
<TABLE>
<CAPTION>
REMAINING TERM ORIGINAL TERM
TO MATURITY TO MATURITY PER ANNUM
PRINCIPAL BALANCE (IN MONTHS) (IN MONTHS) INTEREST RATE
- ----------------- -------------- ------------- -------------
<S> <C> <C> <C>
$350,000,000 292 360 8.5%
</TABLE>
The actual remaining terms to maturity of most of the Mortgages will differ
from the remaining term shown above, perhaps significantly. See 'General
Information -- The Mortgages' in this Supplement.
<PAGE>
Annex 2(f)
Cover Page and Terms Sheet
for
Offering Circular Supplement
dated March 19, 1993
to
Offering Circular
dated January 1, 1993
relating to
Federal Home Loan Mortgage Corporation
Multiclass Mortgage Participation Certificates, series 1505
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
OFFERING CIRCULAR SUPPLEMENT
(LOGO)
(TO OFFERING CIRCULAR DATED JANUARY 1, 1993)
$500,000,000
FEDERAL HOME LOAN MORTGAGE CORPORATION
MULTICLASS MORTGAGE PARTICIPATION CERTIFICATES, SERIES 1505
------------------------
The Federal Home Loan Mortgage Corporation ('Freddie Mac') is offering its
Multiclass Mortgage Participation Certificates, Series 1505 (the 'Multiclass
PCs'). The Multiclass PCs will consist of the various 'Classes' listed below.
The Classes will receive principal and interest payments, in differing
proportions and at differing times, from the cash flows provided by Freddie
Mac 'Gold PCs' and 'Gold Giant PCs' with interest rates of 7% per annum. This
Supplement sometimes refers to the Gold PCs and Gold Giant PCs that will back
the Multiclass PCs as the 'PCs.' Underlying the PCs are pools of fixed-rate,
first lien, residential mortgages and mortgage participations (the
'Mortgages'). See 'General Information -- Structure of Transaction' in this
Supplement.
Freddie Mac guarantees to each 'Holder' of a Multiclass PC (i) the timely
payment of interest at the applicable 'Class Coupon' and (ii) the payment of
the principal amount of the Holder's Multiclass PC as described in this
Supplement.
Freddie Mac will make interest and principal payments on each monthly
'Payment Date,' beginning June 15, 1993, on the Classes entitled to such
payments. See 'Payments' in this Supplement.
This Series will involve the creation of an 'Upper-Tier REMIC Pool' and a
'Lower-Tier REMIC Pool.' Elections will be made to treat both REMIC Pools as
'real estate mortgage investment conduits' ('REMICs') pursuant to the Internal
Revenue Code. The R and RS Classes will be 'Residual Classes' and, for federal
income tax purposes, will be the residual interests in the Upper-Tier and
Lower-Tier REMIC Pools, respectively. The other Classes will be 'Regular
Classes' and, for federal income tax purposes, will be the regular interests
in the Upper-Tier REMIC Pool. The Residual Classes will be subject to transfer
restrictions. See 'Certain Federal Income Tax Consequences' in this Supplement
and in the Multiclass PC Offering Circular.
INVESTORS SHOULD READ THIS SUPPLEMENT IN CONJUNCTION WITH THE DOCUMENTS
LISTED AT THE BOTTOM OF PAGE S-2.
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF THE MULTICLASS PCS
ARE OBLIGATIONS OF FREDDIE MAC ONLY. THE MULTICLASS PCS, INCLUDING ANY INTEREST
THEREON, ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT CONSTITUTE
DEBTS OR OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY OR
INSTRUMENTALITY OF THE UNITED STATES OTHER THAN FREDDIE MAC. INCOME ON
THE MULTICLASS PCS HAS NO EXEMPTION UNDER FEDERAL LAW FROM FEDERAL,
STATE OR LOCAL TAXATION. THE MULTICLASS PCS ARE EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE
'EXEMPTED SECURITIES' WITHIN THE MEANING OF THE SECURITIES
EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
ORIGINAL LIFE AT
CLASS PRINCIPAL PRINCIPAL CLASS INTEREST CUSIP FINAL PAYMENT 175%
1505- AMOUNT(1) TYPE(2) COUPON TYPE(2) NUMBER DATE(3) PSA(4)
- ------------ ----------- -------- ------ -------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A ..... $93,500,000 PAC 5.25 % FIX 312915 Z C 8 January 15, 2011 2.4 Yrs
B ..... 17,500,000 PAC 6.00 FIX 312915 Z D 6 July 15, 2012 4.5
C ..... 45,000,000 PAC 6.00 FIX 312915 Z E 4 September 15, 2015 5.8
D ..... 57,500,000 PAC 5.50 FIX 312915 Z F 1 August 15, 2018 8.0
E ..... 27,250,000 PAC 6.50 FIX 312915 Z G 9 October 15, 2019 10.0
G ..... 41,000,000 PAC 6.50 FIX 312915 Z H 7 May 15, 2021 12.0
H ..... 11,000,000 PAC 7.00 FIX 312915 Z J 3 September 15, 2021 14.0
IA ..... (5) NTL(PAC) 7.00 FIX/IO 312915 Z K 0 January 15, 2011 --
IB ..... (5) NTL(PAC) 7.00 FIX/IO 312915 Z L 8 August 15, 2018 --
IC ..... (5) NTL(PAC) 7.00 FIX/IO 312915 Z M 6 May 15, 2021 --*
ID ..... (5) NTL(PAC) 7.00 FIX/IO 312915 Z N 4 September 15, 2015 --
K ..... 31,000,000 SCH 7.00 FIX 312915 Z P 9 November 15, 2021 2.4
LA ..... 27,650,000 SCH 7.00 FIX 312915 Z Q 7 August 15, 2022 6.9
WEIGHTED AVERAGE
ORIGINAL LIFE AT
CLASS PRINCIPAL PRINCIPAL CLASS INTEREST CUSIP FINAL PAYMENT 175%
1505- AMOUNT(1) TYPE(2) COUPON TYPE(2) NUMBER DATE(3) PSA(4)
- ------------ ----------- -------- ------ -------- -------------------------------------
LB ..... $ 5,450,000 SCH 7.00 % FIX 312915 Z R 5 September 15, 2022 13.0 Yrs
NA ..... 12,880,000 SUP (6) FLT/DLY 312915 Z S 3 December 15, 2022 2.4
NB ..... 5,520,000 SUP (6) INV/DLY 312915 Z T 1 December 15, 2022 2.4
NC ..... 14,000,000 SUP (6) FLT/DLY 312915 Z U 8 December 15, 2022 2.4
ND ..... 5,000,000 SUP (6) INV/DLY 312915 Z V 6 December 15, 2022 2.4
OA ..... 12,040,000 SUP (6) FLT 312915ZW4 April 15, 2023 5.9
OB ..... 5,160,000 SUP (6) INV 312915 Z X 2 April 15, 2023 5.9
P ..... 5,220,263 SUP 7.00 FIX 312915 Z Y 0 May 15, 2023 18.7
Q ..... 51,129,737 CPT/SCH 7.00 FIX 312915 Z Z 7 May 15, 2023 19.7
QA ..... 22,540,000 CPT/SCH (6) FLT 312915 A 2 7 May 15, 2023 19.7
QB ..... 9,660,000 CPT/SCH (6) INV 312915 A 3 5 May 15, 2023 19.7
R ..... 0 NPR 0 NPR 312915 A 4 3 May 15, 2023 --
RS ..... 0 NPR 0 NPR 312915 A 5 0 May 15, 2023 --
- ---------------
(1) Subject to proportionate increase as described under 'Increase in Size' in
this Supplement.
(2) See 'Description of Multiclass PCs -- Standard Definitions and
Abbreviations for Classes' on pages 7-9 of the Multiclass PC Offering
Circular. The type of Class with which the notional principal amount of a
Notional Class will be reduced is indicated in parentheses.
(3) Determined as described under 'Final Payment Dates' in this Supplement.
(4) Determined as described under 'Prepayment and Yield Analysis' in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at the assumed rate of 175% PSA or any
other constant rate, and the actual weighted average lives of many Classes
are likely to differ from those shown, perhaps significantly.
(5) The Notional Classes will not receive principal payments, will have
original notional principal amounts of $23,375,000 (IA), approximately
$12,321,428 (IB), $4,875,000 (IC) and approximately $8,928,571 (ID), and
will bear interest on their notional principal amounts at their Class
Coupons of 7% per annum. The notional principal amounts of the Notional
Classes will be reduced with reductions in the principal amounts of
certain of the PAC Classes, as described under 'Payments -- Interest --
Notional Classes' in this Supplement.
(6) The NA and NB Classes will bear interest based on 'COFI,' the NC and ND
Classes will bear interest based on the 'Three-Month Treasury Index,' and
the OA, OB, QA and QB Classes will bear interest based on 'LIBOR,' as
described under 'Payments -- Interest' in this Supplement.
</TABLE>
The Multiclass PCs are being offered by Citibank, N.A. (the 'Underwriter')
from time to time in negotiated transactions at varying prices to be
determined, in each case, at the time of sale, plus accrued interest from May
1, 1993 on the Fixed Rate and Delay Classes and from May 15, 1993 on the
Floating Rate and Inverse Floating Rate Classes other than the Delay Classes.
The Multiclass PCs are offered by the Underwriter when, as and if issued and
subject to delivery by Freddie Mac and acceptance by the Underwriter, and
subject to the Underwriter's right to reject any order in whole or in part. It
is expected that the Regular Classes (in book-entry form) will be available
for deposit at any Federal Reserve Bank, and that delivery of the Residual
Classes (in certificated form) will be made at the offices of the Underwriter,
55 Water Street, 41st Floor, New York, New York 10043, on or about May 28,
1993 (the 'Closing Date').
LOGO
THE DATE OF THIS OFFERING CIRCULAR SUPPLEMENT IS MARCH 19, 1993.
<PAGE>
MULTICLASS PCS ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE MULTICLASS PCS OF ANY CLASS UNLESS THE
INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD AND LIQUIDITY
RISKS ASSOCIATED WITH THAT CLASS.
------------------------
THE YIELD OF EACH CLASS WILL DEPEND UPON ITS PURCHASE PRICE, ITS
SENSITIVITY TO THE RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGES, THE ACTUAL
CHARACTERISTICS OF THE MORTGAGES AND, IN THE CASE OF EACH FLOATING RATE OR
INVERSE FLOATING RATE CLASS, ITS SENSITIVITY TO THE LEVEL OF COFI, THE
THREE-MONTH TREASURY INDEX OR LIBOR (EACH, AN 'INDEX'). THE MORTGAGES ARE
SUBJECT TO PREPAYMENT AT ANY TIME WITHOUT PENALTY. MORTGAGE PREPAYMENT RATES
ARE LIKELY TO FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME, AS IS THE LEVEL OF
EACH INDEX. INVESTORS SHOULD CONSIDER THE ASSOCIATED RISKS, INCLUDING:
FAST MORTGAGE PREPAYMENT RATES CAN REDUCE THE YIELDS OF CLASSES
PURCHASED AT A PREMIUM, ESPECIALLY THE IA, IB, IC AND ID CLASSES,
WHICH ARE INTEREST ONLY CLASSES. UNDER RAPID PREPAYMENT SCENARIOS,
INVESTORS IN THE INTEREST ONLY CLASSES COULD FAIL TO FULLY RECOVER
THEIR INVESTMENTS.
SLOW MORTGAGE PREPAYMENT RATES CAN INCREASE THE WEIGHTED AVERAGE
LIVES AND, THUS, REDUCE THE YIELDS OF CLASSES PURCHASED AT A
DISCOUNT.
SMALL DIFFERENCES IN THE CHARACTERISTICS OF THE MORTGAGES CAN HAVE A
SIGNIFICANT EFFECT ON THE WEIGHTED AVERAGE LIVES AND YIELDS OF THE
CLASSES.
LOW LEVELS OF THE APPLICABLE INDEX CAN REDUCE THE YIELDS OF THE
FLOATING RATE CLASSES. CONVERSELY, HIGH LEVELS OF THE APPLICABLE
INDEX CAN SIGNIFICANTLY REDUCE THE YIELDS OF THE INVERSE FLOATING
RATE CLASSES.
IN GENERAL, PRINCIPAL PAYMENT RATES ON THE SUPPORT CLASSES ARE LIKELY
TO EXHIBIT A HIGHER SENSITIVITY TO MORTGAGE PREPAYMENTS THAN ARE
PRINCIPAL PAYMENT RATES ON THE PAC AND SCHEDULED CLASSES.
SEE 'PREPAYMENT AND YIELD ANALYSIS' IN THIS SUPPLEMENT.
THE UNDERWRITER INTENDS TO MAKE A MARKET FOR THE PURCHASE AND SALE OF THE
MULTICLASS PCS AFTER THEIR INITIAL ISSUANCE BUT HAS NO OBLIGATION TO DO SO.
THERE IS NO ASSURANCE THAT SUCH A SECONDARY MARKET WILL DEVELOP OR, IF IT
DEVELOPS, THAT IT WILL CONTINUE. CONSEQUENTLY, INVESTORS MAY NOT BE ABLE TO
SELL THEIR MULTICLASS PCS READILY OR AT PRICES THAT WILL ENABLE THEM TO
REALIZE THEIR DESIRED YIELD.
Investors should purchase Multiclass PCs only if they have read and
understand this Supplement and the following documents:
Freddie Mac's Multiclass Mortgage Participation Certificates Offering
Circular dated January 1, 1993 (the 'Multiclass PC Offering
Circular'), which is attached to this Supplement;
Freddie Mac's Mortgage Participation Certificates Offering Circular
dated June 30, 1992 and its Mortgage Participation Certificates
Offering Circular Supplements dated August 3, 1992, November 2, 1992
and April 30, 1993 (collectively, the 'PC Offering Circular');
Freddie Mac's Giant Mortgage Participation Certificates Offering
Circular dated December 23, 1991 and its Giant Mortgage Participation
Certificates Offering Circular Supplement dated December 3, 1992
(together, the 'Giant PC Offering Circular'); and
Freddie Mac's Information Statement dated April 9, 1993, its
Information Statement Supplement dated April 30, 1993 and any other
Information Statement Supplements published by Freddie Mac through
the time of purchase (collectively, the 'Information Statement').
This Supplement incorporates by reference the PC Offering Circular, the
Giant PC Offering Circular and the Information Statement. Investors can order
those documents: from Freddie Mac, by writing or calling its Investor Inquiry
Department at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside
Washington, D.C. metropolitan area, phone 800/336-FMPC; within Washington,
D.C. metropolitan area, phone 703/759-8160); or from the Underwriter, by
writing or calling its offices at 55 Water Street, New York, New York 10043
(phone 212/291-7449).
Investors can obtain additional information regarding the PCs and
Mortgages from the sources described under 'General Information -- Additional
Information' in this Supplement.
<PAGE>
SERIES 1505 TERMS SHEET
THIS TERMS SHEET CONTAINS SELECTED INFORMATION FOR QUICK REFERENCE ONLY.
IT IS NOT A SUMMARY OF THE TRANSACTION. INVESTORS SHOULD REFER TO THE
REMAINDER OF THIS SUPPLEMENT FOR FURTHER INFORMATION.
CLASS COUPONS
The Fixed Rate Classes will bear interest at the Class Coupons shown on
the cover page of this Supplement.
The Floating Rate and Inverse Floating Rate Classes will bear interest as
follows:
<TABLE>
<CAPTION>
CLASS COUPON
-----------------------
INITIAL MINIMUM MAXIMUM
CLASS RATE CLASS COUPON RATE RATE
- -------------------- ----------- --------------------------------------------------- ----------- ----------
<S> <C> <C> <C> <C>
NA* ......... 5.36% COFI + 1% 1.0% 10.0%
NB* ......... 10.82666 21% - (COFI x 2.3333333) 0 21.0
NC* ......... 4.47 Three-Month Treasury Index + 1.5% 1.5 9.5
ND* ......... 14.084 22.4% (Three-Month Treasury Index 2.8) 0 22.4
OA ......... 4.4375 LIBOR + 1.25% 1.25 10.0
OB ......... 12.97916 20.41666% - (LIBOR x 2.333333) 0 20.41666
QA ......... 4.2875 LIBOR + 1.1% 1.1 10.0
QB ......... 13.32916 20.76666% - (LIBOR x 2.333333) 0 20.76666
- ---------------
* Delay Class.
</TABLE>
See 'Payments--Interest' in this Supplement.
NOTIONAL CLASSES
NOTIONAL CLASS REDUCES WITH
- ------------------ ---------------------------------------
IA............ A (PAC Class)
IB............ D (PAC Class)
IC............ E and G (PAC Classes)
ID............ B and C (PAC Classes)
See 'Payments -- Interest -- Notional Classes' in this Supplement.
ALLOCATION OF PRINCIPAL
1. PAC Classes and Components to their Targeted Balances (structured
at 85% - 225% PSA), allocated:
A, B, C, D, E, G and H, in that order
Q-1, QA-1 and QB-1, pro rata
2. K, LA and LB (Scheduled Classes) and the Scheduled Components to
their Targeted Balances (structured at 125% - 180% PSA), allocated:
K, LA and LB, in that order
Q-2, QA-2 and QB-2, pro rata
3. NA, NB, NC and ND, pro rata, until retired
4. OA and OB, pro rata, until retired
5. P until retired
6. K, LA and LB (Scheduled Classes) and the Scheduled Components as in
step 2 until retired
7. PAC Classes and Components as in step 1 until retired
See 'Payments -- Principal' in this Supplement.
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE LIVES (IN YEARS)*
PSA PREPAYMENT ASSUMPTION
-----------------------------------------------------------
0% 85% 175% 225% 450%
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
A......................................... 9.0 2.4 2.4 2.4 2.2
B......................................... 15.4 4.5 4.5 4.5 3.3
C......................................... 17.6 5.8 5.8 5.8 3.7
D......................................... 20.5 8.0 8.0 8.0 4.6
E......................................... 22.4 10.0 10.0 10.0 5.5
G......................................... 23.7 12.0 12.0 12.0 6.5
H......................................... 24.6 14.0 14.0 14.0 7.6
K......................................... 26.8 13.9 2.4 2.4 1.6
LA........................................ 27.6 17.9 6.9 4.4 2.1
LB........................................ 28.0 19.8 13.0 5.3 2.3
NA, NB, NC and ND......................... 29.1 24.5 2.4 1.5 0.7
OA and OB................................. 29.7 28.0 5.9 2.8 1.4
P......................................... 29.9 29.4 18.7 3.4 1.6
Q, QA and QB.............................. 26.6 20.4 19.7 14.9 7.9
Underlying PCs............................ 21.3 12.4 8.4 7.0 4.1
- ---------------
* Determined as described under 'Prepayment and Yield Analysis' in this Supplement, and subject to the
assumptions and qualifications in that section. Prepayments will not occur at any assumed rate shown
or any other constant rate, and the actual weighted average lives of many Classes and of the PCs are
likely to differ from those shown, perhaps significantly.
</TABLE>
ASSUMED MORTGAGE CHARACTERISTICS (AS OF MAY 1, 1993)
APPROXIMATE
WEIGHTED AVERAGE APPROXIMATE APPROXIMATE
APPROXIMATE REMAINING TERM WEIGHTED AVERAGE WEIGHTED AVERAGE
PRINCIPAL TO MATURITY LOAN AGE PER ANNUM
BALANCE (IN MONTHS) (IN MONTHS) INTEREST RATE
- ----------- --------------------- -------------------- -------------------
$ 500,000,000 357 2 7.625%
The actual remaining terms to maturity, loan ages and interest rates of
most of the Mortgages will differ from the weighted averages shown above,
perhaps significantly. See 'General Information--The Mortgages' in this
Supplement.
<PAGE>
PAGE INTENTIONALLY LEFT BLANK
<PAGE>
Annex 2(g)
-------------
OFFERING CIRCULAR SUPPLEMENT
(TO OFFERING CIRCULAR DATED AUGUST 1, 1993)
Freddie
Mac
$1,895,089,961
-------------
-------------
-------------
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
MULTICLASS MORTGAGE PARTICIPATION CERTIFICATES, SERIES 1603
The Federal Home Loan Mortgage Corporation ("Freddie Mac") is offering its
Multiclass Mortgage Participation Certificates of the above Series (the
"Multiclass PCs"). The Multiclass PCs will consist of the various "Classes"
listed below. The Classes will receive principal and interest payments, in
differing proportions and at differing times, from the cash flows provided by
Freddie Mac "Gold PCs" and "Gold Giant PCs" with interest rates of 7% per annum
(the "PCs"). Underlying the PCs are pools of fixed-rate, first lien, residential
mortgages and mortgage participations (the "Mortgages"). See "General
Information -- Structure of Transaction" in this Supplement.
Freddie Mac guarantees to each "Holder" of a Multiclass PC (i) the timely
payment of interest at the applicable "Class Coupon" and (ii) the payment of the
principal amount of the Holder's Multiclass PC as described in this Supplement.
Freddie Mac will make interest and principal payments on each monthly
"Payment Date," beginning November 15, 1993, on the Classes entitled to such
payments. See "Payments" in this Supplement.
This Series will involve the creation of an "Upper-Tier REMIC Pool" and a
"Lower-Tier REMIC Pool." Elections will be made to treat both REMIC Pools as
"real estate mortgage investment conduits" ("REMICs") pursuant to the Internal
Revenue Code. The R and RS Classes will be "Residual Classes" and the other
Classes will be "Regular Classes." The Residual Classes will be subject to
transfer restrictions. See "Certain Federal Income Tax Consequences" in this
Supplement and in the Multiclass PC Offering Circular.
INVESTORS SHOULD READ THIS SUPPLEMENT IN CONJUNCTION WITH THE DOCUMENTS
LISTED AT THE BOTTOM OF PAGE S-2.
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF THE MULTICLASS PCS
ARE OBLIGATIONS OF FREDDIE MAC ONLY. THE MULTICLASS PCS, INCLUDING ANY INTEREST
THEREON, ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT CONSTITUTE DEBTS OR
OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF THE UNITED
STATES OTHER THAN FREDDIE MAC. INCOME ON THE MULTICLASS PCS HAS NO EXEMPTION
UNDER FEDERAL LAW FROM FEDERAL, STATE OR LOCAL TAXATION. THE MULTICLASS PCS ARE
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE
"EXEMPTED SECURITIES" WITHIN THE MEANING OF THE SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
WEIGHTED
PRINCIPAL AVERAGE
ORIGINAL TYPE LIFE AT
PRINCIPAL OR OTHER CLASS INTEREST CUSIP FINAL PAYMENT 235%
CLASS AMOUNT(1) TYPE(2) COUPON TYPE(2) NUMBER DATE(3) PSA(4)
- -------------------- ----------- --------- ----------- --------- ---------- -------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
A ......... $53,053,334 PAC I 4.50% FIX 3133T1QK1 June 15, 2004 1.1 Yrs.
B ......... 67,247,059 PAC I 4.75 FIX 3133T1QL9 July 15, 2010 2.5
C ......... 43,600,000 PAC I 5.00 FIX 3133T1QM7 December 15, 2012 3.5
D ......... 69,813,334 PAC I 5.25 FIX 3133T1QN5 November 15, 2015 4.5
E ......... 99,497,144 PAC I 5.50 FIX 3133T1QP0 October 15, 2018 6.0
F ......... 117,655,385 PAC I 5.75 FIX 3133T1QQ8 April 15, 2021 8.0
G ......... 394,813,744 PAC I (5) FLT 3133T1QR6 April 15, 2021 4.4
H ......... 372,368,837 NTL(PAC I) (5) INV/IO 3133T1QS4 April 15, 2021 --
I ......... 4,000,000 PAC I 6.00 FIX 3133T1QT2 January 15, 2023 11.0
IA ......... 62,005,000 PAC I 6.50 FIX 3133T1QU9 January 15, 2023 11.0
IB ......... 5,148,750 NTL(PAC I) 7.00 FIX/IO 3133T1QV7 January 15, 2023 --
IC ......... 42,000,000 PAC I (5) FLT 3133T1QW5 January 15, 2023 11.0
ID ......... 15,000,000 PAC I (5) INV 3133T1QX3 January 15, 2023 11.0
IE ......... 1,385,000 PAC I 6.25 FIX 3133T1QY1 January 15, 2023 11.0
IF ......... 30,800,000 PAC I (5) FLT 3133T1QZ8 January 15, 2023 11.0
IG ......... 11,000,000 PAC I (5) INV 3133T1RA2 January 15, 2023 11.0
J ......... 50,600,000 PAC I 6.50 FIX 3133T1RB0 July 15, 2023 15.0
K ......... 8,100,000 PAC I 6.50 FIX 3133T1RC8 October 15, 2023 20.2
KA ......... 15,264,604 PAC I (5) FLT 3133T1RD6 October 15, 2023 20.2
KB ......... $7,632,302 PAC I (5) INV 3133T1RE4 October 15, 2023 20.2
L ......... 7,463,843 NTL(PAC I) 7.00% FIX/IO 3133T1RF1 October 15, 2023 --
M ......... 34,850,000 PAC II 7.00 FIX 3133T1RG9 October 15, 2023 3.5
MA ......... 35,000,000 PAC II (5) FLT 3133T1RH7 October 15, 2023 3.5
MB ......... 5,000,000 PAC II (5) INV 3133T1RJ3 October 15, 2023 3.5
MC ......... 106,738,029 CPT (5) FLT 3133T1RK0 October 15, 2023 4.1
MD ......... 22,872,435 CPT (5) INV 3133T1RL8 October 15, 2023 4.1
NA ......... 207,128,274 PAC III (5) FLT/DLY 3133T1RM6 October 15, 2023 4.5
NB ......... 59,179,507 PAC III (5) INV/DLY 3133T1RN4 October 15, 2023 4.5
OA ......... 60,546,935 SUP (5) FLT/DLY 3133T1RP9 October 15, 2023 18.0
OB ......... 17,299,129 SUP (5) INV/DLY 3133T1RQ7 October 15, 2023 18.0
P ......... 22,444,907 NTL(PAC I) (5) INV/IO 3133T1RR5 April 15, 2021 --
QA ......... 28,407,131 SUP 0 PO 3133T1RS3 October 15, 2023 10.4
QB ......... 107,947,093 SUP (5) FLT/DLY 3133T1RT1 October 15, 2023 10.4
QC ......... 79,539,962 SUP (5) INV/DLY 3133T1RU8 October 15, 2023 10.4
SA ......... 28,866,880 SUP (5) FLT 3133T1RV6 November 15, 2022 4.7
SB ......... 8,247,680 SUP (5) INV 3133T1RW4 November 15, 2022 4.7
R ......... 0 NPR 0 NPR 3133T1RX2 October 15, 2023 --
RS ......... 0 NPR 0 NPR 3133T1RY0 October 15, 2023 --
(1) Subject to proportionate increase as described under "Increase in Size" in
this Supplement. The amount shown for a Notional Class is its original
notional principal amount and does not represent principal that will be
paid; see "Payments -- Interest" in this Supplement.
(2) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular. The type of Class with
which the notional principal amount of a Notional Class will be reduced is
indicated in parentheses.
(3) See "Final Payment Dates" in this Supplement.
(4) Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at the assumed rate of 235% PSA or any
other constant rate, and the actual weighted average lives of any or all of
the Classes are likely to differ from those shown, perhaps significantly.
(5) The Floating Rate and Inverse Floating Rate Classes will bear interest as
described under "Terms Sheet -- Class Coupons" in this Supplement.
</TABLE>
The Multiclass PCs are offered by Kidder, Peabody & Co. Incorporated (the
"Underwriter") from time to time in negotiated transactions at varying prices to
be determined at the time of sale, plus accrued interest from October 1, 1993 on
the Fixed Rate and Delay Classes and from October 15, 1993 on the Floating Rate
and Inverse Floating Rate Classes other than the Delay Classes (the "Non-Delay
Classes"). The Multiclass PCs are offered by the Underwriter when, as and if
issued, subject to delivery by Freddie Mac and acceptance by the Underwriter, to
prior sale and to withdrawal, cancellation or modification of the offer without
notice. It is expected that the Regular Classes (in book-entry form) will be
available for deposit at any Federal Reserve Bank, and that delivery of the
Residual Classes (in certificated form) will be made at the offices of the
Underwriter, New York, New York, on or about October 29, 1993 (the "Closing
Date").
KIDDER, PEABODY & CO.
INCORPORATED
OFFERING CIRCULAR SUPPLEMENT DATED SEPTEMBER 9, 1993
MULTICLASS PCS ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE MULTICLASS PCS OF ANY CLASS UNLESS THE
INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD AND LIQUIDITY
RISKS ASSOCIATED WITH THAT CLASS.
------------------------
THE YIELD OF EACH CLASS WILL DEPEND UPON ITS PURCHASE PRICE, ITS
SENSITIVITY TO THE RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGES AND THE ACTUAL
CHARACTERISTICS OF THE MORTGAGES. IN ADDITION, THE YIELD OF EACH FLOATING RATE
OR INVERSE FLOATING RATE CLASS WILL DEPEND UPON ITS SENSITIVITY TO THE LEVEL OF
LIBOR. THE MORTGAGES ARE SUBJECT TO PREPAYMENT AT ANY TIME WITHOUT PENALTY.
MORTGAGE PREPAYMENT RATES ARE LIKELY TO FLUCTUATE SIGNIFICANTLY FROM TIME TO
TIME, AS IS THE LEVEL OF LIBOR. INVESTORS SHOULD CONSIDER THE ASSOCIATED RISKS,
INCLUDING:
. FAST MORTGAGE PREPAYMENT RATES CAN REDUCE THE YIELDS OF THE INTEREST
ONLY CLASSES AND OF ANY OTHER CLASSES PURCHASED AT A PREMIUM OVER
THEIR PRINCIPAL AMOUNTS. UNDER SOME PREPAYMENT SCENARIOS, INVESTORS IN
THE INTEREST ONLY CLASSES COULD FAIL TO FULLY RECOVER THEIR
INVESTMENTS.
. SLOW MORTGAGE PREPAYMENT RATES CAN REDUCE THE YIELDS OF THE PRINCIPAL
ONLY CLASS AND OF ANY OTHER CLASSES PURCHASED AT A DISCOUNT TO THEIR
PRINCIPAL AMOUNTS.
. SMALL DIFFERENCES IN THE CHARACTERISTICS OF THE MORTGAGES CAN HAVE A
SIGNIFICANT EFFECT ON THE WEIGHTED AVERAGE LIVES AND YIELDS OF THE
CLASSES.
. LOW LEVELS OF LIBOR CAN SIGNIFICANTLY REDUCE THE YIELDS OF THE
FLOATING RATE CLASSES. CONVERSELY, HIGH LEVELS OF LIBOR CAN
SIGNIFICANTLY REDUCE THE YIELDS OF THE INVERSE FLOATING RATE CLASSES
AND (ESPECIALLY IN COMBINATION WITH FAST MORTGAGE PREPAYMENT RATES)
MAY RESULT IN THE FAILURE OF INVESTORS IN THE H AND P CLASSES TO FULLY
RECOVER THEIR INVESTMENTS.
. IN GENERAL, PRINCIPAL PAYMENT RATES ON THE SUPPORT AND COMPONENT
CLASSES ARE LIKELY TO EXHIBIT A HIGHER SENSITIVITY TO MORTGAGE
PREPAYMENTS THAN ARE PRINCIPAL PAYMENT RATES ON THE PAC CLASSES.
. IN GENERAL, PRINCIPAL PAYMENT RATES ON THE TYPE II AND TYPE III PAC
CLASSES ARE LIKELY TO EXHIBIT A HIGHER SENSITIVITY TO MORTGAGE
PREPAYMENTS THAN ARE PRINCIPAL PAYMENT RATES ON THE TYPE I PAC
CLASSES.
SEE "PREPAYMENT AND YIELD ANALYSIS" IN THIS SUPPLEMENT.
THE UNDERWRITER INTENDS TO MAKE A MARKET FOR THE PURCHASE AND SALE OF THE
MULTICLASS PCS AFTER THEIR INITIAL ISSUANCE BUT HAS NO OBLIGATION TO DO SO.
THERE IS NO ASSURANCE THAT SUCH A SECONDARY MARKET WILL DEVELOP OR, IF IT
DEVELOPS, THAT IT WILL CONTINUE. CONSEQUENTLY, INVESTORS MAY NOT BE ABLE TO SELL
THEIR MULTICLASS PCS READILY OR AT PRICES THAT WILL ENABLE THEM TO REALIZE THEIR
DESIRED YIELD.
------------------------
Investors should purchase Multiclass PCs only if they have read and
understand this Supplement and the following documents:
. Freddie Mac's Multiclass Mortgage Participation Certificates Offering
Circular dated August 1, 1993 (the "Multiclass PC Offering Circular"),
which is attached to this Supplement;
. Freddie Mac's Mortgage Participation Certificates Offering Circular
dated June 30, 1992 and its Mortgage Participation Certificates
Offering Circular Supplements dated August 3, 1992, November 2, 1992,
April 30, 1993 and August 17, 1993 (collectively, the "PC Offering
Circular");
. Freddie Mac's Giant Mortgage Participation Certificates Offering
Circular dated December 23, 1991 and its Giant Mortgage Participation
Certificates Offering Circular Supplement dated December 3, 1992
(together, the "Giant PC Offering Circular"); and
. Freddie Mac's Information Statement dated April 9, 1993, its
Information Statement Supplements dated April 30, 1993 and August 2,
1993 and any other Information Statement Supplements published by
Freddie Mac through the time of purchase (collectively, the
"Information Statement").
This Supplement incorporates by reference the PC Offering Circular, the
Giant PC Offering Circular and the Information Statement. Investors can order
those documents: from Freddie Mac, by writing or calling its Investor Inquiry
Department at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside
Washington, D.C. metropolitan area, phone 800/336-FMPC; within Washington, D.C.
metropolitan area, phone 703/759-8160); or from the Underwriter, by writing or
calling its Prospectus Department at 60 Broad Street, 6th Floor, New York, New
York 10004 (phone 212/656-1584).
Investors can obtain additional information regarding the PCs and Mortgages
from the sources described under "General Information -- Additional Information"
in this Supplement.
TERMS SHEET
THIS TERMS SHEET CONTAINS SELECTED INFORMATION FOR QUICK REFERENCE ONLY. IT
IS NOT A SUMMARY OF THE TRANSACTION. INVESTORS SHOULD REFER TO THE REMAINDER OF
THIS SUPPLEMENT FOR FURTHER INFORMATION.
CLASS COUPONS
The Fixed Rate Classes will bear interest at the Class Coupons shown on the
cover page of this Supplement.
The QA Class will be a Principal Only Class and will not bear interest.
The Floating Rate and Inverse Floating Rate Classes will bear interest as
follows:
<TABLE>
<CAPTION>
CLASS COUPON SUBJECT TO
INITIAL ----------------------------------
CLASS RATE(1) CLASS COUPON MINIMUM RATE MAXIMUM RATE
- ------------------------------- ------------- --------------------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
G .................... 4.0%(3) LIBOR + 0.5% 0.5% 9.0%
H and P........................ 5.0(3) 8.5% - LIBOR 0 8.5
IC .................... 3.825 LIBOR + 0.7% 0.7 9.5
ID .................... 15.89 24.64% - (LIBOR x 2.8) 0 24.64
IF .................... 3.805 LIBOR + 0.68% 0.68 9.5
IG .................... 15.946 24.696% - (LIBOR x 2.8) 0 24.696
KA .................... 4.275 LIBOR + 1.15% 1.15 9.0
KB .................... 9.45 15.7% - (LIBOR x 2) 0 15.7
MA .................... 3.825 LIBOR + 0.7% 0.7 8.0
MB .................... 29.225 51.1% - (LIBOR x 7) 0 51.1
MC .................... 3.625 LIBOR + 0.5% 0.5 8.5
MD .................... 22.75 37.3333% - (LIBOR x 4.66667) 0 37.3333
NA(2) .................... 3.855 LIBOR + 0.73% 0.73 9.0
NB(2) .................... 18.0075 28.945% - (LIBOR x 3.5) 0 28.945
OA(2) .................... 4.35(4) LIBOR + 1.2% 1.2 9.0
OB(2) .................... 16.2749(4) 27.2999% - (LIBOR x 3.5) 0 27.2999
QB(2) .................... 0 (4.48 x LIBOR) - 14.0% 0 14.0
QC(2) .................... 19.0 38% - (LIBOR x 6.08) 0 19.0
SA .................... 3.925 LIBOR + 0.8% 0.8 9.0
SB .................... 17.7625 28.7% - (LIBOR x 3.5) 0 28.7
-------------------------
(1) Initial Rate will be in effect during first "Accrual Period;"
Class Coupon will adjust monthly thereafter except as otherwise
indicated.
(2) Delay Class.
(3) Rate in effect until October 15, 1994; Class Coupon will adjust
monthly thereafter.
(4) Rate in effect until October 1, 1995; Class Coupon will adjust
monthly thereafter.
</TABLE>
See "Payments -- Interest" in this Supplement and "Description of Multiclass
PCs -- Interest Rate Indices" in the Multiclass PC Offering Circular.
NOTIONAL CLASSES
NOTIONAL CLASS REDUCES WITH
- -------------- --------------------------------------------------
H A, B, C, D, E and F (Type I PAC Classes)
IB I, IA and IE (Type I PAC Classes)
L J, K, KA and KB (Type I PAC Classes)
P D, E and F (Type I PAC Classes)
See "Payments -- Interest -- Notional Classes" in this Supplement.
COMPONENTS
ORIGINAL PRINCIPAL
DESIGNATION PRINCIPAL AMOUNT TYPE*
- ----------- ----------------- ---------
MC-1 $ 51,689,614 PAC II
MC-2 55,048,415 SUP
-----------------
$ 106,738,029
=================
MD-1 $ 11,076,346 PAC II
MD-2 11,796,089 SUP
-----------------
$ 22,872,435
=================
- -------------------------------
* See "Description of Multiclass PCs -- Standard
Definitions and Abbreviations for Classes" in the
Multiclass PC Offering Circular.
See "Payments -- Principal -- Component Classes" in this Supplement.
ALLOCATION OF PRINCIPAL
1. Type I PAC Classes to their Targeted Balances (structured at 95% - 350%
PSA), allocated:
44.4444450029%: A 55.5555549971%: G
47.0588236529%: B 52.9411763471%: G
50%: C 50%: G
53.3333338426%: D 46.6666661574%: G
57.1428577992%: E 42.8571422008%: G
61.5384617396%: F 38.4615382604%: G
100%: I, IA, IC, ID,
IE, IF and IG, pro rata
100%: J
100%: K, KA, and KB, pro rata
2. Type II PAC Classes and Components (M, MA, MB, MC-1 and MD-1, pro rata)
to their Targeted Balances (structured at 126% - 285% PSA)
3. Type III PAC Classes (NA and NB, pro rata) to their Targeted Balances
(structured at 180% - 265% PSA)
4. 54.2857828515% to QA, QB and QC, pro rata, until retired and
45.7142171485% to (a) SA, SB, MC-2 and MD-2, pro rata, until retired,
and then (b) OA and OB, pro rata, until retired
5. NA and NB, pro rata, until retired
6. M, MA, MB, MC-1 and MD-1, pro rata, until retired
7. Type I PAC Classes as in step 1 until retired
See "Payments -- Principal" in this Supplement.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE LIVES (IN YEARS)*
PSA PREPAYMENT ASSUMPTION
----------------------------------------------------------
0% 95% 235% 350% 500%
--------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
A ............................................................ 4.1 1.1 1.1 1.1 1.1
B ............................................................ 10.1 2.5 2.5 2.5 2.5
C ............................................................ 13.5 3.5 3.5 3.5 3.4
D ............................................................ 15.9 4.5 4.5 4.5 3.9
E ............................................................ 18.6 6.0 6.0 6.0 4.6
F ............................................................ 21.1 8.0 8.0 8.0 5.8
G ............................................................ 14.0 4.4 4.4 4.4 3.6
I, IA, IC, ID, IE, IF and IG........................................... 23.1 11.0 11.0 11.0 7.9
J ............................................................ 24.1 15.0 15.0 15.0 10.7
K, KA and KB........................................................... 24.6 20.2 20.2 20.2 14.7
M, MA and MB........................................................... 25.2 11.1 3.5 3.5 2.7
MC and MD.............................................................. 26.8 16.6 4.1 2.5 1.8
NA and NB.............................................................. 26.7 16.0 4.5 3.7 2.4
OA and OB.............................................................. 29.5 27.1 18.0 3.2 2.0
QA, QB and QC.......................................................... 28.9 24.0 10.4 2.2 1.5
SA and SB.............................................................. 28.4 21.7 4.7 1.5 1.0
Underlying PCs......................................................... 21.3 11.9 6.9 5.0 3.8
- -------------------------
* Determined as described under "Prepayment and Yield Analysis" in
this Supplement, and subject to the assumptions and qualifications
in that section. Prepayments will not occur at any assumed rate
shown or any other constant rate, and the actual weighted average
lives of any or all of the Classes and of the PCs are likely to
differ from those shown, perhaps significantly.
</TABLE>
ASSUMED MORTGAGE CHARACTERISTICS (AS OF OCTOBER 1, 1993)
REMAINING TERM
PRINCIPAL TO MATURITY LOAN AGE PER ANNUM
BALANCE (IN MONTHS) (IN MONTHS) INTEREST RATE
- ------------------ ------------------- ----------------- -------------
$ 284,263,501 360 0 7.6%
284,263,492 359 0 7.6
663,281,485 358 1 7.6
379,017,991 355 3 7.6
284,263,492 354 4 7.6
- ------------------
$ 1,895,089,961 357* 2*
==================
- -------------------------
* Weighted average by principal balance.
The actual remaining terms to maturity, loan ages and interest rates of
most of the Mortgages will differ from those shown above, perhaps significantly.
See "General Information -- The Mortgages" in this Supplement.
<PAGE>
Annex 2(h)
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
-------
OFFERING CIRCULAR SUPPLEMENT Freddie
(TO OFFERING CIRCULAR DATED JANUARY 18, 1994) Mac
-------
$390,500,000 -------
-------
FEDERAL HOME LOAN MORTGAGE CORPORATION -------
-------
MULTICLASS MORTGAGE PARTICIPATION CERTIFICATES, SERIES 1723
The Federal Home Loan Mortgage Corporation ("Freddie Mac") is offering its
Multiclass Mortgage Participation Certificates of the above Series (the
"Multiclass PCs"). The Multiclass PCs will consist of the various "Classes"
listed below. The Classes will receive principal and interest payments, in
differing proportions and at differing times, from the cash flows provided by
Freddie Mac Stripped Giant PCs issued as part of Freddie Mac's Stripped Giant
Mortgage Participation Certificates, Series 165 (the "Stripped Giant PCs"). The
Stripped Giant PCs will have a weighted average interest rate of 7% per annum at
all times. Underlying the Stripped Giant PCs will be Freddie Mac "Gold PCs" and
"Gold Giant PCs" with interest rates of 8% per annum (the "PCs"). Underlying the
PCs are pools of fixed-rate, first lien, residential mortgages and mortgage
participations (the "Mortgages"). See "General Information -- Structure of
Transaction" in this Supplement.
Freddie Mac guarantees to each "Holder" of a Multiclass PC (i) the timely
payment of interest at the applicable "Class Coupon" and (ii) the payment of the
principal amount of the Holder's Multiclass PC as described in this Supplement.
Freddie Mac will make interest and principal payments on each monthly
"Payment Date," beginning June 15, 1994, on the Classes entitled to such
payments. See "Payments" in this Supplement.
This Series will involve the creation of an "Upper-Tier REMIC Pool" and a
"Lower-Tier REMIC Pool." Elections will be made to treat both REMIC Pools as
"real estate mortgage investment conduits" ("REMICs") pursuant to the Internal
Revenue Code. The R and RS Classes will be "Residual Classes" and the other
Classes will be "Regular Classes." The Residual Classes will be subject to
transfer restrictions. See "Certain Federal Income Tax Consequences" in this
Supplement and in the Multiclass PC Offering Circular.
INVESTORS SHOULD READ THIS SUPPLEMENT IN CONJUNCTION WITH THE DOCUMENTS
LISTED AT THE BOTTOM OF PAGE S-2.
THE OBLIGATIONS OF FREDDIE MAC UNDER ITS GUARANTEES OF THE MULTICLASS PCs ARE
OBLIGATIONS OF FREDDIE MAC ONLY. THE MULTICLASS PCs, INCLUDING ANY
INTEREST THEREON, ARE NOT GUARANTEED BY THE UNITED STATES AND DO NOT
CONSTITUTE DEBTS OR OBLIGATIONS OF THE UNITED STATES OR ANY AGENCY
OR INSTRUMENTALITY OF THE UNITED STATES OTHER THAN FREDDIE
MAC. INCOME ON THE MULTICLASS PCs HAS NO EXEMPTION UNDER
FEDERAL LAW FROM FEDERAL, STATE OR LOCAL TAXATION. THE
MULTICLASS PCs ARE EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND
ARE "EXEMPTED SECURITIES" WITHIN THE
MEANING OF THE SECURITIES EXCHANGE ACT
OF 1934.
<TABLE>
<CAPTION>
ORIGINAL WEIGHTED AVERAGE
PRINCIPAL PRINCIPAL OR CLASS INTEREST CUSIP FINAL PAYMENT LIFE AT 295%
CLASS AMOUNT(1) OTHER TYPE(2) COUPON TYPE(2) NUMBER DATE(3) PSA(4)
- ----- ----------- ------------- ------ -------- --------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
A ......... $32,000,000 TAC 7.00% FIX 3133T5GN7 May 15, 2024 1.0 Yrs
B ......... 54,050,910 SUP 7.00 FIX 3133T5GP2 May 15, 2024 5.1
C ......... 2,632,232 SUP 7.00 FIX 3133T5GQ0 May 15, 2024 15.5
F ......... 16,338,000 TAC (5) FLT 3133T5GR8 May 15, 2024 1.0
FB ......... 15,000,000 SUP (5) FLT 3133T5GS6 March 15, 2024 3.5
PA ......... 47,722,000 PAC I 6.25 FIX 3133T5GT4 June 15, 2010 1.1
PB ......... 23,159,000 PAC I 6.25 FIX 3133T5GU1 September 15, 2013 2.5
PC ......... 23,370,000 PAC I 6.50 FIX 3133T5GV9 February 15, 2016 3.5
PD ......... 20,556,000 PAC I 6.75 FIX 3133T5GW7 November 15, 2017 4.5
PE ......... 38,987,000 PAC I 6.75 FIX 3133T5GX5 June 15, 2020 5.9
PG ......... 32,768,000 PAC I 7.00 FIX 3133T5GY3 March 15, 2022 7.9
PH ......... 33,490,000 PAC I 7.00 FIX 3133T5GZ0 September 15, 2023 11.0
PJ ......... 9,133,000 PAC I 7.00 FIX 3133T5HA4 February 15, 2024 15.0
PK ......... 7,516,000 PAC I 7.00 FIX 3133T5HB2 May 15, 2024 19.9
PL ......... 9,985,187 NTL(PAC I) 8.00 FIX/IO 3133T5HC0 June 15, 2020 --
PM ......... 22,200,000 PAC II 7.00 FIX 3133T5HD8 May 15, 2024 2.5
PN ......... 2,212,000 PAC II 7.00 FIX 3133T5HE6 May 15, 2024 6.3
S ......... 7,002,000 TAC (5) INV/DLY 3133T5HF3 May 15, 2024 1.0
SA ......... 16,338,000 NTL(TAC) (5) INV/IO/DLY 3133T5HG1 May 15, 2024 --
SB ......... 2,142,858 SUP (5) INV 3133T5HH9 March 15, 2024 3.5
R ......... 220,000 CPT/PAC I (6) W 3133T5HJ5 May 15, 2024 3.6
RS ......... 1,000 SUP 7.00 FIX 3133T5HK2 May 15, 2024 5.1
- ----------------------------------------------------------------------------------------------------------------------
(1) Subject to proportionate increase as described under "Increase in Size" in
this Supplement. The amount shown for a Notional Class is its original
notional principal amount and does not represent principal that will be
paid; see "Payments -- Interest" in this Supplement.
(2) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular. The type of Class with
which the notional principal amount of a Notional Class will be reduced is
indicated in parentheses.
(3) See "Final Payment Dates" in this Supplement.
(4) Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at the assumed rate shown above or any
other constant rate, and the actual weighted average lives of any or all of
the Classes are likely to differ from those shown, perhaps significantly.
(5) The Floating Rate and Inverse Floating Rate Classes will bear interest as
described under "Terms Sheet -- Class Coupons" in this Supplement.
(6) The R Class will bear interest as described under "Terms Sheet -- Component
Class (Weighted Average Coupon Class)" in this Supplement.
</TABLE>
The Multiclass PCs are offered by Lehman Brothers (including Lehman Brothers
Inc. and Lehman Government Securities Inc.) (the "Underwriter") from time to
time for sale in negotiated transactions at varying prices to be determined at
the time of sale, plus accrued interest from May 1, 1994 on the Fixed Rate,
Weighted Average Coupon and Delay Classes and from May 15, 1994 on the Floating
Rate and Inverse Floating Rate Classes other than the Delay Classes (the
"Non-Delay Classes"). The Multiclass PCs are offered by the Underwriter, subject
to prior sale when, as and if delivered to and accepted by the Underwriter and
subject to the Underwriter's right to reject any order in whole or in part. It
is expected that the Regular Classes (in book-entry form) will be available for
deposit at any Federal Reserve Bank, and that delivery of the Residual Classes
(in certificated form) will be made at the offices of the Underwriter, on or
about May 27, 1994 (the "Closing Date").
------------------------
LEHMAN BROTHERS
OFFERING CIRCULAR SUPPLEMENT DATED MARCH 29, 1994
MULTICLASS PCS ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE MULTICLASS PCS OF ANY CLASS UNLESS THE
INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD, LIQUIDITY AND
MARKET RISKS ASSOCIATED WITH THAT CLASS.
------------------------
THE YIELD OF EACH CLASS WILL DEPEND UPON ITS PURCHASE PRICE, ITS
SENSITIVITY TO THE RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGES AND THE ACTUAL
CHARACTERISTICS OF THE MORTGAGES. IN ADDITION, THE YIELD OF EACH FLOATING RATE
OR INVERSE FLOATING RATE CLASS WILL DEPEND UPON ITS SENSITIVITY TO THE LEVEL OF
COFI OR LIBOR (EACH, AN "INDEX"). THE MORTGAGES ARE SUBJECT TO PREPAYMENT AT ANY
TIME WITHOUT PENALTY. MORTGAGE PREPAYMENT RATES ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY FROM TIME TO TIME, AS IS THE LEVEL OF EACH INDEX. INVESTORS SHOULD
CONSIDER THE ASSOCIATED RISKS, INCLUDING:
. FAST MORTGAGE PREPAYMENT RATES CAN REDUCE THE YIELDS OF THE INTEREST
ONLY CLASSES AND OF ANY OTHER CLASSES PURCHASED AT A PREMIUM OVER
THEIR PRINCIPAL AMOUNTS. UNDER SOME PREPAYMENT SCENARIOS, INVESTORS IN
THE INTEREST ONLY CLASSES COULD FAIL TO FULLY RECOVER THEIR
INVESTMENTS.
. SLOW MORTGAGE PREPAYMENT RATES CAN REDUCE THE YIELDS OF CLASSES
PURCHASED AT A DISCOUNT TO THEIR PRINCIPAL AMOUNTS.
. SMALL DIFFERENCES IN THE CHARACTERISTICS OF THE MORTGAGES CAN HAVE A
SIGNIFICANT EFFECT ON THE WEIGHTED AVERAGE LIVES AND YIELDS OF THE
CLASSES.
. LOW LEVELS OF THE APPLICABLE INDEX CAN REDUCE THE YIELDS OF THE
FLOATING RATE CLASSES. CONVERSELY, HIGH LEVELS OF THE APPLICABLE INDEX
CAN SIGNIFICANTLY REDUCE THE YIELDS OF THE INVERSE FLOATING RATE
CLASSES AND (ESPECIALLY IN COMBINATION WITH FAST MORTGAGE PREPAYMENT
RATES) MAY RESULT IN THE FAILURE OF INVESTORS IN THE SA CLASS TO FULLY
RECOVER THEIR INVESTMENTS.
. IN GENERAL, PRINCIPAL PAYMENT RATES ON THE SUPPORT CLASSES ARE LIKELY
TO EXHIBIT A HIGHER SENSITIVITY TO MORTGAGE PREPAYMENTS THAN ARE
PRINCIPAL PAYMENT RATES ON THE PAC AND TAC CLASSES.
. IN GENERAL, PRINCIPAL PAYMENT RATES ON THE TAC CLASSES ARE LIKELY TO
EXHIBIT A HIGHER SENSITIVITY TO MORTGAGE PREPAYMENTS THAN ARE
PRINCIPAL PAYMENT RATES ON THE PAC CLASSES.
SEE "PREPAYMENT AND YIELD ANALYSIS" IN THIS SUPPLEMENT.
------------------------
THE UNDERWRITER INTENDS TO MAKE A MARKET FOR THE PURCHASE AND SALE OF THE
MULTICLASS PCS AFTER THEIR INITIAL ISSUANCE BUT HAS NO OBLIGATION TO DO SO.
THERE IS NO ASSURANCE THAT SUCH A SECONDARY MARKET WILL DEVELOP OR, IF IT
DEVELOPS, THAT IT WILL CONTINUE. CONSEQUENTLY, INVESTORS MAY NOT BE ABLE TO SELL
THEIR MULTICLASS PCS READILY OR AT PRICES THAT WILL ENABLE THEM TO REALIZE THEIR
DESIRED YIELD. THE MARKET VALUES OF THE CLASSES ARE LIKELY TO FLUCTUATE; SUCH
FLUCTUATIONS MAY BE SIGNIFICANT AND COULD RESULT IN SIGNIFICANT LOSSES TO
INVESTORS.
------------------------
Investors should purchase Multiclass PCs only if they have read and
understand this Supplement and the following documents:
. Freddie Mac's Multiclass Mortgage Participation Certificates Offering
Circular dated January 18, 1994 (the "Multiclass PC Offering
Circular"), which is attached to this Supplement;
. Freddie Mac's Mortgage Participation Certificates Offering Circular
dated February 15, 1994 (the "PC Offering Circular");
. Freddie Mac's Giant Mortgage Participation Certificates Offering
Circular dated December 23, 1991, its Giant Mortgage Participation
Certificates Offering Circular Supplement dated December 3, 1992 and
its Stripped Giant Mortgage Participation Certificates, Series 165
Offering Circular Supplement dated March 29, 1994 (collectively, the
"Giant PC Offering Circular"); and
. Freddie Mac's Information Statement dated March 31, 1994 and any
Information Statement Supplements published by Freddie Mac through the
time of purchase (collectively, the "Information Statement").
This Supplement incorporates by reference the PC Offering Circular, the
Giant PC Offering Circular and the Information Statement. Investors can order
those documents: from Freddie Mac, by writing or calling its Investor Inquiry
Department at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside
Washington, D.C. metropolitan area, phone 800/336-FMPC; within Washington, D.C.
metropolitan area, phone 703/759-8160); or from the Underwriter, by writing or
calling its Prospectus Department at 140 58th Street, Brooklyn, New York 11220
(phone 718/921-8466).
Investors can obtain additional information regarding the Multiclass PCs,
Stripped Giant PCs, PCs and Mortgages from the sources described under "General
Information -- Additional Information" in this Supplement.
TERMS SHEET
THIS TERMS SHEET CONTAINS SELECTED INFORMATION ABOUT THIS SERIES. INVESTORS
SHOULD REFER TO THE REMAINDER OF THIS SUPPLEMENT FOR FURTHER INFORMATION.
CLASS COUPONS
The Fixed Rate Classes will bear interest at the Class Coupons shown on the
cover page of this Supplement.
The R Class will be a Weighted Average Coupon Class and will bear interest
as shown under "Component Class (Weighted Average Coupon Class)" below.
The Floating Rate and Inverse Floating Rate Classes will bear interest as
follows:
<TABLE>
<CAPTION>
CLASS COUPON SUBJECT TO
INITIAL ----------------------------------
CLASS RATE(1) CLASS COUPON MINIMUM RATE MAXIMUM RATE
- --------------------- ------------- ---------------------------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
F .......... 4.51% COFI + 0.8% 0.8% 10.0%
FB .......... 5.50 LIBOR + 1.75% 1.75 8.0
S(2)................. 12.46 21.1166666% - (COFI x 2.3333333) 0 21.1166666
SA(2)................ 0.15 9.2% - COFI 0 0.15
SB .......... 17.4999958 43.7499853% - (LIBOR x 6.9999972) 0 43.7499853
-------------------------
(1) Initial Rate will be in effect during first Accrual Period; Class
Coupon will adjust monthly thereafter.
(2) Delay Class.
</TABLE>
See "Payments -- Interest" in this Supplement and "Description of Multiclass
PCs -- Interest Rate Indices" in the Multiclass PC Offering Circular.
NOTIONAL CLASSES
NOTIONAL CLASS REDUCES WITH
- ------------------------- -----------------------------------------------
PL ............................... PA, PB, PC, PD, PE, R-1 and R-2
(Type I PAC Classes and Components)
SA ............................... F (TAC Class)
See "Payments -- Interest -- Notional Classes" in this Supplement.
COMPONENT CLASS (WEIGHTED AVERAGE COUPON CLASS)
ORIGINAL PRINCIPAL COMPONENT INTEREST
DESIGNATION PRINCIPAL AMOUNT TYPE* COUPON TYPE*
- ----------- ----------------- ----------- ----------- -----------
R-1 $ 75,000 PAC I 6.25% FIX
R-2 125,000 PAC I 6.25 FIX
R-3 20,000 PAC I 7.00 FIX
-----------------
$ 220,000
=================
-------------------------
* See "Description of Multiclass PCs -- Standard Definitions and
Abbreviations for Classes" in the Multiclass PC Offering Circular.
See "Payments -- Interest -- Weighted Average Coupon Class" in this Supplement.
ALLOCATION OF PRINCIPAL
On each Payment Date, Freddie Mac will pay the "PC Principal Amount" for
that Payment Date to the Classes and Components in the following order of
priority:
TYPE I 1. To the Type I PAC Classes and Components, until reduced to their
"Targeted Balances" for PAC that Payment Date, allocated to:
PA and R-1, pro rata
PB and R-2, pro rata
PC, PD, PE, PG, PH and PJ, in that order
PK and R-3, pro rata
TYPE II 2. To PM and PN, in that order, until reduced to their Targeted
Balances for that Payment PAC Date
TAC 3. To A, F and S, pro rata, until reduced to their Targeted
Balances for that Payment Date
SUPPORT 4. Concurrently:
73.2142847468% to B and RS, pro rata, until retired, and
26.7857152532% first to FB and SB, pro rata, until retired,
and then to C, until retired
TAC 5. To A, F and S, pro rata, until retired
TYPE II 6. To PM and PN, in that order, until retired PAC
TYPE I 7. To the Type I PAC Classes and Components as in step 1, but
without regard to their PAC Targeted Balances, until retired
The Targeted Balances (shown under "Payments -- Principal -- Targeted
Balances Schedules" in this Supplement) were structured as follows:
STRUCTURING RANGE OR RATE
-------------------------
Type I PAC Classes and Components........... 100% - 325% PSA
Type II PAC Classes......................... 125% - 325% PSA
TAC Classes................................. 275% PSA
See "Payments -- Principal" and "Prepayment and Yield Analysis" in this
Supplement.
WEIGHTED AVERAGE LIVES (IN YEARS)*
PSA PREPAYMENT ASSUMPTION
-----------------------------------
0% 100% 295% 325% 600%
------- ----------- ----------- ----------- -----------
A, F and S..... 27.3 15.4 1.0 1.0 0.9
B and RS....... 29.1 23.2 5.1 2.8 0.6
C.............. 29.9 27.6 15.5 5.2 1.1
FB and SB...... 29.0 22.5 3.5 2.4 0.5
PA............. 7.6 1.1 1.1 1.1 1.0
PB ............ 14.0 2.5 2.5 2.5 2.0
PC............. 16.6 3.5 3.5 3.5 2.3
PD ............ 18.5 4.5 4.5 4.5 2.6
PE............. 20.5 5.9 5.9 5.9 3.2
PG............. 22.6 7.9 7.9 7.9 4.1
PH............. 24.1 11.0 11.0 11.0 5.7
PJ............. 25.0 15.0 15.0 15.0 7.8
PK............. 25.4 19.9 19.9 19.9 10.9
PM............. 25.9 10.2 2.5 2.5 1.3
PN............. 26.3 12.0 6.3 6.3 1.7
R.............. 12.9 3.6 3.6 3.6 2.5
Underlying PCs. 21.8 10.9 4.9 4.5 2.4
-------------------------
* Determined as described under "Prepayment and Yield Analysis" in
this Supplement, and subject to the assumptions and qualifications
in that section. Prepayments will not occur at any assumed rate
shown or any other constant rate, and the actual weighted average
lives of any or all of the Classes and of the PCs are likely to
differ from those shown, perhaps significantly.
ASSUMED MORTGAGE CHARACTERISTICS (AS OF MAY 1, 1994)
REMAINING TERM
TO MATURITY LOAN AGE PER ANNUM
(IN MONTHS) (IN MONTHS) INTEREST RATE
- ------------------- --------------- ---------------
340 18 8.55%
The actual remaining terms to maturity, loan ages and interest rates of
most of the Mortgages will differ from those shown above, perhaps significantly.
See "General Information -- The Mortgages" in this Supplement.
THE STRIPPED GIANT PCS
As of the Closing Date, the Stripped Giant PCs will have a principal
balance of not less than $390,500,000 and a weighted average interest rate of 7%
per annum. The Stripped Giant PCs will be backed by PCs having interest rates of
8% per annum. See "General Information -- Structure of Transaction" in this
Supplement.
<PAGE>
General Info page
Annex 2(i)
Cover Page and Terms Sheet
for
Offering Circular Supplement
dated July 12, 1996
to
Offering Circular
dated October 1, 1995
relating to
Federal Home Loan Mortgage Corporation
Multiclass Mortgage Participation Certificates,
Callable Passs-Through Certificates and Modifiable
and Combinable REMIC Certificates, Series 1869
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
-------
Offering Circular Supplement Freddie
(To Offering Circular Dated October 1, 1995) Mac
-------
$457,581,485 -------
-------
Federal Home Loan Mortgage Corporation -------
-------
Multiclass Mortgage Participation Certificates, Callable Pass-Through
Certificates and Modifiable and Combinable REMIC Certificates, Series 1869
- ------------------------
The Federal Home Loan Mortgage Corporation ("Freddie Mac") is offering its
Multiclass Mortgage Participation Certificates of the above Series (the
"Multiclass PCs"). The Multiclass PCs will consist of Classes that will receive
payments from the cash flows provided by the following Freddie Mac "Gold PCs"
and/or "Gold Giant PCs" or Freddie Mac Multiclass Mortgage Participation
Certificates (together, the "Assets"), having the principal amounts indicated
below (each, an "Asset Group"):
Group 1 Assets:
. $400,000,000 of 8.0% per annum PCs
Group 2 Assets:
.Series 1599, F Class, $37,187,628 (the "1599-F Class")
.Series 1599, S Class, $ 3,841,091 (the "1599-S Class")
Group 3 Asset:
. Series 1702, J Class, $16,552,766 (the "1702-J Class")
Underlying the Group 2 and Group 3 Assets are Freddie Mac Gold PCs and/or
Gold Giant PCs with per annum interest rates of 6.5%. The Gold PCs and/or Gold
Giant PCs constituting the Group 1 Assets and those underlying the Group 2 and
Group 3 Assets are referred to as the "PCs." Underlying the PCs are pools of
fixed-rate, first lien, residential mortgages and mortgage participations (the
"Mortgages"). All of the Mortgages underlying the Assets had original terms to
maturity of 360 months or less. See "General Information -- Structure of
Transaction" and "-- The Mortgages" in this Supplement.
Freddie Mac is also offering certain Classes of "Callable Pass-Through
Certificates" ("CPCs"). Each related pair of CPCs, consisting of a "Callable
Class" and a "Call Class," will represent the entire beneficial interest in a
related Class of Multiclass PCs as described in this Supplement. The "Holders"
of each Callable Class will be entitled to all of the interest and principal
payments on the related Class of Multiclass PCs. As described in this
Supplement, the Holder of each Call Class (i) will not receive payments of
principal and interest, (ii) will have the right to direct Freddie Mac to
redeem, on any "Payment Date" beginning in August 1997, all and not less than
all of the related Callable Class at a "redemption price" equal to 100% of its
unpaid principal amount, plus interest to the date of redemption, calculated as
described in this Supplement, and (iii) after payment to Freddie Mac of the
"Redemption Amount" for redemption of the related Callable Class and an exchange
fee, will be entitled to receive from Freddie Mac, in exchange for the Holder's
Call Class, the related Class of Multiclass PCs. See "Redemption and Exchange"
in this Supplement.
Certain of the Classes of Multiclass PCs of this Series may, upon notice and
payment of an exchange fee, be exchanged for one or more Classes (each, a "MACR
Class") of Modifiable and Combinable REMIC Certificates ("MACR Certificates") as
provided in this Supplement. Each MACR Certificate issued in such an exchange
will represent a proportionate beneficial ownership interest in, and will be
entitled to receive a proportionate amount of the cash flow from, the related
Class or Classes of Multiclass PCs. The characteristics of the MACR Classes are
set forth in Appendix 1 to this Supplement. CPCs may not be exchanged for MACR
Certificates. See "Modification and Combination" in this Supplement and Appendix
1 to this Supplement.
As used in this Supplement, unless the context requires otherwise, the term
"Securities" includes Multiclass PCs, CPCs and MACR Certificates and the term
"Classes" includes the Classes of Multiclass PCs, the Classes of CPCs and the
MACR Classes.
Freddie Mac guarantees to each Holder of a Security other than a Call Class
(i) the timely payment of interest at the applicable "Class Coupon" and (ii) the
payment of the principal amount of the Holder's Security as described in this
Supplement. Freddie Mac guarantees to the Holder of each Call Class all proceeds
due such Holder upon exercise of its right to cause Freddie Mac to redeem the
related Callable Class as described under "Redemption and Exchange" in this
Supplement.
Freddie Mac will make interest and principal payments on each monthly
"Payment Date," beginning September 15, 1996, on the Classes entitled to such
payments. See "Payments" in this Supplement.
This Series will involve the creation of an "Upper-Tier REMIC Pool" and a
"Lower-Tier REMIC Pool." Elections will be made to treat both REMIC Pools as
"real estate mortgage investment conduits" ("REMICs") pursuant to the Internal
Revenue Code. The R and RS Classes will be "Residual Classes" and the other
Classes of Multiclass PCs will be "Regular Classes." The Residual Classes will
be subject to transfer restrictions. See "Certain Federal Income Tax
Consequences" in this Supplement and in the Multiclass PC Offering Circular.
The risks associated with the Securities may make them unsuitable for some
investors. See page S-2 and "Prepayment and Yield Analysis" in this Supplement.
Investors should read this Supplement in conjunction with the documents
listed at the bottom of page S-2.
The obligations of Freddie Mac under its guarantees of the Securities are
obligations of Freddie Mac only. The Securities, including any interest thereon,
are not guaranteed by the United States and do not constitute debts or
obligations of the United States or any agency or instrumentality of the United
States other than Freddie Mac. Income on the Securities has no exemption under
federal law from federal, state or local taxation. The Securities are exempt
from the registration requirements of the Securities Act of 1933 and are
"exempted securities" within the meaning of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Weighted
Classes of Original Principal or Average
Multiclass Principal Other Class Interest CUSIP Final Payment Life Under
PCs and CPCs(1) Amount(2) Type(3) Coupon Type(3) Number Date(4) Scenario III(5)
- -------------------- --------- ------------ --- --------- ---------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
A ......... $5,000,000 SUP 8.0% FIX 3133T7RX9 October 15, 2023 10.0 Yrs
B ......... 14,085,000 SEQ 8.0 FIX 3133T7SS9 Decemberr 15, 2024 12.9
B1 ......... 14,085,000 CALLABLE/SEQ 8.0 FIX 3133T7ST7 Decemberr 15, 2024 12.9
B2 ......... 14,085,000 CALL -- -- 3133T7SU4 Decemberr 15, 2024 --
C ......... 31,615,000 SEQ 8.0 FIX 3133T7TP4 August 15, 2026 19.4
C1 ......... 31,615,000 CALLABLE/SEQ 8.0 FIX 3133T7TQ2 August 15, 2026 19.4
C2 ......... 31,615,000 CALL -- -- 3133T7TR0 August 15, 2026 --
D ......... 1,585,000 SEQ 7.75 FIX 3133T7U80 August 15, 2026 19.4
D1 ......... 1,585,000 CALLABLE/SEQ 7.75 FIX 3133T7U98 August 15, 2026 19.4
D2 ......... 1,585,000 CALL -- -- 3133T7UA5 August 15, 2026 --
E ......... 1,585,000 SEQ 8.25 FIX 3133T7UB3 August 15, 2026 19.4
E1 ......... 1,585,000 CALLABLE/SEQ 8.25 FIX 3133T7UC1 August 15, 2026 19.4
E2 ......... 1,585,000 CALL -- -- 3133T7UD9 August 15, 2026 --
F ......... 27,200,792 SC/PT (6) FLT 3133T7UE7 October 15, 2023 18.9
FA ......... 25,121,778 SUP (6) FLT 3133T7UF4 October 15, 2023 10.0
U ......... 30,737,778 SEQ (6) FLT 3133T7UG2 August 15, 2026 19.4
U1 ......... 30,737,778 CALLABLE/SEQ (6) FLT 3133T7UH0 August 15, 2026 19.4
U2 ......... 30,737,778 CALL -- -- 3133T7UJ6 August 15, 2026 --
G ......... 10,000,000 SEQ 8.0 FIX 3133T7UK3 February 15, 2024 11.4
G1 ......... 10,000,000 CALLABLE/SEQ 8.0 FIX 3133T7UL1 February 15, 2024 11.4
G2 ......... 10,000,000 CALL -- -- 3133T7UM9 February 15, 2024 --
H ......... 4,000,000 SEQ 8.0 FIX 3133T7UN7 May 15, 2024 12.0
H1 ......... 4,000,000 CALLABLE/SEQ 8.0 FIX 3133T7UP2 May 15, 2024 12.0
H2 ......... 4,000,000 CALL -- -- 3133T7UQ0 May 15, 2024 --
J ......... 10,085,000 SEQ 8.0 FIX 3133T7UX5 December 15, 2024 13.2
J1 ......... 10,085,000 CALLABLE/SEQ 8.0 FIX 3133T7UY3 December 15, 2024 13.2
J2 ......... 10,085,000 CALL -- -- 3133T7UZ0 December 15, 2024 --
K ......... 1,847,730 SC/SEQ 7.5 FIX 3133T7V22 March 15, 2024 5.7
L ......... 6,179,000 SC/SEQ 7.5 FIX 3133T7V30 March 15, 2024 11.9
M ......... 6,319,000 SC/SEQ 7.5 FIX 3133T7V48 March 15, 2024 17.1
N ......... 13,827,927 SC/PT 6.5 FIX 3133T7V55 October 15, 2023 18.9
PO ......... 2,207,036 SC/STP 0.0 PO 3133T7VD8 March 15, 2024 13.4
S ......... 27,200,792 SC/NTL(PT) (6) INV/IO 3133T7VG1 October 15, 2023 --
SA ......... 3,140,222 SUP (6) INV 3133T7VH9 October 15, 2023 10.0
V ......... 3,842,222 SEQ (6) INV 3133T7VJ5 August 15, 2026 19.4
V1 ......... 3,842,222 CALLABLE/SEQ (6) INV 3133T7VK2 August 15, 2026 19.4
V2 ......... 3,842,222 CALL -- -- 3133T7VL0 August 15, 2026 --
TA ......... 7,463,200 TAC 7.0 FIX 3133T7VM8 January 15, 2010 1.1
TB ......... 158,713,450 TAC 7.0 FIX 3133T7VN6 November 15, 2021 3.5
TC ......... 30,000,000 TAC 7.5 FIX 3133T7VP1 July 15, 2023 5.0
TD ......... 24,356,950 TAC 7.5 FIX 3133T7VQ9 July 15, 2023 8.0
TE ......... 8,669,400 TAC 7.0 FIX 3133T7VR7 July 15, 2023 8.0
TF ......... 30,000,000 TAC (6) FLT 3133T7VS5 July 15, 2023 4.0
TG ......... 23,378,065 NTL(TAC) 8.0 FIX/IO 3133T7VT3 July 15, 2023 --
TS ......... 30,000,000 NTL(TAC) (6) INV/IO 3133T7VU0 July 15, 2023 --
R ......... 0 NPR 0.0 NPR 3133T7VE6 August 15, 2026 --
RS ......... 0 NPR 0.0 NPR 3133T7VF3 August 15, 2026 --
(1) The MACR Classes are shown on Appendix 1 to this Supplement.
(2) The amount shown for a Notional or Call Class is its original notional
principal amount and does not represent principal that will be paid; see
"Payments -- Interest" in this Supplement.
(3) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular. The type of Class with
which the notional principal amount of a Notional Class will be reduced is
indicated in parentheses. A "Callable Class" is redeemable at the direction
of the Holder of the related "Call Class," as described in this Supplement.
(4) See "Final Payment Dates" in this Supplement.
(5) Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section, including the assumptions that each Class is issued and outstanding
from the Closing Date through retirement and that no redemptions occur.
Prepayments will not occur at the percentages of PSA assumed under the
scenario indicated above or any other prescribed rate, certain Classes will
not be outstanding on the Closing Date, such redemptions may occur and the
actual weighted average lives of any or all of the Classes are likely to
differ from those shown, perhaps significantly. See page S-6 for the PSA
Prepayment Scenarios used in this Supplement.
(6) The Floating Rate and Inverse Floating Rate Classes will bear interest as
described under "Terms Sheet -- Class Coupons" in this Supplement.
</TABLE>
The Securities (other than the Call Classes and the Classes of Multiclass PCs
backing CPCs) are offered by Bear, Stearns & Co. Inc. (the "Underwriter") from
time to time in negotiated transactions at varying prices to be determined at
the time of sale, plus accrued interest from August 1, 1996 on the Fixed Rate
Classes and from August 15, 1996 on the Floating Rate and Inverse Floating Rate
Classes. Each Call Class will be offered by the Underwriter in a negotiated
transaction with a single purchaser at a price to be determined at the time of
sale. Each Class of Multiclass PCs backing a pair of CPCs will be issued and
held by Freddie Mac unless and until the related Callable Class has been
redeemed. The Securities are offered by the Underwriter, subject to sale by
Freddie Mac and receipt and acceptance by the Underwriter and subject to the
Underwriter's right to reject any order in whole or in part. It is expected that
the Regular Classes, the Classes of CPCs and the MACR Classes (in book-entry
form) will be available for deposit at any Federal Reserve Bank, and that
delivery of the Residual Classes (in certificated form) will be made at the
offices of the Underwriter, 245 Park Avenue, New York, New York 10167, on or
about August 30, 1996 (the "Closing Date").
Bear, Stearns & Co. Inc.
Offering Circular Supplement Dated July 12, 1996
THE SECURITIES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE SECURITIES OF ANY CLASS UNLESS THE
INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, REDEMPTION, YIELD,
LIQUIDITY AND MARKET RISKS ASSOCIATED WITH THAT CLASS.
The Securities are complex securities and it is important that each investor
in any Class possess, either alone or together with an investment advisor, the
expertise necessary to evaluate the information contained and incorporated in
this Supplement in the context of that investor's financial situation.
------------------------
The yield of each Class of Multiclass PCs, each Callable Class and each MACR
Class will depend upon its purchase price, the rate of principal payments on its
related Asset or Assets (which, in turn, will be sensitive to the rate of
principal payments on the related Mortgages), the actual characteristics of the
related Mortgages and, in the case of each Callable Class, whether a redemption
of that Class occurs. In addition, the yields of the Floating Rate and Inverse
Floating Rate Classes will be sensitive to the level of LIBOR. The Mortgages are
subject to prepayment at any time without penalty. Mortgage prepayment rates are
likely to fluctuate significantly from time to time, as is the level of LIBOR.
In addition, principal payments on the Mortgages underlying the Group 2 and
Group 3 Assets will be allocated among the various classes of the related
Series, and such allocations will affect the sensitivity of the yield of each
related Class to Mortgage prepayment rates generally. Investors should consider
the associated risks, including:
. Fast prepayment rates on the related Mortgages can reduce the yields of
the Interest Only Classes and any other Classes purchased at a premium
over their principal amounts. Under some prepayment scenarios,
investors in the Interest Only Classes could fail to fully recover
their investments.
. Slow prepayment rates on the related Mortgages can reduce the yields of
the Principal Only Classes and any other Classes purchased at a
discount to their principal amounts.
. Small differences in the characteristics of the Mortgages can have a
significant effect on the weighted average lives and yields of the
related Classes.
. Low levels of LIBOR can reduce the yields of the Floating Rate Classes.
Conversely, high levels of LIBOR can significantly reduce the yields of
the Inverse Floating Rate Classes and (especially in combination with
fast Mortgage prepayment rates) may result in the failure of investors
in the S and TS Classes to fully recover their investments.
. In general, principal payment rates on the Support and Sequential Pay
Classes are likely to exhibit a higher sensitivity to prepayments on
the Mortgages underlying the Group 1 Assets than are principal payment
rates on the TAC Classes.
. The Group 2 Assets are Support Classes. In general, principal payment
rates on the Group 2 Assets (and, therefore, their related Classes in
Series 1869) are likely to exhibit a high degree of sensitivity to
Mortgage prepayments.
. The Group 3 Asset was structured as a TAC Class. However, there can be
no assurance that the Group 3 Asset (and, therefore, its related
Classes in Series 1869) will receive principal payments in accordance
with its schedule of Targeted Balances.
. The value of a Callable Class after it has become redeemable is not
likely to exceed (and may be lower than) its redemption price.
The value of a Call Class will depend primarily upon the market value of the
related Class of Multiclass PCs from time to time (which will depend on
prevailing interest rates and other market and economic conditions), market
expectations regarding its likely future value and the costs associated with any
exercise of such Call Class Holder's right of redemption. An investor in a Call
Class should consider the risk that it may suffer a loss of all of its initial
investment.
See "Prepayment and Yield Analysis" in this Supplement.
------------------------
The Underwriter intends to make a market for the purchase and sale of the
Securities after their initial issuance but has no obligation to do so. There is
no assurance that such a secondary market will develop or, if it develops, that
it will continue. Consequently, investors may not be able to sell their
Securities readily or at prices that will enable them to realize their desired
yield. The market values of the Securities are likely to fluctuate; such
fluctuations may be significant and could result in significant losses to
investors.
The secondary markets for mortgage-related securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of Securities that are
especially sensitive to prepayment, redemption or interest rate risk or that
have been structured to meet the investment requirements of limited categories
of investors.
------------------------
Investors should purchase Securities only if they have read and understand
this Supplement and the following documents:
. Freddie Mac's Multiclass Mortgage Participation Certificates Offering
Circular dated October 1, 1995 (the "Multiclass PC Offering Circular"),
which is attached to this Supplement;
. Freddie Mac's Offering Circular Supplements for its Series 1599 and
Series 1702 Multiclass Mortgage Participation Certificates and their
related Multiclass Mortgage Participation Certificates Offering
Circulars (each, an "Asset Offering Circular");
. Freddie Mac's Mortgage Participation Certificates Offering Circular
dated September 1, 1995 (the "PC Offering Circular");
. Freddie Mac's Giant Participation Certificates and Other Structured
Pass-Through Participation Certificates Offering Circular dated
September 1, 1995 (the "Giant PC Offering Circular"); and
. Freddie Mac's Information Statement dated March 29, 1996, its
Information Statement Supplements dated May 15, 1996 and August 14,
1996 and any other Information Statement Supplements published by
Freddie Mac through the time of purchase (collectively, the
"Information Statement").
This Supplement incorporates by reference the Asset Offering Circulars, the
PC Offering Circular, the Giant PC Offering Circular and the Information
Statement. Investors can order those documents: from Freddie Mac, by writing or
calling its Investor Inquiry Department at 8200 Jones Branch Drive, McLean,
Virginia 22102 (outside Washington, D.C. metropolitan area, phone 800/336-FMPC;
within Washington, D.C. metropolitan area, phone 703/450-3777); or from the
Underwriter, by writing or calling its Prospectus Department at One MetroTech
Center North, Brooklyn, New York 11201-3859 (phone 212/272-1581).
Investors can obtain additional information regarding the Multiclass PCs,
CPCs, MACR Certificates, Assets, PCs and Mortgages from the sources described
under "General Information -- Additional Information" in this Supplement.
TERMS SHEET
This Terms Sheet contains selected information about this Series. Investors
should refer to the remainder of this Supplement for further information.
Modification and Combination
Holders of certain of the Regular Classes of Multiclass PCs will be
entitled, upon notice and payment of an exchange fee, to exchange all or a
portion of such Classes for proportionate interests in one or more related MACR
Classes shown on Appendix 1 to this Supplement. The Holders of MACR Classes will
be entitled to receive payments from the related Class or Classes of Multiclass
PCs. Holders of MACR Classes will be entitled to exchange all or any portion of
such MACR Classes for proportionate interests in the related Class or Classes of
Multiclass PCs or, in some cases, other related MACR Classes. See "Modification
and Combination" in this Supplement. Appendix 1 shows the combinations of the
Classes of Multiclass PCs and the related MACR Classes. CPCs may not be
exchanged for MACR Certificates, and any Class of Multiclass PCs that backs a
pair of CPCs may not be exchanged for MACR Certificates unless the related
Callable Class has been redeemed.
Class Coupons
The Fixed Rate Classes will bear interest at the Class Coupons shown on the
cover page of this Supplement or on Appendix 1 to this Supplement.
The PA, PB, PC, PD, PE, PG and PO Classes will be Principal Only Classes
and will not bear interest.
The Floating Rate and Inverse Floating Rate Classes will bear interest as
follows:
<TABLE>
<CAPTION>
Class Coupon Subject to
Initial --------------------------------
Class Rate* Class Coupon Minimum Rate Maximum Rate
- ------------ ------------ ------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
F 6.6375% LIBOR + 1.2% 1.2% 9.0%
FA 6.5 LIBOR + 1.0% 1.0 9.0
U and U1 6.75 LIBOR + 1.25% 1.25 9.0
S 0.39 7.8% - LIBOR 0 0.39
SA 20.0 64.0% - (LIBOR x 8) 0 64.0
V and V1 18.0 62.0% - (LIBOR x 8) 0 62.0
TF 6.1% LIBOR + 0.6% 0.6 8.5
TS 2.4 7.9% - LIBOR 0 7.9
- ---------------
* Initial Rate will be in effect during first Accrual Period; Class Coupon will
adjust monthly thereafter.
</TABLE>
See "Payments -- Interest" in this Supplement and "Description of Multiclass
PCs -- Interest Rate Indices" in the Multiclass PC Offering Circular.
<TABLE>
<CAPTION>
Notional Classes
Original Notional
Class Principal Amount Reduces Proportionately with
--------- ----------------- --------------------------------------
<S> <C> <C> <C>
TG $ 466,450 TA (TAC Class)
20,133,419
2,778,196
-----------------
Multiclass PCs $ 23,378,065
-----------------
----------------- TB (TAC Class)
TE (TAC Class)
TS 30,000,000 TF (TAC Class)
S 27,200,792 F (Pass-Through Class)
IA $ 31,875,000 TF (TAC Class)
IB $ 10,000,000 G (Sequential Pay Class)
IC $ 10,085,000 J (Sequential Pay Class)
MACR Classes ID $ 14,085,000 B (Sequential Pay Class)
IE $ 31,615,000 C (Sequential Pay Class)
IG $ 34,580,000 U and V (Sequential Pay Classes)
See "Payments -- Interest -- Notional Classes" in this Supplement.
</TABLE>
Allocation of Principal
Multiclass PCs
On each Payment Date, Freddie Mac will pay:
. The "Group 1 Asset Principal Amount" for that Payment Date in the
following order of priority:
TAC 1. To the TAC Classes, until reduced to their "Targeted Balances" for
that Payment Date, allocated:
(a) While TB is outstanding, concurrently:
73.2668052177% to TB
12.2799670033% to TF
14.4532277790% to TA and TC, in that order
(b) Thereafter, concurrently:
14.4532277790% to TC
57.2040755978% to TD
20.3607189318% to TE
7.9819776914% to TF
Support 2. To A, FA and SA, pro rata, until retired
TAC 3. To the TAC Classes as described in step 1, but without regard
to their Targeted Balances, until retired
Sequential 4. To G, until retired Pay
5. Concurrently 50% to B and 50% to H and J, in that order, until
retired
6. To C, D, E, U and V, pro rata, until retired
Pass-Throug . The "Group 2 Asset Principal Amount" for that Payment Date to F
and N, pro rata, until retired
. The "Group 3 Asset Principal Amount" for that Payment Date,
allocated concurrently:
Sequential (a) 86.6666634446% to K, L, M, in that order, until retired Pay
Strip (b) 13.3333365554% to PO, until retired
The Targeted Balances (shown under "Payments -- Principal -- Targeted
Balances Schedules" in this Supplement) were structured as follows:
Structuring
Rate
---------
TAC Classes.............................................. 180% PSA
MACR Classes and Callable Classes
On any Payment Date when payments of principal are to be allocated from
Multiclass PCs to MACR Certificates or Callable Classes, such payments will be
allocated from the applicable Class or Classes of Multiclass PCs to the related
MACR Class or Callable Class or, if there are two or more related MACR Classes
that are entitled to principal payments, to such MACR Classes, pro rata.
See "Payments -- Principal" and "Prepayment and Yield Analysis" in this
Supplement.
Callable Pass-Through Certificates
Description
Each Callable Class, together with the related Call Class, will represent
the entire interest in the related Class of Multiclass PCs (for this purpose,
"related" Classes are those with the same letter designation). Each such Class
of Multiclass PCs will be issued on the Closing Date but will be held by Freddie
Mac unless and until the related Callable Class is redeemed.
The Callable Classes
Interest
The Callable Classes that are Fixed Rate Classes will bear interest at the
Class Coupons shown on the cover page of this Supplement. The Callable Classes
that are Floating Rate or Inverse Floating Rate Classes will bear interest as
set forth under "Class Coupons" above.
Allocation of Principal
On any Payment Date, when payments of principal are made on a related Class
of Multiclass PCs, Freddie Mac will pay such principal to the related Callable
Class, until redeemed or retired.
Redemption
Each Callable Class may be redeemed by Freddie Mac, at the direction of the
Holder of the related Call Class, on any Payment Date beginning in August 1997.
This is most likely to occur if the related Class of Multiclass PCs has a market
value in excess of its principal amount but could occur under other
circumstances. Upon such a redemption, the Holder of the Callable Class will
receive the outstanding principal amount of the Callable Class plus interest to
the date of redemption, calculated as described under "Redemption and Exchange"
in this Supplement.
The Call Classes
The Call Classes will not receive payments of principal and interest.
The Holder of each Call Class will have the right to direct Freddie Mac to
redeem the related Callable Class on any Payment Date beginning in August 1997.
After payment to Freddie Mac of the "Redemption Amount" for the redemption of
such Callable Class and an exchange fee in an amount equal to 1/32 of 1% of the
outstanding principal amount of the Callable Class (but not less than $7,500),
the Holder of the Call Class will be entitled to receive from Freddie Mac, in
exchange for the Call Class, the related Class of Multiclass PCs. See
"Redemption and Exchange" in this Supplement.
Only one Holder is permitted to hold a Call Class at any time.
PSA Prepayment Scenarios
<TABLE>
<CAPTION>
This Supplement uses the following prepayment scenarios:
PSA Prepayment Scenarios*
-----------------------------------------------------
Multiclass PCs/Asset Group** I II III IV V
- ----------------------------------------------------------------------- - --- --- --- ---
<S> <C> <C> <C> <C> <C>
A, B, C, D, E, FA, U, G, H, J, S, SA, V, TA, TB, TC, TD, TE, TF, TG and
TS/Group 1............................................................. 0% 100% 180% 300% 500%
F, N and S/Group 2..................................................... 0 100 130 300 500
K, L, M and PO/Group 3................................................. 0 100 130 300 500
-------------------------
* Expressed as percentages of PSA. See "Prepayment and Yield
Analysis -- General -- PSA Model" in this Supplement.
** The prepayment scenario used for each Callable Class or MACR Class
is the same as that used for its related Class or Classes of
Multiclass PCs.
Weighted Average Lives (in years)*
PSA Prepayment Scenario
-----------------------------------------------------
No Redemption of Callable Classes I II III IV V
--------- --------- --------- --------- ---------
A, FA and SA.............................................................. 26.6 15.3 10.0 1.3 0.6
B, B1, BH, BI, BJ, BK, BL, BM, BO, BP,
BQ, BR and PD........................................................... 27.9 19.0 12.9 8.3 5.2
C, C1,D, D1, E, E1, U, U1, V, V1, BS,
BT, BU, BV, BW, BX, BZ, CA, CB, CC,
PE, CD, CE, CF, CG, CH, CI, CJ, CK, CL, CM, CN and PG...................
29.2 24.6 19.4 13.4 8.3
F, N and Group 2 Assets................................................... 24.9 20.6 18.9 7.6 1.1
G, G1, AL, AM, AN, AO, AP, AQ, AS,
AT, AU, AV and PB....................................................... 27.3 17.2 11.4 7.3 4.6
H and H1.................................................................. 27.6 18.0 12.0 7.8 4.8
J, J1, AW, AX, AY, AZ, BA, BB, BD, BE,
BF, BG and PC........................................................... 28.0 19.4 13.2 8.5 5.3
K ............................................................... 25.1 17.1 5.7 0.2 0.1
L ............................................................... 25.5 18.9 11.9 0.4 0.2
M ............................................................... 25.9 21.7 17.1 0.9 0.5
O ............................................................... 17.9 6.1 4.0 3.3 2.3
PO and Group 3 Asset...................................................... 25.6 19.9 13.4 0.6 0.3
TA ............................................................... 7.8 1.6 1.1 1.1 1.0
TB........................................................................ 17.0 5.4 3.5 3.0 2.1
TC ............................................................... 20.9 7.8 5.0 4.1 2.7
TD and TE................................................................. 25.3 12.5 8.0 6.3 4.0
TF, AA, AB, AC, AD, AE, AF, AG, AH, AI, AJ,
AK and PA............................................................... 17.9 6.2 4.0 3.3 2.3
Group 1 Assets............................................................ 21.8 11.5 8.1 5.5 3.5
Redemption of Callable Classes on August 15, 1997
B1 ............................................................... 1.0 1.0 1.0 1.0 1.0
C1, D1, E1, U1 and V1..................................................... 1.0 1.0 1.0 1.0 1.0
G1 ............................................................... 1.0 1.0 1.0 1.0 1.0
H1........................................................................ 1.0 1.0 1.0 1.0 1.0
J1........................................................................ 1.0 1.0 1.0 1.0 1.0
Redemption of Callable Classes on August 15, 2001
B1 ............................................................... 5.0 5.0 5.0 5.0 4.9
C1, D1, E1, U1 and V1..................................................... 5.0 5.0 5.0 5.0 5.0
G1 ............................................................... 5.0 5.0 5.0 5.0 4.6
H1........................................................................ 5.0 5.0 5.0 5.0 4.8
J1........................................................................ 5.0 5.0 5.0 5.0 5.0
-------------------------
* Determined as described under "Prepayment and Yield Analysis" in
this Supplement, and subject to the assumptions and qualifications
in that section, including the assumptions that each Class is issued
and outstanding from the Closing Date through retirement.
Prepayments will not occur at the percentages of PSA assumed in any
scenario or any other prescribed rate, certain Classes will not be
outstanding on the Closing Date, redemptions of Callable Classes may
occur on a date other than a date shown and the actual weighted
average lives of any or all of the Classes and of the Assets are
likely to differ from those shown, perhaps significantly.
</TABLE>
<TABLE>
<CAPTION>
The Assets
The Group 1 Assets consist of PCs with per annum interest rates of 8.0%.
The Group 2 and Group 3 Assets have the following characteristics:
Percentage of Principal Amount Principal
Class in Lower-Tier August 1996 Type/
Asset in Lower-Tier REMIC Pool Class Class Interest Final Payment
Group Class REMIC Pool as of Closing Date Factor Coupon Type(1) Date
- --------- --------- --------------- ------------------ ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
2 1599-F 44.7022009952% $ 37,187,628 0.9786218 (2) SUP/FLT October 15, 2023
1599-S 12.0048937146% 3,841,091 0.9786218 (2) SUP/INV October 15, 2023
3 1702-J 29.2306086230 16,552,766 0.9852837 6.5% TAC/FIX March 15, 2024
- ---------------
(1) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular.
(2) Class Coupon is calculated as follows:
Class Coupon Subject to
Asset ----------------------------------
Group Class Class Coupon Minimum Rate Maximum Rate
- ----------------- --------- ----------------------- --------------- -----------------
2 1599-F LIBOR + 1.59% 1.59% 9.0%
2 1599-S 19.266% - (LIBOR x 2.6) 0 19.266
</TABLE>
See "General Information -- Structure of Transaction -- The Assets" and
"Prepayment and Yield Analysis -- Prepayment and Weighted Average Life
Considerations -- The Assets" in this Supplement and Exhibits I and II to this
Supplement.
Mortgage Characteristics (as of August 1, 1996)
Group 1 Assets--Assumed Mortgage Characteristics
Remaining Term
to Maturity Loan Age Per Annum
Principal Balance (in months) (in months) Interest Rate
- ----------------- ------------------- ----------------- -----------------
$ 400,000,000 353 5 8.5%
<TABLE>
<CAPTION>
Group 2 and Group 3 Assets--Mortgage Characteristics
Weighted Average
Remaining Term Weighted Average Weighted Average
to Maturity Loan Age Per Annum
Asset Group Series (in months) (in months) Interest Rate
- ----------------- ----------- --------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
2 1559 316 35 7.169%
3 1702 321 30 7.224
</TABLE>
The actual remaining terms to maturity, loan ages and interest rates of
most of the Mortgages differ from those shown above, in some cases
significantly. See "General Information -- The Mortgages" in this Supplement.
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Annex 2(j)
Cover Page and Terms Sheet
for
Offering Circular Supplement
dated January 16, 1997
to
Offering Circular
dated January 1, 1997
relating to
Federal Home Loan Mortgage Corporation
Multiclass Mortgage participation Certificates,
Callable Pass-Through Certificates and Modifiable
and Combinable REMIC Certificates, Series 1993
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Offering Circular Supplement
(To Offering Circular Dated January 1, 1997)
$2,274,450,004
Federal Home Loan Mortgage Corporation
Multiclass Mortgage Participation Certificates
and Modifiable and Combinable REMIC Certificates, Series 1933
Offered Securities: Classes of Multiclass PCs listed below; MACR Classes listed
on Appendix 1 to this Supplement Guarantee: Principal and interest guaranteed by
Freddie Mac, as described in this Supplement Tax Status: REMIC (Double-Tier,
consisting of one Upper-Tier REMIC Pool and two Lower-Tier REMIC Pools)
Underlying Assets: Four Asset Groups, consisting of two Groups of Freddie Mac
PCs (Gold PCs and Gold Giant PCs), one Group of Freddie Mac Callable
Pass-Through Certificates (CPCs), and one Group of Freddie Mac Multiclass PCs
Payment Dates: Monthly, beginning March 15, 1997
Redemption of
Callable Classes: CPCs underlying Callable Classes are redeemable beginning
February 15, 1998; upon redemption the
Callable Classes would be retired
Form of Securities: Regular and MACR Classes: Book-entry (Federal Reserve
Banks) Residual Classes (R, RA and RB): Certificated
Offering Terms: Classes offered in negotiated transactions at varying
prices through the Underwriter named below
Closing Date: February 28, 1997
The risks associated with the Securities may make them unsuitable for some
investors. See "Certain Risk Considerations" and "Prepayment and Yield Analysis"
in this Supplement.
Investors should read this Supplement in conjunction with the documents listed
under "Available Information" in this Supplement.
The obligations of Freddie Mac under its guarantees of the Securities are
obligations of Freddie Mac only. The Securities, including any interest thereon,
are not guaranteed by the United States and do not constitute debts or
obligations of the United States or any agency or instrumentality of the United
States other than Freddie Mac. Income on the Securities has no exemption under
federal law from federal, state or local taxation. The Securities are exempt
from the registration requirements of the Securities Act of 1933 and are
"exempted securities" within the meaning of the Securities Exchange Act of 1934.
==============================================================================
<TABLE>
<CAPTION>
Class of Original Weighted
Multiclass Principal Principal or Class Interest CUSIP Final Payment Average
PCs Amount(1) Other Type(2) Coupon Type(2) Number Date(3) Life(4)
- --------------------- ------------------ ------ ----------- ---------- ------------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
A ....... $ 80,000,000 TAC 7.00% FIX 3133T9 D A 0 March 15, 2025 4.4Yrs
AA....... 6,647,000 PAC 7.00 FIX 3133T9 D B 8 March 15, 2025 3.0
AB....... 25,022,000 TAC 7.00 FIX 3133T9 D C 6 March 15, 2025 4.8
AC....... 30,000,000 TAC 7.00 FIX 3133T9 D D 4 March 15, 2020 2.5
AD....... 30,000,000 TAC 7.00 FIX 3133T9 D E 2 March 15, 2020 2.5
AE....... 45,006,300 TAC 7.00 FIX 3133T9 D F 9 March 15, 2025 7.0
B ....... 117,422,900 TAC 7.00 FIX 3133T9 D J 1 March 15, 2022 3.0
C ....... 46,644,800 TAC 7.00 FIX 3133T9 D K 8 March 15, 2025 7.8
D ....... 20,000,000 TAC 7.25 FIX 3133T9 D L 6 March 15, 2025 4.4
E ....... 73,155,000 PAC 6.50 FIX 3133T9 D M 4 March 15, 2025 3.5
F ....... 21,900,000 CPT/SCH (5) FLT 3133T9 D N 2 February 15, 2027 3.9
FA ...... 37,600,000 CPT/SCH (5) FLT 3133T9 D P 7 February 15, 2027 3.9
FB ...... 33,700,000 CPT/SCH (5) FLT 3133T9 D Q 5 February 15, 2027 3.9
FC ...... 23,131,927 TAC/AD (5) FLT 3133T9 D R 3 February 15, 2027 8.9
FD ...... 36,300,000 CPT/SCH (5) FLT 3133T9 D S 1 February 15, 2027 3.9
FE ...... 20,000,000 CPT/SCH (5) FLT 3133T9 D T 9 February 15, 2027 3.9
FG....... 36,200,000 TAC (5) FLT 3133T9 D U 6 March 15, 2025 4.4
FH....... 53,680,000 SUP (5) FLT 3133T9 D V 4 June 15, 2022 10.8
FJ ...... 62,079,000 AD/SEQ (5) FLT 3133T9 D W 2 March 15, 2012 7.7
FK ...... 38,800,000 TAC (5) FLT 3133T9 D X 0 March 15, 2025 4.4
FL ...... 135,634,000 TAC (5) FLT 3133T9 D Y 8 March 15, 2025 4.4
FM....... 31,500,000 TAC (5) FLT 3133T9 D Z 5 March 15, 2025 4.8
FN....... 36,600,000 TAC (5) FLT 3133T9 E 2 7 March 15, 2025 4.8
FO ...... 34,300,000 TAC (5) FLT 3133T9 E 3 5 March 15, 2025 4.8
FP ...... 30,819,800 TAC (5) FLT 3133T9 E 4 3 March 15, 2025 4.8
FQ....... 20,509,200 TAC (5) FLT 3133T9 E 5 0 March 15, 2025 4.8
FR ...... 25,000,000 Callable/SEQ (5) FLT 3133T9 E 6 8 September 15, 2020 2.5
FT ...... 132,840,900 Callable/SEQ (5) FLT 3133T9 E 7 6 May 15, 2026 5.5
G ....... 4,275,000 TAC 7.00 FIX 3133T9 E A 9 March 15, 2025 2.7
H ....... 75,000,000 SCH 7.00 FIX 3133T9 E B 7 March 15, 2025 4.5
IA ...... 33,069,784 NTL(PAC) 7.50 FIX/IO 3133T9 E C 5 December 15, 2025 --
IB ...... 22,860,938 NTL(PAC) 8.00 FIX/IO 3133T9 E D 3 March 15, 2025 --
J ....... 20,000,000 Callable/SEQ 7.00 FIX 3133T9 E E 1 September 15, 2020 2.5
JA ...... 30,000,000 Callable/SEQ 7.00 FIX 3133T9 E F 8 September 15, 2020 2.5
K ....... 38,044,600 Callable/SEQ 7.50 FIX 3133T9 E G 6 March 15, 2025 4.5
KA....... 26,103,600 Callable/SEQ 7.25 FIX 3133T9 E H 4 March 15, 2025 4.5
KB....... 2,763,900 Callable/SEQ 7.50 FIX 3133T9 E J 0 November 15, 2025 12.0
KC....... 1,896,400 Callable/SEQ 7.25 FIX 3133T9 E K 7 November 15, 2025 12.0
L ....... 23,223,700 Callable/SEQ 7.50 FIX 3133T9 E N 1 January 15, 2023 5.9
M ....... 14,870,400 Callable/SEQ 7.50 FIX 3133T9 E P 6 May 15, 2024 8.0
N ....... 3,747,275 Callable/SEQ (5) FIX 3133T9 E Q 4 May 15, 2026 14.3
P ....... 15,105,653 TAC/AD 0.00 PO 3133T9 E R 2 February 15, 2027 5.5
</TABLE>
<TABLE>
<CAPTION>
Class of Original Weighted
Multiclass Principal Principal or Class Interest CUSIP Final Payment Average
PCs Amount(1) Other Type(2) Coupon Type(2) Number Date(3) Life(4)
- --------------------- ------------------ ------ ----------- ---------- ------------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
PA ...... $ 35,387,120 PAC 5.00% FIX 3133T9 E S 0 January 15, 2013 1.7Yrs
PB ...... 39,288,000 PAC 6.50 FIX 3133T9 E T 8 May 15, 2016 3.5
PC ...... 28,964,000 PAC 6.50 FIX 3133T9 E U 5 April 15, 2018 4.5
PD ...... 65,445,000 PAC 6.75 FIX 3133T9 E V 3 July 15, 2021 6.0
PE ...... 15,953,900 PAC 7.00 FIX 3133T9 E W 1 March 15, 2022 7.4
PG....... 90,896,800 CPT/PAC 6.15 FIX 3133T9 E X 9 December 15, 2025 10.0
PJ ...... 26,428,000 PAC 7.50 FIX 3133T9 E Y 7 February 15, 2027 20.2
PK ...... 40,975,300 PAC 7.50 FIX 3133T9 E Z 4 June 15, 2026 12.9
PN....... 17,056,000 SUP 0.00 PO 3133T9 F 2 6 February 15, 2027 13.9
PO ...... 5,734,000 TAC 0.00 PO 3133T9 F 3 4 February 15, 2027 3.5
PQ....... 9,763,004 SC/PT 0.00 PO 3133T9 F 4 2 February 15, 2024 20.2
Q ....... 66,420,450 Callable/SEQ 7.50 FIX 3133T9 F 6 7 May 15, 2026 5.5
S ....... 75,000,000 NTL(TAC) (5) INV/IO 3133T9 F A 8 March 15, 2025 --
SA ...... 44,233,880 NTL(PAC) (5) INV/IO 3133T9 F B 6 January 15, 2013 --
SB ...... 128,398,047 NTL(TAC/AD) (5) INV/IO 3133T9 F C 4 February 15, 2027 --
SC ...... 15,105,653 NTL(TAC/AD) (5) INV/IO 3133T9 F D 2 February 15, 2027 --
SD ...... 44,233,880 NTL(PAC) (5) INV/IO 3133T9 F E 0 January 15, 2013 --
SE ...... 9,763,004 SC/NTL(PT) (5) INV/IO 3133T9 F F 7 February 15, 2024 --
SH....... 13,420,000 SUP (5) INV 3133T9 F H 3 June 15, 2022 10.8
SJ ...... 62,079,000 NTL(AD/SEQ) (5) INV/IO 3133T9 F J 9 March 15, 2012 --
SK ...... 75,000,000 NTL(TAC) (5) INV/IO 3133T9 F K 6 March 15, 2025 --
SO ...... 153,729,000 NTL(TAC) (5) INV/IO 3133T9 F P 5 March 15, 2025 --
SQ....... 25,000,000 Callable/NTL(SEQ) (5) INV/IO 3133T9 F R 1 September 15, 2020 --
SS ...... 135,634,000 NTL(TAC) (5) INV/IO 3133T9 F T 7 March 15, 2025 --
ST ...... 132,840,900 Callable/NTL(SEQ) (5) INV/IO 3133T9 F U 4 May 15, 2026 --
SV ...... 14,760,100 Callable/SEQ (5) INV 3133T9 F W 0 May 15, 2026 5.5
SX ...... 75,000,000 NTL(TAC) (5) INV/IO 3133T9 F Y 6 March 15, 2025 --
SY ...... 135,634,000 NTL(TAC) (5) INV/IO 3133T9 F Z 3 March 15, 2025 --
T ....... 40,597,000 Callable/SEQ 8.00 FIX 3133T9 G 2 5 February 15, 2027 20.0
U ....... 20,860,400 Callable/SEQ 7.50 FIX 3133T9 G 3 3 November 15, 2025 10.8
V ....... 14,000,000 Callable/SEQ 8.00 FIX 3133T9 G 4 1 November 15, 2025 5.0
VA....... 21,328,000 AD/SEQ 6.75 FIX 3133T9 G 5 8 February 15, 2004 3.8
VB ...... 17,172,600 AD/SEQ 7.25 FIX 3133T9 G 6 6 February 15, 2007 8.5
VC....... 50,088,400 AD/SEQ 7.55 FIX 3133T9 G 7 4 March 15, 2012 11.8
W ....... 3,747,275 Callable/SEQ 7.75 FIX 3133T9 G 8 2 May 15, 2026 14.3
X ....... 4,524,000 Callable/SEQ 7.50 FIX 3133T9 G 9 0 May 15, 2026 14.3
Z ....... 27,421,300 SUP 8.50 FIX/Z 3133T9 G A 7 February 15, 2027 19.5
ZA....... 64,696,000 SEQ 8.00 FIX/Z 3133T9 G B 5 February 15, 2027 17.7
R ....... 0 NPR 0.00 NPR 3133T9 F 7 5 February 15, 2027 --
RA....... 0 NPR 0.00 NPR 3133T9 F 8 3 February 15, 2027 --
RB....... 0 NPR 0.00(6) NPR 3133T9 F 9 1 February 15, 2027 --
</TABLE>
==============================================================================
(1) The amount shown for a Notional Class is its original notional principal
amount and does not represent principal that will be paid; see "Payments --
Interest" in this Supplement.
(2) See "Description of Multiclass PCs -- Standard Definitions and Abbreviations
for Classes" in the Multiclass PC Offering Circular. The type of Class with
which a Notional Class will reduce is indicated in parentheses.
(3) See "Final Payment Dates" in this Supplement.
(4) Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section. Weighted average lives are calculated at the "Prepayment
Assumption" shown under "Certain Federal Income Tax Consequences -- Regular
Classes" in this Supplement. Prepayments will not occur at the rates
assumed, and the actual weighted average lives of the Classes may differ
significantly from those shown.
(5) Calculated as shown under "Terms Sheet -- Class Coupons" in this Supplement.
(6) The RB Class may receive certain payments as described under "General
Information -- Structure of Transaction -- The Group 3 Asset" and "Payments
-- Interest -- Fixed Rate Classes" in this Supplement.
------------------------
Bear, Stearns & Co. Inc.
Offering Circular Supplement Dated January 16, 1997
(LOGO)
<PAGE>
CERTAIN RISK CONSIDERATIONS
THE SECURITIES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, NO INVESTOR SHOULD PURCHASE SECURITIES OF ANY CLASS UNLESS THE
INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, REDEMPTION, YIELD,
LIQUIDITY AND MARKET RISKS ASSOCIATED WITH THAT CLASS. ------------------------
The Securities are complex securities and it is important that each
investor in any Class possess, either alone or together with an investment
advisor, the expertise necessary to evaluate the information contained and
incorporated in this Supplement in the context of that investor's financial
situation. ------------------------
The yield of each Class will depend upon its purchase price, the rate of
principal payments on the related Asset or Assets (which will be sensitive to
the rate of principal payments on the related Mortgages), the actual
characteristics of the related Mortgages and, in the case of the Callable
Classes, whether a redemption of the Group 3 Asset occurs (as described under
"General Information -- Structure of Transaction -- The Group 3 Asset" in this
Supplement). In addition, the yields of the Floating Rate and Inverse Floating
Rate Classes will be sensitive to the level of LIBOR. The Mortgages are subject
to prepayment at any time without penalty. Mortgage prepayment rates are likely
to fluctuate significantly from time to time, as is the level of LIBOR. In
addition, principal payments on the Mortgages underlying the Group 4 Asset will
be allocated among the various classes of Series 1669, and such allocations will
affect the sensitivity of each related Class of this Series to Mortgage
prepayment rates generally. Investors should consider the associated risks,
including:
-Fast prepayment rates on the related Mortgages or, in the case of the
Callable Classes, a redemption of the Group 3 Asset, can reduce the
yields of the Interest Only Classes and any other Classes purchased at a
premium over their principal amounts. Under some prepayment and
redemption scenarios, investors in such Classes (especially Interest
Only and Callable Classes) could fail to fully recover their
investments.
-Slow prepayment rates on the related Mortgages and, in the case of the
Callable Classes, the absence of a redemption of the Group 3 Asset, can
reduce the yields of the Principal Only Classes and any other Classes
purchased at a discount to their principal amounts.
-Small differences in the characteristics of the Mortgages can have a
significant effect on the weighted average lives and yields of the
related Classes.
-Low levels of LIBOR can reduce the yields of the Floating Rate Classes.
Conversely, high levels of LIBOR can significantly reduce the yields of
the Inverse Floating Rate Classes and (especially in combination with
fast Mortgage prepayment rates or, if applicable, a redemption of the
Group 3 Asset) may result in the failure of investors in the Inverse
Floating Rate Classes that are also Interest Only Classes to fully
recover their investments.
-The Group 3 Asset consists of a Callable Class of Freddie Mac's CPCs,
Series C035 ("Series C035"). As further described under "General
Information -- Structure of Transaction -- The Group 3 Asset" in this
Supplement, the Group 3 Asset may be redeemed on any Payment Date
beginning in February 1998 at the direction of the holder of the Call
Class of Series C035. The holder of the Call Class, which may include
the Underwriter (or an affiliate), may also be a Holder of one or more
Callable Classes of this Series, such as an Interest Only Class, which
may affect such holder's decision whether to direct a redemption of the
Group 3 Asset. The redemption of the Group 3 Asset would result in the
concurrent retirement of all Callable Classes then outstanding and would
reduce the weighted average lives of such Classes, perhaps
significantly.
-In general, principal payment rates on the Support and Sequential Pay
Classes (other than those which are also Accretion Directed Classes) are
likely to exhibit a higher sensitivity to prepayments on the related
Mortgages than are principal payment rates on the PAC, TAC, Scheduled
and Accretion Directed Classes.
-The Group 4 Asset is a Support Class. In general, principal payment
rates on the Group 4 Asset (and, therefore, on the related Classes of
this Series) are likely to exhibit a high degree of sensitivity to
Mortgage prepayments.
See "Prepayment and Yield Analysis" in this Supplement.
------------------------
The Underwriter intends to make a market for the purchase and sale of the
Securities after their initial issuance but has no obligation to do so. There is
no assurance that such a secondary market will develop or, if it develops, that
it will continue. Consequently, investors may not be able to sell their
Securities readily or at prices that will enable them to realize their desired
yield. The market values of the Securities are likely to fluctuate; such
fluctuations may be significant and could result in significant losses to
investors. In addition, the redemption feature of the Group 3 Asset may affect
the market values of the Callable Classes. ------------------------
The secondary markets for mortgage-related securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of Securities that are
especially sensitive to prepayment, redemption or interest rate risk or that
have been structured to meet the investment requirements of limited categories
of investors.
Freddie Mac's Multiclass Mortgage Participation Certificates Offering
Circular dated January 1, 1997 (the "Multiclass PC Offering Circular")
accompanies this Supplement. Capitalized terms that are used in this Supplement
without further definition have the meanings given them in the Multiclass PC
Offering Circular. Investors should purchase Securities only if they have read
and understood this Supplement, the Multiclass PC Offering Circular and the
documents listed under "Available Information" in this Supplement.
<PAGE>
TERMS SHEET
This Terms Sheet contains selected information about this Series. Investors
should refer to the remainder of this Supplement for further information.
MACR Certificates
This Series provides for the issuance of Classes (each, a "MACR Class") of
Modifiable and Combinable REMIC Certificates ("MACR Certificates") in exchange
for certain Classes of Multiclass PCs. Holders of such Multiclass PCs will be
entitled to exchange all or a portion of their Multiclass PCs for related MACR
Certificates, and Holders of MACR Certificates will be entitled to exchange all
or a portion of their MACR Certificates for related Multiclass PCs. Appendix 1
to this Supplement shows the characteristics of the MACR Classes and the
"Combinations" of Classes of Multiclass PCs and MACR Certificates. As used in
this Supplement, unless the context requires otherwise, the term "Securities"
includes Multiclass PCs and MACR Certificates and the term "Classes" includes
Classes of Multiclass PCs and MACR Certificates.
See "MACR Certificates" in the Multiclass PC Offering Circular for a
description of MACR Certificates and procedures for effecting exchanges. The fee
payable to Freddie Mac in connection with each exchange will equal 2/32 of 1% of
the outstanding principal amount (exclusive of any notional principal amount) of
the Securities submitted for exchange (but not less than $5,000). The fee
payable to Freddie Mac in connection with an exchange involving Combination 5,
6, 7, 8, 9 or 10 will equal 2/32 of 1% of the outstanding notional principal
amount of the Securities submitted for exchange (but not more than $60,000).
Class Coupons
The Fixed Rate Classes (other than the N Class) will bear interest at the
Class Coupons shown on the cover page of this Supplement and on Appendix 1 to
this Supplement.
The N Class will bear interest during the first 12 Accrual Periods at a
Class Coupon of 9.00% per annum and will bear interest thereafter at a Class
Coupon of 7.25% per annum.
The P, PN, PO, PQ and PR Classes are Principal Only Classes and will not
bear interest.
<PAGE>
The Floating Rate and Inverse Floating Rate Classes will bear interest as
follows:
Multiclass PCs
<TABLE>
<CAPTION>
Class Coupon Subject to
----------------------------
Class Initial Rate* Class Coupon Minimum Rate Maximum Rate
- ----------------------- ------------- ----------------------------- ------------ ------------
<S> <C> <C> <C> <C>
F, FA, FB, FC, FD and
FE................... 6.4% LIBOR + 0.90% 0.90% 9.5%
FG and FK.............. 6.3375 LIBOR + 0.90% 0.90 9.5
FH..................... 6.1375 LIBOR + 0.70% 0.70 10.0
FJ..................... 5.9375 LIBOR + 0.50% 0.50 9.0
FL..................... 5.9875 LIBOR + 0.55% 0.55 9.0
FM, FN, FO, FP and FQ.. 6.1875 LIBOR + 0.75% 0.75 9.0
FR..................... 5.9375 LIBOR + .50% 0.50 8.5
FT..................... 5.8875 LIBOR + .45% 0.45 10.0
S and SY............... 0.95 8.45% - LIBOR 0 0.95
SA..................... 1.5 7.0% - LIBOR 0 7.0
SB..................... 2.6 8.1% - LIBOR 0 8.1
SC..................... 4.25 73.1% - (LIBOR X 8.5) 0 4.25
SD..................... 1.6 8.6% - LIBOR 0 1.6
SE..................... 10.5 102.375% - (LIBOR X 13.125) 0 10.5
SK and SS.............. 2.0625 7.5% - LIBOR 0 7.5
SH..................... 15.45 37.2% - (LIBOR X 4) 0 37.2
SJ..................... 3.0625 8.5% - LIBOR 0 8.5
SO..................... 2.8125 8.25% - LIBOR 0 8.25
SQ..................... 2.5625 8.00% - LIBOR 0 8.00
ST..................... 2.8625 8.3% - LIBOR 0 8.3
SV..................... 11.25 85.95% - (LIBOR X 9) 0 11.25
SX..................... 0.15 8.6% - LIBOR 0 0.15
</TABLE>
MACR Classes
<TABLE>
<CAPTION>
Class Coupon Subject to
----------------------------
Class Initial Rate* Class Coupon(1) Minimum Rate Maximum Rate
- ----------------------- ------------- ----------------------------- ------------ ------------
<S> <C> <C> <C> <C>
FW..................... 6.4% LIBOR + 0.90% 0.90% 9.5%
FX..................... 6.1875 LIBOR + 0.75% 0.75 9.0
SG..................... 2.0625 7.5% - LIBOR 0 7.5
SM..................... 4.25 73.1% - (LIBOR X 8.5) 0 4.25
SN..................... 10.5 102.375% - (LIBOR X 13.125) 0 10.5
SP, SR and SU 3.0125 8.45% - LIBOR 0 8.45
SW..................... 3.1625 8.6% - LIBOR 0 8.6
</TABLE>
<TABLE>
<CAPTION>
Class Coupon
-----------------------------------------------------------
Class Initial Rate* 8.4375% LIBOR and Lower 8.5000% LIBOR and Higher Minimum Rate Maximum Rate
- ------ -------------- ----------------------- ------------------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
SL 1.00341% 8.50341% - LIBOR 3.06218% - (LIBOR X 0.3560679) 0% 1.00341%
</TABLE>
- ---------------
* Initial Rate will be in effect during the first Accrual Period; Class Coupon
will adjust monthly thereafter.
See "Payments -- Interest" in this Supplement and "Description of Multiclass PCs
- -- Interest Rate Indices" in the Multiclass PC Offering Circular.
<PAGE>
Notional Classes
Multiclass PCs
Original
Notional
Class Principal Amount Reduces Proportionately With
- ---- ---------------- --------------------------------------------
$ 9,100,267 PB and PC, in the aggregate (PAC Classes)
6,544,500 PD (PAC Class)
1,063,593 PE (PAC Class)
16,361,424 PG (PAC Class)
----------------
$ 33,069,784
=============
I,2
IB $ 22,860,937 E (PAC Class)
S 75,000,000 FG and FK (TAC Classes)
SA 44,233,880 PA (PAC Class)
SB 128,398,047 P (TAC/Accretion Directed Class)
SC 15,105,653 P (TAC/Accretion Directed Class)
SD 44,233,880 PA (PAC Class)
SE 9,763,004 PQ (Pass-Through Class)
SJ 62,079,000 FJ (Accretion Directed/Sequential Pay Class)
SK 75,000,000 FG and FK (TAC Classes)
SO 153,729,000 FM (TAC Class)
SQ 25,000,000 FR (Sequential Pay Class)
SS 135,634,000 FL (TAC Class)
ST 132,840,900 FT (Sequential Pay Class)
SX 75,000,000 FG and FK (TAC Classes)
SY 135,634,000 FL (TAC Class)
MACR Classes
SP $ 75,000,000 FG and FK (TAC Classes)
SW 75,000,000 FG and FK (TAC Classes)
SR 135,634,000 FL (TAC Class)
SU 210,634,000 FG, FK and FL (TAC Classes)
SG 210,634,000 FG, FK and FL (TAC Classes)
SL 210,634,000 FG, FK and FL (TAC Classes)
See "Payments -- Interest -- Notional Classes" in this Supplement.
IA
<PAGE>
Components
Original Principal
Designation Principal Amount Type*
- ----------- ---------------- -------
F-1 $ 6,479,746 PAC
F-2 15,420,254 SCH/AD
----------------
$ 21,900,000
=============
FA-1 $ 11,125,043 PAC
FA-2 26,474,957 SCH/AD
----------------
$ 37,600,000
=============
FB-1 $ 9,971,115 PAC
FB-2 23,728,885 SCH/AD
----------------
$ 33,700,000
=============
FD-1 $ 10,740,400 PAC
FD-2 25,559,600 SCH/AD
----------------
$ 36,300,000
=============
FE-1 $ 5,917,576 PAC
FE-2 14,082,424 SCH/AD
----------------
$ 20,000,000
=============
PG-1 $ 33,245,100 PAC
PG-2 57,651,700 PAC
----------------
$ 90,896,800
=============
-------------------------------------------
* See "Description of Multiclass PCs -- Standard
Definitions and Abbreviations for Classes" in
the Multiclass PC Offering Circular.
See "Payments -- Principal -- Component Classes" in this Supplement.
<PAGE>
Allocation of Principal
Multiclass PCs
On each Payment Date, Freddie Mac will pay:
- The "Z Accrual Amount" for that Payment Date to the Classes and
Components shown below in the following order of priority:
1. Concurrently:
Accretion (a) 10.5263160462% to P, until retired
Directed (b) 89.4736839538% to F-2, FA-2, FB-2, FD-2 and FE-2, pro rata,
and until retired, and then to FC, until retired
Accrual
2. To Z
- The "Group 1 Asset Principal Amount" for that Payment Date to the Classes
and Components shown below in the following order of priority:
1. To the following PAC Classes and Components, until reduced to their
"Targeted Balances" for that Payment Date, allocated:
(a) To F-1, FA-1, FB-1, FD-1, FE-1 and PA, pro rata, while
PAC outstanding, and then
(b) To PB, PC, PD, PE and PG-1, in that order, while outstanding,
and then
(c) 72.9999366888% to PG-2 and 27.0000633112% to PK, while PG-2 is
outstanding, and then
(d) To PK and PJ, in that order
2. Concurrently:
TAC (a) 11.7647058824% as follows:
Support (i) To PO, until reduced to its Targeted Balance for that Payment
TAC Date
(ii) To PN, until retired
(iii) To PO, until retired
(b) 88.2352941176% as follows:
(i) Concurrently:
Scheduled
TAC (A) 89.4736839538% as follows:
I. To F-2, FA-2, FB-2, FD-2 and FE-2, pro rata, until
Scheduled reduced to their "Higher Targeted Balances" for that
Payment Date
TAC II. To FC, until reduced to its Targeted Balance for that
Payment Date
Support III. To F-2, FA-2, FB-2, FD-2 and FE-2, pro rata, until
reduced to their "Lower Targeted Balances" for that
Payment Date
(B) 10.5263160462% to P, while outstanding
(ii) To Z, until retired
(iii) Concurrently:
(A) 89.4736839538% as follows:
TAC I. To FC, until retired
II. To F-2, FA-2, FB-2, FD-2 and FE-2, pro rata, until
Scheduled retired
TAC (B) 10.5263160462% to P, until retired
PAC 3. To the PAC Classes and Components as in Step 1, but without regard
to their Targeted Balances, until retired
- The "ZA Accrual Amount" for that Payment Date to the Classes shown below
in the following order of priority:
Accretion 1. 44.4444444444% to VA and 55.5555555556% to FJ, until VA is retired
Directed 2. 57.1429522162% to VB and 42.8570477838% to FJ, until VB is retired
3. 68.9656881643% to VC and 31.0343118357% to FJ, until retired
- The "Group 2 Asset Principal Amount" and the remainder of the ZA Accrual
Amount, if any, for that Payment Date to the Classes shown below in the
following order of priority:
1. Concurrently:
(a) 33.8552383776% to A, D, FG, FK and FL, pro rata, until reduced to
their Targeted Balances for that Payment Date
(b) 17.8813365361% to B and C, in that order, until reduced to
TAC their Targeted Balances for that Payment Date
(c) 11.4443792941% first to AC and AD, pro rata, until reduced to
their Targeted Balances for that Payment Date, and then to AE,
until reduced to its Targeted Balance for that Payment Date
(d) 24.7275311269% as follows:
PAC (i) Beginning August 15, 1998, to E, until reduced to its
Targeted Balance for that Payment Date
TAC (ii) To FM, FN, FO, FP and FQ, pro rata, while outstanding (iii)
To E, while outstanding
PAC (e) 8.6399879678% as follows:
(i) To H, until reduced to its Higher Targeted Balance for
Scheduled that Payment Date
and TAC (ii) To G, until reduced to its Targeted Balance for that
Payment Date
(iii) To H, until reduced to its Lower Targeted Balance for
that Payment Date
(iv) To G, while outstanding, and then to H
(f) 3.4515266975% as follows:
PAC (i) Beginning November 15, 1998, to AA, until reduced to its
Targeted Balance for that Payment Date
TAC (ii) To AB, while outstanding
PAC (iii) To AA, while outstanding
Support 2. To FH and SH, pro rata, until retired
3. Concurrently:
TAC (a) 33.8552383776% to A, D, FG, FK and FL, pro rata, until retired
(b) 17.8813365361% to B and C, in that order, until retired
(c) 11.4443792941% first to AC and AD, pro rata, until retired, and
then to AE, until retired
(d) 24.7275311269% as follows:
PAC (i) To E, until reduced to its Targeted Balance for that
Payment Date
TAC (ii) To FM, FN, FO, FP and FQ, pro rata, until retired
PAC (iii) To E, until retired
Scheduled
and TAC (e) 8.6399879678% to G and H, in that order, until retired
(f) 3.4515266975% as follows:
PAC (i) To AA, until reduced to its Targeted Balance for that
Payment Date
TAC (ii) To AB, until retired
PAC (iii) To AA, until retired
4. 44.4444444444% to VA and 55.5555555556% to FJ, until VA is retired
Sequential
Pay 5. 57.1429522162% to VB and 42.8570477838% to FJ, until VB is retired
6. 68.9656881643% to VC and 31.0343118357% to FJ, until retired
7. To ZA, until retired
- The "Group 3 Asset Principal Amount" for that Payment Date to the
Classes shown below in the following order of priority:
1. Concurrently:
(a) 48.3333333333% to FT, Q and SV, pro rata
Sequential
Pay (b) 3.3369778668% to V, until retired
(c) 6.6739557335% to KA and KC, in that order, until retired
(d) 9.7269329483% to K and KB, in that order, until retired (e)
31.9288001181% first to FR, J and JA, pro rata, until retired,
and then to L, M and U, in that order, until retired
2. To FT, Q, SV, N, W and X, pro rata (based on their then outstanding
balances), until retired
3. To T, until retired
Pass - The "Group 4 Asset Principal Amount" for that Payment Date to PQ,
Through until retired
<PAGE>
The Targeted Balances (shown under "Payments -- Principal -- Targeted
Balances Schedules" in this Supplement) were structured as follows:
Class or Component Structuring Range or Rate
------------------------------------------------ -------------------------
PACs
F-1, FA-1, FB-1, FD-1, FE-1, PA, PB, PC, PD, PE,
PG-1, PG-2, PJ and PK......................... 100% PSA - 275% PSA
AA and E........................................ 100% PSA - 300% PSA
TACs
A, AB, AC, AD, AE, B, C, D, FG, FK, FL, FM, FN,
FO, FP, FQ and FX............................. 225% PSA
FC and P........................................ 200% PSA
G............................................... 175% PSA
PO.............................................. 135% PSA
Scheduled
F-2, FA-2, FB-2, FD-2 and FE-2.................. 200% PSA (Lower Targeted
Balance)
165% PSA (Higher Targeted
Balance)
H............................................... 225% PSA (Lower Targeted
Balance)
115% PSA (Higher Targeted
Balance)
MACR Classes
On any Payment Date when payments of principal are to be allocated from
Multiclass PCs to MACR Certificates, such payments will be allocated from the
applicable Class or Classes of Multiclass PCs to the related MACR Class.
See "Payments -- Principal" and "Prepayment and Yield Analysis" in this
Supplement.
Freddie Mac Guarantee
Freddie Mac guarantees to each Holder of a Security (i) the timely payment
of interest at the applicable Class Coupon and (ii) the payment of the principal
amount of the Holder's Security as described in this Supplement.
REMIC Status
Freddie Mac will form an "Upper-Tier REMIC Pool" and two "Lower-Tier REMIC
Pools" for this Series. Elections will be made to treat each REMIC Pool as a
"real estate mortgage investment conduit" ("REMIC") pursuant to the Internal
Revenue Code. The R, RA and RB Classes will be "Residual Classes" and the other
Classes of Multiclass PCs will be "Regular Classes." The Residual Classes will
be subject to transfer restrictions. See "Certain Federal Income Tax
Consequences" in this Supplement and the Multiclass PC Offering Circular.
<PAGE>
Weighted Average Lives (in years)*
Group 1
PSA Prepayment Assumption
----------------------------------
0% 100% 165% 275% 400%
------ ------ ------ ------ ------
F, FA, FB, FD, FE and FW...... 10.6 8.1 3.9 3.1 2.1
FC............................ 20.7 16.3 8.9 2.0 1.4
P and SM...................... 13.9 11.7 5.5 3.4 2.1
PA............................ 6.2 1.7 1.7 1.7 1.7
PB............................ 12.4 3.5 3.5 3.5 3.4
PC............................ 14.8 4.5 4.5 4.5 3.9
PD............................ 17.5 6.0 6.0 6.0 4.6
PE............................ 19.5 7.4 7.4 7.4 5.4
PG............................ 21.9 10.0 10.0 10.0 7.1
PJ............................ 25.1 20.2 20.2 20.2 14.9
PK............................ 23.4 12.9 12.9 12.9 9.2
PN............................ 28.2 22.4 13.9 3.0 1.7
PO............................ 25.9 13.0 3.5 3.5 2.6
PR............................ 27.6 20.0 11.3 3.1 1.9
Z............................. 27.6 23.0 19.5 1.7 0.8
Group 1 Assets................ 20.4 11.6 8.7 6.0 4.4
Group 2
PSA Prepayment Assumption
----------------------------------
0% 100% 225% 350% 500%
------ ------ ------ ------ ------
A, AG, D, FG, FK and FL....... 16.8 8.0 4.4 3.6 2.7
AA............................ 8.2 3.0 3.0 3.0 3.0
AB............................ 19.1 9.3 4.8 3.7 2.6
AC and AD..................... 13.1 4.4 2.5 2.2 1.7
AE............................ 21.8 12.8 7.0 5.4 4.0
AH, FH and SH................. 24.3 17.6 10.8 1.0 0.6
B............................. 14.5 5.5 3.0 2.6 2.0
C............................. 22.6 14.3 7.8 6.1 4.4
E............................. 10.3 3.5 3.5 3.5 3.5
FJ............................ 8.0 8.0 7.7 6.5 5.2
FM, FN, FO, FP, FQ and FX..... 19.9 10.1 4.8 3.6 2.3
G............................. 23.7 16.5 2.7 1.6 1.1
H............................. 16.4 7.5 4.5 3.7 2.8
VA............................ 3.8 3.8 3.8 3.8 3.7
VB............................ 8.5 8.5 8.5 7.9 6.0
VC............................ 12.7 12.7 11.8 8.9 6.7
ZA............................ 27.3 23.5 17.7 13.3 10.0
Group 2 Assets................ 20.5 11.7 7.0 4.9 3.6
--------------------
* Determined as described under "Prepayment and Yield Analysis" in this
Supplement, and subject to the assumptions and qualifications in that
section. Prepayments will not occur at any assumed rate shown or any
other constant rate, a redemption of the Group 3 Asset may occur on a
date other than a date shown and the actual weighted average lives of any
or all of the Classes and of the Assets are likely to differ from those
shown, perhaps significantly.
<PAGE>
Group 3
PSA Prepayment Assumption
----------------------------------
0% 100% 225% 350% 500%
------ ------ ------ ------ ------
Redemption on February 15,
1998
FR, J and JA.................. 1.0 0.9 0.9 0.9 0.8
FT, Q and SV.................. 1.0 0.9 0.9 0.9 0.9
K and KA...................... 1.0 0.9 0.9 0.9 0.9
KB and KC..................... 1.0 1.0 1.0 1.0 1.0
KD, KE and V.................. 1.0 0.9 0.9 0.9 0.9
L............................. 1.0 1.0 1.0 1.0 1.0
M............................. 1.0 1.0 1.0 1.0 1.0
N, W and X.................... 1.0 1.0 1.0 1.0 1.0
T............................. 1.0 1.0 1.0 1.0 1.0
U............................. 1.0 1.0 1.0 1.0 1.0
Group 3 Asset................. 1.0 0.9 0.9 0.9 0.9
Redemption on February 15,
2002
FR, J and JA.................. 4.7 3.7 2.5 1.8 1.4
FT, Q and SV.................. 4.8 4.3 3.6 3.1 2.6
K and KA...................... 4.8 4.2 3.5 2.9 2.3
KB and KC..................... 5.0 5.0 5.0 5.0 5.0
KD, KE and V.................. 4.8 4.2 3.6 3.0 2.5
L............................. 5.0 5.0 5.0 4.0 3.0
M............................. 5.0 5.0 5.0 4.9 3.8
N, W and X.................... 5.0 5.0 5.0 5.0 5.0
T............................. 5.0 5.0 5.0 5.0 5.0
U............................. 5.0 5.0 5.0 5.0 4.8
Group 3 Asset................. 4.8 4.3 3.8 3.3 2.8
No Redemption
FR, J and JA.................. 13.8 4.6 2.5 1.8 1.4
FT, Q and SV.................. 19.1 9.9 5.5 3.7 2.7
K and KA...................... 18.0 8.3 4.5 3.1 2.3
KB and KC..................... 27.1 20.6 12.0 8.0 5.7
KD, KE and V.................. 18.6 9.2 5.0 3.4 2.5
L............................. 22.9 11.4 5.9 4.0 3.0
M............................. 25.0 14.9 8.0 5.4 3.8
N, W and X.................... 27.8 23.1 14.3 9.6 6.8
T............................. 28.5 26.5 20.0 14.2 10.0
U............................. 26.6 19.1 10.8 7.2 5.1
Group 3 Asset................. 19.9 11.3 6.7 4.6 3.3
Group 4
PSA Prepayment Assumption
----------------------------------
0% 50% 100% 200% 300%
------ ------ ------ ------ ------
PQ, SN and Group 4 Asset...... 24.6 22.9 20.2 10.7 2.3
The Assets
The Group 1 Assets will consist of $581,287,000 of Freddie Mac 7.5% per
annum PCs, and the Group 2 Assets will consist of $1,200,000,000 of Freddie Mac
8.0% per annum PCs.
The Group 3 and Group 4 Assets have the following characteristics:
<TABLE>
<CAPTION>
Percentage of Class Principal Amount
in Related in Related Lower-
Asset Lower-Tier Tier REMIC Pool as February 1997 Class Principal Type/
Group Class REMIC Pool of Closing Date Class Factor Coupon Interest Type(1) Final Payment Date
- ------ -------- ------------------- ------------------ -------------- ------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3 C035-A 100% $483,400,000 1.0000000 8.00% Callable/FIX February 15, 2027
4 1669-Q 100% 9,763,004 0.9880346 (2) SUP/INV February 15, 2024
</TABLE>
- ---------------
(1) See "Description of Multiclass PCs -- Standard Definitions and
Abbreviations for Classes" in the Multiclass PC Offering Circular.
(2) Calculated as shown in the Series 1669 Asset Offering Circular. See
Exhibit II to this Supplement.
The Group 3 Asset may be redeemed by Freddie Mac at the direction of the
holder of the Call Class of Series C035 on any Payment Date beginning in
February 1998 if, as of the date Freddie Mac receives notice of intention to
redeem, the market value of the Giant PC underlying the Group 3 Asset exceeds
its principal amount.
A redemption is most likely to occur if prevailing interest rates have
declined. Upon a redemption of the Group 3 Asset, investors in each Callable
Class will receive the outstanding principal amount of the investor's Security,
plus interest, calculated as described under "General Information -- Structure
of Transaction -- The Group 3 Asset" in this
Supplement.
See "Payments -- Redemption and Exchange" in the Series C035 Asset Offering
Circular, "General Information -- Structure of Transaction" and "Prepayment and
Yield Analysis" in this Supplement and Exhibits I and II to this Supplement.
Mortgage Characteristics (as of February 1, 1997)
Group 1, Group 2 and Group 3 Assets -- Assumed Mortgage Characteristics
<TABLE>
<CAPTION>
Remaining Term Per Annum
to Maturity Loan Age Per Annum Interest Rate
Asset Group Principal Balance (in months) (in months) Interest Rate of Related PCs
- ----------- ----------------- -------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1 $ 581,287,000 357 3 8.150% 7.5%
2 1,200,000,000 356 4 8.550 8.0
3 483,400,000 348 8 8.485 8.0
</TABLE>
Group 4 Asset -- Mortgage Characteristics
Weighted
Average Weighted Weighted
Remaining Term Average Average Per Annum
to Maturity Loan Age Per Annum Interest Rate of
Series (in months) (in months) Interest Rate Related PCs
- ------- -------------- ----------- ------------- ----------------
1669 312 37 7.045% 6.5%
The actual remaining terms to maturity, loan ages and interest rates of
most of the Mortgages differ from those shown above, in some cases
significantly. See "General Information -- The Mortgages" in this Supplement.
<PAGE>
[This Page Intentionally Left Blank]
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS MORTGAGE SECURITIES INC.
SELLER
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), which may be sold from time to time in one or more Series on
terms determined at the time of sale and described in the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of
one or more trust funds (each a "Trust Fund"). As specified in the related
Prospectus Supplement, a Trust Fund for a Series of Certificates will include
certain mortgage-related assets (the "Mortgage Assets") consisting of (i) first
lien mortgage loans or partici- pations therein secured by one- to four-family
residential properties ("Single Family Loans"), (ii) first lien mortgage loans
or participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by security
interests or similar liens on shares in cooperative housing corporations and the
related proprietary leases or occupancy agreements ("Cooperative Loans"), (iv)
con- ditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing ("Contracts"), (v)
mortgage pass-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") or other government agencies or government-sponsored agencies or (vi)
privately issued mortgage-backed securities ("Private Mortgage-Backed
Securities"). If specified in the related Prospectus Supplement, certain
Certificates will evidence the entire beneficial ownership interest in a Trust
Fund which will contain a beneficial ownership interest in another Trust Fund
which will contain the Mortgage Assets. The Mortgage Assets will be acquired by
Bear Stearns Mortgage Securities Inc. (the "Seller") from one or more
institutions which may be affiliates of the Seller (each, a "Lender") and
conveyed by the Seller to the related Trust Fund. A Trust Fund also may include
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other assets to the extent
described in the related Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Certificates
of such Series. One or more classes of Certificates of a Series may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other classes of Certificates of such Series or after the
occurrence of specified events or may be required to absorb one or more types of
losses prior to one or more other classes of Certificates, in each case as
specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Certificates of a Series will be made only from the assets of the related Trust
Fund.
The Certificates will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality or by any other person. Unless otherwise
specified in the related Prospectus Supplement, the only obligations of the
Seller with respect to a Series of Certificates will be to obtain certain
representations and warranties from the Lenders or other third parties and to
assign to the trustee (the "Trustee") for the related Series of Certificates the
Seller's rights with respect to such representations and warranties. The
principal obligations of one or more master servicers (each, a "Master
Servicer") named in the Prospectus Supplement with respect to the related Series
of Certificates will be limited to its or their contractual servicing
obligations, including any obligation to advance delinquent payments on the
Mortgage Assets in the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by
the rate of payment of principal (including prepayments) on the Mortgage Assets
in the related Trust Fund and the timing of receipt of such payments as
described herein and in the related Prospectus Supplement. A Trust Fund may be
subject to early termination under the circumstances described herein and in the
related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made
to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences." (cover continued on next page)
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Certificates
of any Series and there can be no assurance that a secondary market for any
Certificates will develop. This Prospectus may not be used to consummate sales
of a Series of Certificates unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. All
Certificates will be distributed by, or sold by underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is October 10, 1996.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series
to be offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates; (ii) the rate of interest (the "Pass-Through Rate") or method of
determining the amount of interest, if any, to be passed through to each such
class; (iii) the aggregate principal amount, if any, relating to each such
class; (iv) the distribution dates (each a "Distribution Date") for interest and
principal payments and, if applicable, the initial and final scheduled
Distribution Dates for each class; (v) if applicable, the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class of
Certificates; (vi) information as to the nature and extent of subordination with
respect to any class of Certificates that is subordinate to any other class;
(vii) information as to the assets comprising the Trust Fund, including the
general characteristics of the Mortgage Assets included therein and, if
applicable, the amount and source of any reserve fund (a "Reserve Account"), and
the insurance, letters of credit, guarantees, or other instruments or agreements
included in the Trust Fund; (viii) the circumstances, if any, under which the
Trust Fund may be subject to early termination; (ix) additional information with
respect to the plan of distribution of such Certificates; (x) whether one or
more REMIC elections will be made and designation of the regular interests and
residual interests; (xi) information as to the Trustee; and (xii) information as
to the Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of Certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street - Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center - 13th Floor, New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, with respect to
a series of Certificates subsequent to the date of this Prospectus and the
related Prospectus Supplement and prior to the termination of the offering of
such series of Certificates shall be deemed to be incorporated by reference in
this Prospectus as supplemented by the related Prospectus Supplement. If so
specified in any such documents, such document shall also be deemed to be
incorporated by reference in the Registration Statement of which this Prospectus
forms a part.
Any statement contained herein or in a Prospectus Supplement for a
series of Certificates or in a document incorporated or deemed to be
incorporated by reference herein or therein shall be deemed to be modified or
superseded for purposes of this Prospectus and such Prospectus Supplement and,
if applicable, the Registration Statement to the extent that a statement
contained herein or therein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein or therein modifies or
supersedes such statement, except to the extent that such subsequently filed
document expressly states otherwise. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or the related Prospectus Supplement or, if
applicable, the Registration Statement.
The Depositor will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, Bear Stearns Mortgage Securities Inc., 245
Park Avenue, New York, New York 10167. Telephone requests for such copies should
be directed to the President at (212) 272-2000.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Certificateholders. See "Description of the
Certificates--Reports to Certificateholders."
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement which will be prepared in connection with each Series of
Certificates.
Title of Securities.................... Mortgage Pass-Through Certificates
(Issuable in Series).
Seller................................. Bear Stearns Mortgage Securities
Inc., a Delaware corporation and
a wholly-owned subsidiary of Bear
Stearns Mortgage Capital
Corporation. See "The Seller."
Trustee................................ The Trustee for each Series of
Certificates will be specified in the
related Prospectus Supplement.
Master Servicer........................ One or more entities named as a Master
Servicer in the related Prospectus
Supplement, which may be an affiliate
of the Seller. See "The Pooling and
Servicing Agreement--Certain Matters
Regarding the Master Servicer and the
Seller."
Trust Fund Assets...................... A Trust Fund for a Series of
Certificates will include the Mortgage
Assets consisting of (i) a pool (a
"Mortgage Pool") of Single Family
Loans, Multifamily Loans, Cooperative
Loans or Contracts (collectively, the
"Mortgage Loans"), (ii) Agency
Securities or (iii) Private Mortgage-
Backed Securities, together with
payments in respect of such Mortgage
Assets and certain other accounts,
obligations or agreements, in each
case as specified in the related
Prospectus Supplement.
A. Single Family, Cooperative
and Multi-family Loans............. Unless otherwise specified in the
related Prospectus Supplement, Single
Family Loans will be secured by
first mortgage liens on one- to
four-family residential properties.
Unless otherwise specified in the
related Prospectus Supplement,
Cooperative Loans will be
secured by security interests
in shares issued by private,
nonprofit, cooperative housing
housing corporations ("Cooperatives")
and in the related proprietary leases
or occupancy agreements granting
exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings. Single Family Loans and
Cooperative Loans may be conventional
loans (i.e., loans that are not
insured or guaranteed by any
governmental agency), insured by the
Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans
Administration ("VA") as specified in
the related Prospectus Supplement.
Unless otherwise specified in the
related Prospectus Supplement, Single
Family Loans and Cooperative Loans
will all have individual principal
balances at origination of not less
than $25,000 and not more than
$1,000,000, and original terms to
stated maturity of 15 to 40 years.
Multifamily Loans will be secured by
first mortgage liens on rental
apartment buildings or projects
containing five or more residential
units, including apartment buildings
owned by Cooperatives. Such loans may
be conventional loans or insured by
the FHA, as specified in the related
Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, Multifamily
Loans will all have individual
principal balances at origination of
not less than $25,000 and original
terms to stated maturity of not more
than 40 years.
The payment terms of the Mortgage
Loans to be included in a Trust Fund
will be described in the related
Prospectus Supplement and may include
any of the following features or
combinations thereof or other features
described in the related Prospectus
Supplement:
(a) Interest may be payable t a fixed
rate, a rate adjustable from time
to time in relation to an index, a
rate that is fixed for a period of
time or under certain
circumstances and is followed by
an adjustable rate, a rate that
otherwise varies from time to
time, or a rate that is
convertible from an adjustable
rate to a fixed rate. Changes to
an adjustable rate may be subject
to periodic limitations, maximum
rates, minimum rates or a
combination of such limitations.
Accrued interest may be deferred
and added to the principal of a
Mortgage Loan for such periods and
under such circumstances as may be
specified in the related
Prospectus Supplement. Mortgage
Loans may provide for the payment
of interest at a rate lower than
the specified interest rate on the
Mortgage Loan (the "Mortgage
Rate") for a period of time or for
the life of the Mortgage Loan, and
the amount of any difference may
be contributed from funds supplied
by the seller of the Mortgaged
Property or another source
("Buydown Loans") or may be
treated as accrued interest and
added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a
level debt service basis to fully
amortize, the Mortgage Loan over
its term, may be calculated on the
basis of an assumed amortization
schedule that is significantly
longer than the original term to
maturity or on an interest rate
that is different from the
interest rate on the Mortgage Loan
or may not be amortized during all
or a portion of the original term.
Payment of all or a substantial
portion of the principal may be
due on maturity ("balloon"
payments). Principal may include
interest that has has been
deferred and added to the
principal balance of the the
Mortgage Loan.
(c) Payments of principal and interest
may be fixed for the life of the
Mortgage Loan, may increase over a
specified period of time or may or
may change from period to period.
Mortgage Loans may include limits
on periodic increases or decreases
in the amount of monthly payments
and may include maximum or minimum
amounts of monthly payments.
(d) Prepayments of principal may be
subject to a prepayment fee, which
may be fixed for the life of the
Mortgage Loan or may decline over
time, and may be prohibited for
the life of the Mortgage Loan or
for certain periods ("lockout
periods"). Certain Mortgage
Loans may permit prepayments after
expiration of the applicable
lockout period and may require the
payment of a prepayment fee in
connection with any such
subsequent prepayment. Other
Mortgage Loans may permit
prepayments without payment of a
fee unless the prepayment occurs
during specified time periods.
The Mortgage Loans may include
due-on-sale clauses which permit
the mortgagee to demand payment of
the entire Mortgage Loan in
connection with the sale or
certain transfers of the related
Mortgaged Property. Other
Mortgage Loans may be assumable
by persons meeting the then
applicable underwriting standards
of the Lender.
Certain Mortgage Loans may be
originated or acquired in
connection with employee
relocation programs. The real
property constituting security for
repayment of a Mortgage Loan may
be located in any one of the fifty
states or the District of
Columbia. Unless otherwise
specified in the related
Prospectus Supplement, all of the
Mortgage Loans will be covered by
standard hazard insurance policies
insuring against losses due to
fire and various other causes. The
Mortgage Loans will be covered by
primary mortgage insurance
policies to the extent provided in
the related Prospectus Supplement.
All Mortgage Loans will have been
purchased by the Seller, either
directly or through an affiliate,
from Lenders.
B. Contracts............................... Contracts will consist of
conditional sales and
installment sales or loan
agreements secured by new or
used Manufactured Homes (as
defined herein). Contracts
may be conventional loans,
insured by the FHA or
partially guaranteed by the
VA, as specified in the
related Prospectus
Supplement. Unless otherwise
specified in the related
Prospectus Supplement, each
Contract will be fully amortizing
and will bear interest at a fixed
accrual percentage rate
("APR"). Unless otherwise
specified in the related
Prospectus Supplement,
Contracts will all have
individual principal balances
at origination of not less
than $10,000 and not more
than $1,000,000 and original
terms to stated maturity of 5 to
30 years.
C. Agency Securities....................... The Agency Securities will
consist of (i) fully modified
pass-through mortgage-backed
certificates guaranteed as to
timely payment of principal
and interest by the
Government National Mortgage
Association ("GNMA Certificates"),
(ii) Guaranteed Mortgage
Pass-Through Certificates
issued and guaranteed as to
timely payment of principal
and interest by the Federal
National Mortgage Association
("FNMA Certificates"), (iii)
Mortgage Participation
Certificates issued and
guaranteed as to timely
payment of interest and,
unless otherwise specified in
the related Prospectus
Supplement, ultimate payment
of principal by the Federal
Home Loan Mortgage
Corporation ("FHLMC
Certificates"), (iv) stripped
mortgage-backed securities
representing an undivided
interest in all or a part of
either the principal
distributions (but not the
interest distributions) or
the interest distributions (but
not the principal
distributions) or in some
specified portion of the
principal and interest
distributions (but not all of
such distributions) on
certain GNMA, FNMA, FHLMC or other
government agency or
government-sponsored agency
Certificates and, unless
otherwise specified in the
Prospectus Supplement,
guaranteed to the same extent
as the underlying securities,
(v) another type of guaranteed
pass-through certificate
issued or guaranteed by GNMA,
FNMA, FHLMC or another
government agency or
government-sponsored agency
and described in the related
Prospectus Supplement, or
(vi) a combination of such Agency
Securities. All GNMA
Certificates will be backed
by the full faith and credit of
the United States. No FNMA
or FHLMC Certificates will be
backed, directly or indirectly,
by the full faith and credit of
the United States. The Agency
Securities may consist of pass-
through securities issued under
the GNMA I Program, the GNMA II
Program, FHLMC's Cash or
Guarantor Program or another
program specified in the
Prospectus Supplement. The
payment characteristics of
the Mortgage Loans underlying
the Agency Securities will be
described in the related
Prospectus Supplement.
D. Private Mortgage-Backed
Securities................................Private Mortgage-Backed
Securities may include (i)
mortgage participations or
pass-through certificates
representing beneficial interests
in certain Mortgage Loans or (ii)
Collateralized Mortgage
Obligations ("CMOs") secured
by such Mortgage Loans. Private
MortgageBacked Securities may
include stripped mortgage-backed
securities representing an
undivided interest in all or a
part of any of the principal
distributions (but not the
interest distributions) or
the interest distributions (but
not the principal distributions)
or in some specified portion of
the principal and interest
distributions (but not all of such
distributions) on certain mortgage
loans. Although individual
Mortgage Loans underlying a
Private Mortgage-Backed Security
may be insured or guaranteed by
the United States or an agency or
instrumentality thereof, they need
not be, and the Private
Mortgage-Backed Securities
themselves will not be so insured
or guaranteed. See "The Trust
Fund--Private Mortgage-Backed
Securities." Unless otherwise
specified in the Prospectus
Supplement relating to a Series of
Certificates, payments on the
Private Mortgage-Backed Securities
will be distributed directly to
the Trustee as registered owner of
such Private Mortgage-Backed
Securities. See "The Trust
Fund--Private Mortgage-Backed
Securities."
The related Prospectus Supplement
for a Series will specify (i) the
aggregate approximate principal
amount and type of any Private
Mortgage-Backed Securities to be
included in the Trust Fund for
such Series; (ii) certain
characteristics of the Mortgage
Loans which comprise the
underlying assets for the
Private Mortgage-Backed
Securities including to the
extent available (A) the
payment features of such Mortgage
Loans, (B) the approximate
aggregate principal amount, if
known, of the underlying Mortgage
Loans which are insured or
guaranteed by a governmental
entity, (C) the servicing fee
or range of servicing fees
with respect to the Mortgage
Loans, and (D) the minimum
and maximum stated maturities of
the Mortgage Loans at origination;
(iii) the maximum original term-
to-stated maturity of the Private
Mortgage-Backed Securities;
(iv) the weighted average
term-to-stated maturity of
the Private Mortgage-Backed
Securities; (v) the pass-through
or certificate rate or ranges
thereof for the Private Mortgage-
Backed Securities; (vi) the
weighted average pass-through or
certificate rate of the
Private Mortgage-Backed
Securities; (vii) the issuer
of the Private Mortgage-Backed
Securities (the "PMBS Issuer"),
the servicer of the Private
Mortgage-Backed Securities (the
"PMBS Servicer") and the trustee
of the Private Mortgage-Backed
Securities (the "PMBS Trustee");
(viii) certain characteristics of
credit support, if any, such as
reserve funds, insurance policies,
letters of credit, financial
guaranty insurance policies or
third party guarantees, relating
to the Mortgage Loans underlying
the Private Mortgage-Backed
Securities, or to such Private
Mortgage-Backed Securities
themselves; (ix) the terms on
which underlying Mortgage
Loans for such Private
Mortgage-Backed Securities
may, or are required to, be
repurchased prior to stated
maturity; and (x) the terms
on which substitute Mortgage
Loans may be delivered to
replace those initially
deposited with the PMBS
Trustee. See "The Trust Fund."
E. Pre-Funding and
Capitalized Interest
Accounts................................ If specified in the related
Prospectus Supplement, a
Trust Fund will include one or
more segregated trust accounts
(each, a "Pre-Funding Account")
established and maintained with
the Trustee for the related
Series. If so specified, on the
closing date for such Series, a
portion of the proceeds of the
sale of the Certificates of
such Series (such amount, the
"Pre-Funded Amount") will be
deposited in the Pre-Funding
Account and may be used to
purchase additional Primary
Assets during the period of time,
not to exceed six months,
specified in the related
Prospectus Supplement (the
"Pre-Funding Period"). The
Primary Assets to be so purchased
will be required to have certain
characteristics specified in the
related Prospectus Supplement. If
any Pre-Funded Amount remains on
deposit in the Pre-Funding
Account at the end of the Pre-
Funding Period, such amount will
be applied in the manner specified
in the related Prospectus
Supplement to prepay the
Certificates of the applicable
Series. The amount initially
deposited in a pre-funding
account for a Series of
Certificates will not exceed fifty
percent of the aggregate principal
amount of such Series of
Certificates.
If a Pre-Funding Account is
established, one or more
segregated trust accounts (each, a
"Capitalized Interest Account")
may be established and maintained
with the Trustee for the related
Series. On the closing date for
such Series, a portion of the
proceeds of the sale of the
Certificates of such Series will
be deposited in the Capitalized
Interest Account and used to fund
the excess, if any, of (x) the sum
of (i) the amount of interest
accrued on the Certificates of
such Series and (ii) if specified
in the related Prospectus
Supplement, certain fees or
expenses during the Pre-Funding
Period such as trustee fees and
credit enhancement fees, over (y)
the amount of interest available
therefor from the Primary Assets
in the Trust Fund. Any amounts on
deposit in the Capitalized
Interest Account at the end of the
Pre-Funding Period that are not
necessary for such purposes will
be distributed to the person
specified in the related
Prospectus Supplement.
Description of the
Certificates............................. Each Certificate will represent a
beneficial ownership interest in
a Trust Fund created by the Seller
pursuant to a Pooling and
Servicing Agreement (each, an
"Agreement") among the Seller, the
Master Servicer(s) and the Trustee
for the related Series. The
Certificates of any Series may be
issued in one or more classes as
specified in the related
Prospectus Supplement. A Series of
Certificates may include one or
more classes of senior
Certificates (collectively, the
"Senior Certificates") which
receive certain preferential
treatment specified in the related
Prospectus Supplement with
respect to one or more classes of
subordinate Certificates
(collectively, the "Subordinated
Certificates"). Certain Series or
classes of Certificates may be
covered by insurance policies,
cash accounts, letters of credit,
financial guaranty insurance
policies, third party guarantees
or other forms of credit
enhancement as described herein
and in the related Prospectus
Supplement.
One or more classes of
Certificates of each Series (i)
may be entitled to receive
distributions allocable only to
principal, only to interest or to
any combination thereof; (ii) may
be entitled to receive
distributions only of prepayments
of principal throughout the lives
of the Certificates or during
specified periods; (iii) may be
subordinated in the right to
receive distributions of scheduled
payments of principal, prepayments
of principal, interest or any
combination thereof to one or more
other classes of Certificates of
such Series throughout the lives
of the Certificates or during
specified periods or may be
subordinated with respect to
certain losses or delinquencies;
(iv) may be entitled to receive
such distributions only after the
occurrence of events specified in
the Prospectus Supplement; (v) may
be entitled to receive
distributions in accordance with a
schedule or formula or on the
basis of collections from
designated portions of the assets
in the related Trust Fund; (vi) as
to Certificates entitled to
distributions allocable to
interest, may be entitled to
receive interest at a fixed rate
or a rate that is subject to
change from time to time; and
(vii) as to Certificates entitled
to distributions allocable to
interest, may be entitled to
distributions allocable to
interest only after the occurrence
of events specified in the
Prospectus Supplement and may
accrue interest until such events
occur, in each case as specified
in the Prospectus Supplement. The
timing and amounts of such
distributions may vary among
classes, over time, or otherwise
as specified in the related
Prospectus Supplement.
Distributions on the
Certificates.............................. Distributions on the
Certificates entitled thereto
will be made monthly,
quarterly, semi-annually or
at such other intervals and on
such other Distribution Dates
specified in the Prospectus
Supplement solely out of the
payments received in respect
of the assets of the related
Trust Fund or other assets
pledged for the benefit of
the Certificates as specified in
the related Prospectus
Supplement. The amount
allocable to payments of
principal and interest on any
Distribution Date will be
determined as specified in
the Prospectus Supplement.
Unless otherwise specified in the
Prospectus Supplement, all
distributions will be made
pro rata to Certificateholders
of the class entitled thereto,
and the aggregate original
principal balance of the
Certificates will equal the
aggregate distributions
allocable to principal that
such Certificates will be
entitled to receive. If
specified in the Prospectus
Supplement, the Certificates
will have an aggregate
original principal balance
equal to the aggregate unpaid
principal balance of the
Mortgage Assets as of a date
specified in the related
Prospectus Supplement related
to the creation of the Trust
Fund (the "Cut-off Date") and
will bear interest in the
aggregate at a rate equal to
the interest rate borne by
the underlying Mortgage Loans,
Agency Securities or Private
Mortgage-Backed Securities,
net of the aggregate
servicing fees and any other
amounts specified in the
Prospectus Supplement. If
specified in the Prospectus
Supplement, the aggregate original
principal balance of the
Certificates and interest rates
on the classes of Certificates
will be determined based on the
cash flow on the Mortgage
Assets. The Pass-Through
Rate at which interest will be
passed through to holders of
Certificates entitled thereto
may be a fixed rate or a rate
that is subject to change
from time to time from the time
and for the periods, in each
case as specified in the
Prospectus Supplement. Any
such rate may be calculated
on a loan-by-loan, weighted
average or other basis, in
each case as described in the
Prospectus Supplement.
Credit Enhancement ......................... The assets in a Trust Fund or
the Certificates of one or
more classes in the related
Series may have the benefit
of one or more types of credit
enhancement described in the
related Prospectus Supplement.
The protection against losses
afforded by any such credit
support will be limited. Such
credit enhancement may include
one or more of the following
types:
A. Subordination.......................... The rights of the holders of
the Subordinated Certificates
of a Series to receive
distributions with respect to
the assets in the related
Trust Fund will be
subordinated to such rights
of the holders of the Senior
Certificates of the same
Series to the extent
described in the related Prospectus
Supplement. This subordination
is intended to enhance the
likelihood of regular receipt
by holders of Senior
Certificates of the full
amount of payments which such
holders would be entitled to
receive if there had been no
losses or delinquencies. The
protection afforded to the
holders of Senior Certificates
of a Series by means of the
subordination feature may be
accomplished by (i) the
preferential right of such
holders to receive, prior to
any distribution being made
in respect of the related
Subordinated Certificates,
the amounts of principal and
interest due them on each
Distribution Date out of the
funds available for
distribution on such date in
the related Certificate
Account and, to the extent
described in the related
Prospectus Supplement, by the
right of such holders to
receive future distributions
on the assets in the related
Trust Fund that would
otherwise have been payable
to the Subordinated
Certificateholders;
(ii) reducing the ownership
interest of the related
subordinated Certificates;
(iii) a combination of
clauses (i) and (ii) above; or (iv)
as otherwise described in the
related Prospectus
Supplement. The protection
afforded to the holders of
Senior Certificates of a
Series by means of the
subordination feature also
may be accomplished by allocating
certain types of losses or
delinquencies to the
Subordinated Certificates to
the extent described in the
related Prospectus
Supplement.
If so specified in the related
Prospectus Supplement, the same
class of Certificates may be Senior
Certificates with respect to
certain types of payments or
certain types of losses or
delinquencies and Subordinated
Certificates with respect to other
types of payments or types of
losses or delinquencies. If so
specified in the related Prospectus
Supplement, subordination may apply
only in the event of certain types
of losses not covered by other
forms of credit support, such as
hazard losses not covered by
standard hazard insurance policies
or losses due to the bankruptcy of
the borrower. If specified in the
Prospectus Supplement, a reserve
fund may be established and
maintained by the deposit therein
of distributions allocable to the
holders of Subordinated
Certificates until a specified
level is reached. The related
Prospectus Supplement will set
forth information concerning the
amount of subordination of a class
or classes of Subordinated
Certificates in a Series, the
circumstances in which such
subordination will be applicable,
the manner, if any, in which the
amount of subordination will
decrease over time, the manner of
funding the related reserve fund,
if any, and the conditions under
which amounts in any such reserve
fund will be used to make
distributions to holders of Senior
Certificates or released from the
related Trust Fund.
B. Reserve Accounts....................... One or more Reserve Accounts
may be established and
maintained for each Series.
The related Prospectus
Supplement will specify
whether or not any such
Reserve Account will be
included in the corpus of the
Trust Fund for such Series
and will also specify the manner
of funding the related
Reserve Account and the conditions
under which the amounts in
any such Reserve Account will be
used to make distributions to
holders of Certificates of a
particular class or released
from the related Trust Fund.
C. Pool Insurance Policy.................. A mortgage pool insurance
policy or policies (the "Pool
Insurance Policy") may be
obtained and maintained for
each Series pertaining to
Single Family Loans,
Cooperative Loans or
Contracts, limited in scope,
covering defaults on the
related Single Family Loans,
Cooperative Loans or Contracts
in an initial amount equal
to a specified percentage of
the aggregate principal balance
of all Single Family Loans,
Cooperative Loans or
Contracts included in the Mortgage
Pool as of the Cut-off Date or
such other date as is
specified in the related
Prospectus Supplement.
D. Special Hazard Insurance
Policy................................. In the case of Single Family
Loans, Cooperative Loans or
Contracts, certain physical
risks that are not otherwise
insured against by standard
hazard insurance policies may
be covered by a special
hazard insurance policy or policies
(the "Special Hazard Insurance
Policy"). Unless otherwise
specified in the related
Prospectus Supplement, each
Special Hazard Insurance
Policy will be limited in
scope and will cover losses in an
initial amount equal to the
greatest of (i) a specified
percentage of the aggregate
principal balance of the Single
Family Loans, Cooperative Loans
or Contracts as of the related
Cut-off Date, (ii) twice the unpaid
principal balance as of the related
Cut-off Date of the largest Single
Family Loan, Cooperative Loan
or Contract in the related Mortgage
Pool, or (iii) the aggregate
principal balance of Single Family
Loans, Cooperative Loans or
Contracts as of the Cut-off
Date secured by property in any
single zip code concentration.
E. Bankruptcy Bond........................ A bankruptcy bond or bonds
(the "Bankruptcy Bond") may
be obtained covering certain
losses resulting from action
which may be taken by a
bankruptcy court in connection
with a Single Family Loan,
Cooperative Loan or Contract.
The level of coverage of each
Bankruptcy Bond will be
specified in the related
Prospectus Supplement.
Certain Federal Income Tax
Consequences. . . . . . . . . ........... The federal income tax
consequences of the purchase,
ownership and disposition of
the Certificates of each
series will depend on whether
an election is made to treat
the corresponding Trust Fund
(or certain assets of the
Trust Fund) as a "real estate
mortgage investment conduit"
("REMIC") under the Internal
Revenue Code of 1986, as
amended (the "Code").
REMIC. If an election is to be made
to treat the Trust Fund for a series
of Certificates as a REMIC for
federal income tax purposes, the
related Prospectus Supplement will
specify which class or classes
thereof will be designated as regular
interests in the REMIC ("REMIC
Regular Certificates") and which
class of Certificates will be
designated as the residual interest
in the REMIC ("REMIC Residual
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
Certifi- cates will be includible in
the income of the Holders thereof as
it accrues, in advance of receipt of
the cash attributable thereto, which
rate of accrual will be determined
based on a 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")
gener- ally may not be offset by such
a holder's net operating loss
carryovers or other deduc- tions, and
in the case of a tax-exempt holder of
a REMIC Residual Certificate will be
treated as "unrelated business
taxable income". In certain
situations, particularly in the early
years of a REMIC, holders of a REMIC
Residual Certificate may have taxable
income, and possibly tax liabilities
with respect to such income, in
excess of cash distributed to them.
"DISQUALIFIED ORGANIZATIONS", AS
DEFINED IN "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES--REMIC RESIDUAL
CERTIFICATES--TAX ON DISPOSITION OF
REMIC RESIDUAL CERTIFICATES;
RESTRICTION ON TRANSFER; HOLDING BY
PASS- THROUGH ENTITIES," ARE
PROHIBITED FROM ACQUIRING OR HOLDING
ANY BENEFICIAL INTEREST IN THE REMIC
RESIDUAL CERTIFICATES. In certain
cases, a transfer of a REMIC Residual
Certificate will not be effective for
Federal income tax purposes. See
"Certain Federal Income Tax
Consequences-Transfers of REMIC
Residual Certificates" and "-Foreign
Investors" herein.
GRANTOR TRUST. If no election is to
be made to treat the Trust Fund for a
series of Certificates ("Non-REMIC
Certificates") as a REMIC, the Trust
Fund will be classified as a grantor
trust for federal income tax purposes
and not as an association taxable as
a corporation. Holders of Non- REMIC
Certificates will be treated for such
purposes, subject to the possible
application of the stripped bond
rules, as owners of undivided
interests in the related Mortgage
Loans and generally will be required
to report as income their pro rata
share of the entire gross income
(including amounts paid as reasonable
servicing compensation) from the
Mortgage Loan and will be entitled,
subject to certain limitations, to
deduct their pro rata share of
expenses of the Trust Fund.
Investors are advised to consult
their tax advisors and to review
"Certain Federal Income Tax
Consequences" herein and, if
applicable, in the related Prospectus
Supplement.
ERISA Considerations . . . . . .......... A fiduciary of any employee
benefit plan or other
retirement plan or
arrangement subject to the Employee
Retirement Income Security
Act of 1974, as amended
("ERISA"), or Section 4975 of
the Code should carefully
review with its legal
advisors whether the purchase,
holding or disposition of
Certificates could give rise
to a prohibited transaction
under ERISA or the Code or
subject the assets of the
Trust Fund to the fiduciary
investment standards of
ERISA. See "ERISA
Considerations."
<PAGE>
THE TRUST FUND
A Trust Fund for a Series of Certificates will include the Mortgage Assets
consisting of (A) a Mortgage Pool* comprised of (i) Single Family Loans, (ii)
Multifamily Loans, (iii) Cooperative Loans or (iv) Contracts, (B) Agency
Securities, or (C) Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
*
Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interest, as described below, in a single Trust Fund
consisting primarily of the Mortgage Loans in such Mortgage Pool. Similarly, the
term "Pass-Through Rate" will refer to the Pass-Through Rate borne by the
Certificates of one specific Series and the term "Trust Fund" will refer to one
specific Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire beneficial
ownership interest in a Trust Fund which will contain a beneficial ownership
interest in another Trust Fund which will contain the Mortgage Assets. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Assets of
any Trust Fund will consist of Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities but not a combination thereof.
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from the Lenders and conveyed by the Seller to the related
Trust Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program--Underwriting Standards."
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series will be attached to the Agreement
delivered to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS--GENERAL
The real property and Manufactured Homes, as the case may be, which secure
repayment of the Mortgage Loans (the "Mortgaged Properties") may be located in
any one of the fifty states or the District of Columbia, Guam, Puerto Rico or
any other territory of the United States. Certain Mortgage Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the Prospectus Supplement and described below. Mortgage Loans with
certain Loan-to-Value Ratios (as defined herein) and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
or bi-weekly. Unless otherwise specified in the related Prospectus Supplement,
all of the monthly-pay Mortgage Loans in a Mortgage Pool will have payments due
on the first day of each month. The payment terms of the Mortgage Loans to be
included in a Trust Fund will be described in the related Prospectus Supplement
and may include any of the following features or combination thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for
period of time or under certain circumstances and is followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the Mortgage
Rate for a period of time or for the life of the Mortgage Loan, and the
amount of any difference may be contributed from funds supplied by the
seller of the Mortgaged Property or another source or may be treated as
accrued interest added to the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments. Certain Mortgage Loans sometimes called graduated payment
mortgage loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of a portion of the interest due monthly during such period,
and recoup the deferred interest through negative amortization whereby
the difference between the scheduled payment of interest and the amount
of interest actually accrued is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
growing equity mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal. Other Mortgage Loans sometimes
referred to as reverse mortgages may provide for monthly payments to
the borrowers with interest and principal payable when the borrowers
move or die. Reverse mortgages typically are made to older persons who
have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers
of the related Mortgaged Property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards
of the Lender.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the Seller,
with respect to the Mortgage Loans contained in the related Mortgage Pool,
including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., one- to
four-family houses, vacation and second homes, Manufactured Homes, multifamily
apartments or other real property), (iii) the original terms to maturity of the
Mortgage Loans, (iv) the largest original principal balance and the smallest
original principal balance of any of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of any of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the Mortgage Rates or APR's or range of
Mortgage Rates or APR's borne by the Mortgage Loans, and (viii) the geographical
distribution of the Mortgage Loans on a state-by-state basis. If specific
information respecting the Mortgage Loans is not known to the Seller at the time
the related Certificates are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, the "Collateral
Value" of a Mortgaged Property, other than with respect to Contracts and certain
Mortgage Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "Refinance Loan"), is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
Mortgage Loan and (b) the sales price for such property. Unless otherwise
specified in the related Prospectus Supplement, in the case of Refinance Loans,
the Collateral Value of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Collateral Value is no greater than the sum of a fixed percentage of
the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. Unless otherwise
specified in the related Prospectus Supplement, the Collateral Value of a used
Manufactured Home is the least of the sales price, appraised value, and National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building resulting
in an oversupply of rental housing stock or a decrease in employment reducing
the demand for rental units in an area; federal, state or local regulations and
controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness to tenants of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the holders of the Certificates of the related Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Pooling and Servicing Agreement." With respect to Mortgage Loans
serviced by a Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Seller with respect to a Series of Certificates will be to
obtain certain representations and warranties from the Lenders or other third
parties and to assign to the Trustee for such Series of Certificates the
Seller's rights with respect to such representations and warranties. See "The
Pooling and Servicing Agreement--Assignment of Mortgage Assets." The obligations
of each Master Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Agreement
(including its obligation to enforce the obligations of the Sub-Servicers,
Lenders or other third parties as more fully described herein under "Mortgage
Loan Program -- Representations by Lenders; Repurchases" and "The Pooling and
Servicing Agreement--Sub-Servicing by Lenders," "--Assignment of Mortgage
Assets") and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Certificates--Advances." The
obligations of a Master Servicer to make advances may be subject to limitations,
to the extent provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, the Single Family Loans may include
loans or participations therein secured by mortgages or deeds of trust on
condominium units in condominium buildings together with such condominium unit's
appurtenant interest in the common elements of the condominium building. Unless
otherwise specified, the Cooperative Loans will be secured by security interests
in or similar liens on stock, shares or membership certificates issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. Single Family Loans and Cooperative Loans may be
conventional loans (i.e., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, Single Family Loans and Cooperative Loans
will all have individual principal balances at origination of not less than
$25,000 and not more than $1,000,000, and original terms to stated maturity of
15 to 40 years.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. Such loans may be conventional loans or FHA-insured loans, as specified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Multifamily Loans will all have original terms to stated
maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by Cooperatives. The Cooperative owns all the
apartment units in the building and all common areas. The Cooperative is owned
by tenant-stockholders who, through ownership of stock, shares or membership
certificates in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific apartments or units.
Generally, a tenantstockholder of a Cooperative must make a monthly payment to
the Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its mortgage loan, real property taxes, maintenance
expenses and other capital or ordinary expenses. Those payments are in addition
to any payments of principal and interest the tenant-stockholder must make on
any loans to the tenant-stockholder secured by its shares in the Cooperative.
The Cooperative will be directly responsible for building management and, in
most cases, payment of real estate taxes and hazard and liability insurance. A
Cooperative's ability to meet debt service obligations on a Multifamily Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR. Unless
otherwise specified in the related Prospectus Supplement, Contracts will all
have individual principal balances at origination of not less than $10,000 and
not more than $1,000,000 and original terms to stated maturity of 5 to 40 years.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust Fund, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related Trust Fund; and the original maturities of
the Contracts and the last maturity date of any Contract.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States with the United States Department of
Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by FHA under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform its
obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may be
issued under either the GNMA I Program or the GNMA II Program) will be a "fully
modified pass-through" mortgaged-backed certificate issued and serviced by a
mortgage banking company or other financial concern ("GNMA Issuer") approved by
GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The
mortgage loans underlying the GNMA Certificates will consist of FHA Loans and/or
VA Loans. Each such mortgage loan is secured by a one- to four-family
residential property or a manufactured home. GNMA will approve the issuance of
each such GNMA Certificate in accordance with a guaranty agreement (a "Guaranty
Agreement") between GNMA and the GNMA Issuer. Pursuant to its Guaranty
Agreement, a GNMA Issuer will be required to advance its own funds in order to
make timely payments of all amounts due on each such GNMA Certificate, even if
the payments received by the GNMA Issuer on the FHA Loans or VA Loans underlying
each such GNMA Certificate are less than the amounts due on each such GNMA
Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties or manufactured homes and will provide for the payment by
or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or Buydown Loans. No statistics comparable
to the FHA's prepayment experience on level payment, non-buydown loans are
available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
The GNMA Certificates included in a Trust fund, and the related underlying
mortgage loans, may have characteristics and terms different from those
described above. Any such different characteristics and terms will be described
in the related Prospectus Supplement.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholderowned and
privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than in its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the Prospectus Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related underlying
mortgage loans, may have characteristics and terms different from those
described above. Any such different characteristics and terms will be described
in the related Prospectus Supplement.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 30 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group. Under the Guarantor Program, any
such FHLMC Certificate group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a Series of Certificates, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor, published
in the month preceding the month of distribution and the pool factor published
in such month of distribution. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans underlying
a FHLMC Certificate may exceed the pass-through rate on the FHLMC Certificate by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
interest rate of the mortgage loans and participations purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a FHLMC Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a FHLMC Certificate group based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans. Under FHLMC's Guarantor Program,
the pass-through rate on a FHLMC Certificate is established based upon the
lowest interest rate on the underlying mortgage loans, minus a minimum servicing
fee and the amount of FHLMC's management and guaranty income as agreed upon
between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or governmentsponsored agency, each as trustee, or
by another trustee named in the related Prospectus Supplement. FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of Mortgage
Loans, or (b) collateralized mortgage obligations secured by Mortgage Loans.
Private Mortgage-Backed Securities will have been issued pursuant to a PMBS
agreement (the "PMBS Agreement"). The seller/servicer of the underlying Mortgage
Loans will have entered into the PMBS Agreement with the PMBS Trustee under the
PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
Mortgage Loans underlying such Private Mortgage-Backed Security. Mortgage Loans
underlying a Private Mortgage-Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub- servicers who may be subject to the
supervision of the PMBS Servicer. Unless otherwise described in the Prospectus
Supplement, the PMBS Servicer will be a FNMA or FHLMC approved servicer and, if
FHA Loans underlie the Private Mortgage-Backed Securities, approved by the
Department of Housing and Urban Development ("HUD") as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Seller. The obligations of the PMBS Issuer will generally be limited to
certain representations and warranties with respect to the assets conveyed by it
to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the Mortgage Loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such Mortgage Loans
may be secured by single family property, multifamily property, Manufactured
Homes or by an assignment of the proprietary lease or occupancy agreement
relating to a specific dwelling within a Cooperative and the related shares
issued by such Cooperative. Except as otherwise specified in the related
Prospectus Supplement, (i) no Mortgage Loan will have had a Loanto-Value Ratio
at origination in excess of 95%, (ii) each Single Family Loan secured by a
Mortgaged Property having a Loan-toValue Ratio in excess of 80% at origination
will be covered by a primary mortgage insurance policy until the principal
balance is reduced to 80%, (iii) each Mortgage Loan will have had an original
term to stated maturity of not less than 5 years and not more than 40 years,
(iv) no Mortgage Loan that was more than 30 days delinquent more than once in
the past 12 months and will not be delinquent as of the Cut-off Date as to the
payment of principal or interest will have been eligible for inclusion in the
assets under the related PMBS Agreement, (v) each Mortgage Loan (other than a
Cooperative Loan) will be required to be covered by a standard hazard insurance
policy (which may be a blanket policy), and (vi) each Mortgage Loan (other than
a Cooperative Loan or a Contract secured by a Manufactured Home) will be covered
by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify (i) the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of the
Mortgage Loans which comprise the underlying assets for the Private
Mortgage-Backed Securities including to the extent available (A) the payment
features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, and (D) the minimum and maximum stated maturities
of the underlying Mortgage Loans at origination, (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities, (iv) the
weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Mortgage Loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying Mortgage Loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which Mortgage Loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee to
be incomplete. The period during which such substitution will be permitted
generally will be indicated in the related Prospectus Supplement. The related
Prospectus Supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the Trust
Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the sale of
the Certificates of each Series to repay short-term loans incurred to finance
the purchase of the Mortgage Assets related to such Certificates, to acquire
certain of the Mortgage Assets to be deposited in the related trust Fund, and/or
to pay other expenses connected with pooling Mortgage Assets and issuing
Certificates. Any amounts remaining after such payments may be used for general
corporate purposes. The Seller expects to sell Certificates in Series from time
to time.
THE SELLER
Bear Stearns Mortgage Securities Inc., the Seller, is a Delaware
corporation organized on October 17, 1991 for the purpose of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller maintains
its principal office at 245 Park Avenue, New York, New York 10167. Its telephone
number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Seller, either directly
or through affiliates, from Lenders. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans so acquired by the Seller will have
been originated in accordance with the underwriting criteria specified below
under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Seller or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders or
manufactured home lenders generally during the period of origination. As to any
Mortgage Loan insured by the FHA or partially guaranteed by the VA, the Lender
will represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Mortgaged Property as collateral. In general, a prospective borrower
applying for a Single Family Loan or a Cooperative Loan or for financing secured
by a Manufactured Home is required to fill out a detailed application designed
to provide to the underwriting officer pertinent credit information. As part of
the description of the borrower's financial condition, the borrower generally is
required to provide a current list of assets and liabilities and a statement of
income and expenses, as well as an authorization to apply for a credit report
which summarizes the borrower's credit history with local merchants and lenders
and any record of bankruptcy. In most cases, an employment verification is
obtained from an independent source (typically the borrower's employer) which
verification reports the length of employment with that organization, the
current salary, and whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts. Underwriting
standards which pertain to the creditworthiness of borrowers seeking Multifamily
Loans will be described in the related Prospectus Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to Cooperative Loans, the appraisal is based
on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a comparable
Manufactured Home. With respect to a Multifamily Loan, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis, was
used. An appraisal employing the income approach to value analyzes a multifamily
project's cashflow, expenses, capitalization and other operational information
in determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts, once
all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a leasehold
interest in a real property, the title to which is held by a third party lessor,
the Lender will represent and warrant, among other things, that the remaining
term of the lease and any sublease is at least five years longer than the
remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase.
QUALIFICATIONS OF LENDERS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will be required to satisfy the qualifications set forth herein. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Unless otherwise
specified in the Prospectus Supplement, each Lender must be a seller/servicer
approved by either FNMA or FHLMC, and each Lender must be a mortgagee approved
by the HUD or an institution the deposit accounts in which are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or
Agreement, each Lender will have made representations and warranties in respect
of the Mortgage Loans sold by such Lender and evidenced by a Series of
Certificates. Such representations and warranties generally include, among other
things: (i) that title insurance (or in the case of Mortgaged Properties located
in areas where such policies are generally not available, an attorney's
certificate of title) in the case of Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first lien on, or a perfected security interest with respect
to, the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Mortgaged Property was free from damage and was in good
repair; (iv) that there were no delinquent tax or assessment liens against the
Mortgaged Property, (v) that no required payment on a Mortgage Loan was more
than thirty days delinquent; and (vi) that each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable state and federal laws
and regulations in all material respects.
Unless otherwise specified in the related Prospectus Supplement, all of the
representations and warranties of a Lender in respect of a Mortgage Loan will
have been made as of the date on which such Lender sold the Mortgage Loan to the
Seller or one of its affiliates. A substantial period of time may have elapsed
between such date and the date of initial issuance of the Series of Certificates
evidencing an interest in such Mortgage Loan. Since the representations and
warranties of a Lender do not address events that may occur following the sale
of a Mortgage Loan by such Lender, its repurchase obligation described below
will not arise if the relevant event that would otherwise have given rise to
such an obligation with respect to a Mortgage Loan occurs after the date of sale
of such Mortgage Loan by such Lender to the Seller or its affiliates. If the
Master Servicer is also a Lender with respect to a particular Series, such
representations will be in addition to the representations and warranties, if
any, made by the Master Servicer in its capacity as a Master Servicer.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or the Trustee, if the Master Servicer is the Lender, will promptly
notify the relevant Lender of any breach of any representation or warranty made
by it in respect of a Mortgage Loan which materially and adversely affects the
interests of the Certificateholders in such Mortgage Loan. Unless otherwise
specified in the related Prospectus Supplement, if such Lender cannot cure such
breach within 60 days after notice from the Master Servicer or the Trustee, as
the case may be, then such Lender will be obligated to repurchase such Mortgage
Loan from the Trust Fund at a price (the "Purchase Price") equal to the unpaid
principal balance thereof as of the date of the repurchase plus accrued interest
thereon to the first day of the month following the month of repurchase at the
Mortgage Rate (less any amount payable as related servicing compensation if the
Lender is the Master Servicer) or such other price as may be described in the
related Prospectus Supplement. Except in those cases in which the Master
Servicer is the Lender, the Master Servicer will be required under the
applicable Agreement to enforce this obligation for the benefit of the Trustee
and the holders of the Certificates, following the practices it would employ in
its good faith business judgment were it the owner of such Mortgage Loan. This
repurchase obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by a Lender. Certain
rights of substitution for defective Mortgage Loans may be provided with respect
to a Series in the related Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer is
the Lender) will be obligated to purchase a Mortgage Loan if a Lender defaults
on its obligation to do so, and no assurance can be given that Lenders will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under "The Pooling and Servicing Agreement--Assignment of Mortgage
Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Certificateholders. In such cases, the third party will
be obligated to purchase a Mortgage Loan upon a breach of such representations
and warranties, and the Lender will not be obligated to purchase a Mortgage Loan
if the third party defaults on its obligation to do so.
The Lender and any third party which conveyed the Mortgage Loans to the
Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the Mortgage
Loans. Any arrangements for the assignment of representations and the repurchase
of Mortgage Loans must be acceptable to the Rating Agency rating the related
Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer may,
at its option, purchase from the Trust Fund any Mortgage Loan which is
delinquent in payment by 91 days or more. Any such purchase shall be at such
price as may be described in the related Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the related Cut-off Date, among the Seller, one or more Master Servicers
and the Trustee for the benefit of the holders of the Certificates of such
Series. The provisions of each Agreement will vary depending upon the nature of
the Certificates to be issued thereunder and the nature of the related Trust
Fund. A form of an Agreement is an exhibit to the Registration Statement of
which this Prospectus is a part. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Certificates will describe any provision of the Agreement relating to
such Series that materially differs from the description thereof contained in
this Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Seller will provide a copy of the Agreement (without exhibits)
relating to any Series without charge upon written request of a holder of a
Certificate of such Series addressed to Bear Stearns Mortgage Securities Inc.,
245 Park Avenue, New York, New York 10167.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in fully registered form only, in the
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the Mortgage Assets included in any other Trust Fund established by the Seller.
The Certificates will not represent obligations of the Seller or any affiliate
of the Seller. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the Prospectus
Supplement ("Retained Interest")), (ii) such assets as from time to time are
required to be deposited in the related Protected Account, Certificate Account
or any other accounts established pursuant to the Agreement (collectively, the
"Accounts"); (iii) property which secured a Mortgage Loan and which is acquired
on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure and (iv) any Primary Insurance Policies, FHA insurance (the "FHA
Insurance"), VA guarantees (the "VA Guarantees"), other insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may include one or more of the following: reinvestment income on payments
received on the Mortgage Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a financial guaranty insurance policy, third party guarantees
or similar instruments or other agreements. If provided in the related
Agreement, a certificate administrator may be obligated to perform certain
duties in connection with the administration of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that receive certain preferential
treatment with respect to one or more other classes of Certificates of such
Series. Certain Series or classes of Certificates may he covered by insurance
policies or other forms of credit enhancement, in each case as described herein
and in the related Prospectus Supplement. Distributions on one or more classes
of a Series of Certificates may be made prior to one or more other classes,
after the occurrence of specified events, in accordance with a schedule or
formula, on the basis of collections from designated portions of the Mortgage
Assets in the related Trust Fund or on a different basis, in each case, as
specified in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (i.e, monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the Prospectus
Supplement (each, a "Record Date"). Distributions will be made by check or money
order mailed to the persons entitled thereto at the address appearing in the
register maintained for holders of Certificates (the "Certificate Register") or,
if specified in the related Prospectus Supplement, in the case of Certificates
that are of a certain minimum denomination, upon written request by the
Certificateholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee or other person specified in
the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
DISTRIBUTIONS ON CERTIFICATES
General. In general, the method of determining the amount of distributions
on a particular Series of Certificates will depend on the type of credit
support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal and interest on the Certificates will
be made by the Trustee out of, and only to the extent of, funds in the related
Certificate Account, including any funds transferred from any Reserve Account
and funds received as a result of credit enhancement. As between Certificates of
different classes and as between distributions of interest and principal and, if
applicable, between distributions of prepayments of principal and scheduled
payments of principal, distributions made on any Distribution Date will be
applied as specified in the Prospectus Supplement. Unless otherwise specified in
the Prospectus Supplement, distributions to any class of Certificates will be
made pro rata to all Certificateholders of that class.
Available Funds. All distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust
Fund received by the Master Servicer after the Cut-off Date and on or
prior to the day of the month of the related Distribution Date
specified in the Prospectus Supplement (the "Determination Date")
except:
(a) all payments which were due on or before the
Cut-off Date;
(b) all Liquidation Proceeds, all Insurance Proceeds,
all Principal Prepayments (each defined herein) and all
proceeds of any Mortgage Loan purchased by a Lender or any
other entity pursuant to the Agreement that were received
after the prepayment period specified in the Prospectus
Supplement and all related payments of interest representing
interest for any period after such prepayment period;
(c) all scheduled payments of principal and
interest due on a date or dates subsequent to the
first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as
late payments of principal or interest or other amounts
required to be paid by the mortgagors (the "Mortgagors"), but
only to the extent of any unreimbursed advance in respect
thereof made by the Master Servicer (including the related
Sub-Servicers);
(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under "Advances"
below, for advances made by the Master Servicer and advances
made by Sub-Servicers that were deposited into the Certificate
Account, and amounts representing reimbursement for certain
other losses and expenses incurred by the Master Servicer or
the Seller and described below or in the related Agreement;
and
(f) that portion of each collection of interest on a
particular Mortgage Loan in such Trust Fund which represents
servicing compensation payable to the Master Servicer or
Retained Interest which is to be retained from such collection
or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans
purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer
(including Sub-Servicers) as described under "Advances" below and
deposited by it in the Certificate Account; and
(iii) if applicable, amounts withdrawn from a Reserve Account
or received in connection with other credit support.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Current Principal Amount
(defined herein) (or, in the case of Certificates entitled only to distributions
allocable to interest, the aggregate notional principal balance) of each class
of Certificates entitled to interest from the date, at the PassThrough Rate and
for the periods specified in the Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Certificates entitled to interest (other than a class of Certificates
that provides for interest that accrues, but is not currently payable, referred
to hereafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the Prospectus Supplement until the aggregate
Current Principal Amount of the Certificates of such class has been distributed
in full or, in the case of Certificates entitled only to distributions allocable
to interest, until the aggregate notional principal balance of such Certificates
is reduced to zero or for the period of time designated in the Prospectus
Supplement. The original Current Principal Amount of each Certificate will equal
the aggregate distributions allocable to principal to which such Certificate is
entitled. Unless otherwise specified in the Prospectus Supplement, distributions
allocable to interest on each Certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional principal
balance of such Certificate. The notional principal balance of a Certificate
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Current Principal Amount of
such class of Certificates on that Distribution Date. Unless otherwise specified
in the Prospectus Supplement, distributions of interest on each class of Accrual
Certificates will commence only after the occurrence of the events specified in
the Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement, prior to such time, the beneficial ownership interest of such class
of Accrual Certificates in the Trust Fund, as reflected in the aggregate Current
Principal Amount of such class of Accrual Certificates, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Certificates during the preceding interest accrual period but that was
not required to be distributed to such class on such Distribution Date. Any such
class of Accrual Certificates will thereafter accrue interest on its outstanding
Current Principal Amount as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate "Current Principal Amount" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Current Principal Amount of such class of Certificates specified in the
Prospectus Supplement, reduced by all distributions and losses reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates. The Prospectus Supplement will specify the method by which the
amount of principal to be distributed on the Certificates on each Distribution
Date will be calculated and the manner in which such amount will be allocated
among the classes of Certificates entitled to distributions of principal.
If so provided in the Prospectus Supplement, one or more classes of Senior
Certificates will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in the
Prospectus Supplement. Any such allocation of Principal Prepayments to such
class or classes of Certificateholders will have the effect of accelerating the
amortization of such Senior Certificates while increasing the interests
evidenced by the Subordinated Certificates in the Trust Fund. Increasing the
interests of the Subordinated Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinated Certificates. See "Credit
Enhancement--Subordination."
Unscheduled Distributions. If specified in the Prospectus Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in the Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the Prospectus Supplement if, due to substantial payments of
principal (including Principal Prepayments) on the Mortgage Assets, low rates
then available for reinvestment of such payments or both, the Trustee or the
Master Servicer determines, based on the assumptions specified in the Agreement,
that the amount anticipated to be on deposit in the Certificate Account on the
next Distribution Date, together with, if applicable, any amounts available to
be withdrawn from any Reserve Account, may be insufficient to make required
distributions on the Certificates on such Distribution Date. Unless otherwise
specified in the Prospectus Supplement, the amount of any such unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
Certificates on the next Distribution Date. Unless otherwise specified in the
Prospectus Supplement, all unscheduled distributions will include interest at
the applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the same
priority and manner as distributions of principal on the Certificates would have
been made on the next Distribution Date, and with respect to Certificates of the
same class, unscheduled distributions of principal will be made on a pro rata
basis. Notice of any unscheduled distribution will be given by the Trustee prior
to the date of such distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in any of the
Accounts for future distributions to the holders of such Certificates), an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
will be recoverable out of late payments by Mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise with respect to the specific Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the Mortgage
Loans.
In making advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If advances are
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Account on
such Distribution Date would be less than the amount required to be available
for distributions to Certificateholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Mortgage Loans with respect to which such advances were made (e.g.,
late payments made by the related Mortgagor, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Mortgage Loan purchased by a Lender
under the circumstances described hereinabove). Advances by the Master Servicer
(and any advances by a Sub-Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer) from cash otherwise distributable to
Certificateholders (including the holders of Senior Certificates) at such time
as the Master Servicer determines that any such advances previously made are not
ultimately recoverable from the proceeds with respect to the specific Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a specific Mortgage Loan. The Master Servicer also will
be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the
Agreement. If specified in the related Prospectus Supplement, the obligations of
the Master Servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in such
Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Certificateholder of record of the related Series a statement setting forth, to
the extent applicable or material to such Series of Certificates, among other
things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus Supplement,
prepayment penalties included therein;
(ii) the amount of such distribution allocable to
interest;
(iii) the amount of any advance by the Master
Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Certificateholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the
amounts distributed to the Senior Certificateholders;
(v) the outstanding Current Principal Amount or notional
principal balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) if applicable, the percentage of principal payments on
the Mortgage Loans, if any, which such class will be entitled to
receive on the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate,
the Pass-Through Rate applicable to the distribution on the
Distribution Date;
(viii) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month and (b) two
or more months;
(ix) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure, and if such real
estate secured a Multifamily Loan, such additional information as may
be specified in the related Prospectus Supplement; and
(x) if applicable, the amount remaining in any Reserve Account
or the amount remaining of any other credit support, after giving
effect to the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having a denomination or
interest specified in the related Prospectus Supplement or the report to
Certificateholders. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year and (b) such other customary information as may be deemed
necessary or desirable for Certificateholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates registered
in the name of Cede & Co. ("Cede"), the nominee for The Depository Trust Company
("DTC"). DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code ("UCC")
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the Certificates
from the Trustee through DTC and its Participants. Under a book-entry format,
Certificateholders will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede, as nominee for
DTC, on each such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Certificateholders. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit payments of principal of and interest of the Certificates.
Participants and Indirect Participants with which Certificateholders have
accounts with respect to the Certificates similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Certificateholders
or their nominees ("Definitive Certificates"), rather than to DTC or its nominee
only under the events specified in the related Agreement. Such events may
include the following: (i) the Seller advises the Trustee in writing that DTC is
no longer willing or able to properly discharge its responsibilities as
Depository with respect to the Certificates, and the Trustee or the Seller is
unable to locate a qualified successor, (ii) the Seller, at its option, elects
to terminate the book-entry system through DTC, or (iii) after the occurrence of
an Event of Default (defined herein), Certificateholders representing not less
than 50% of the aggregate Current Principal Amount of the Certificates advise
the Trustee and DTC through Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interest of the Certificateholders. Upon the occurrence of any of the events
specified in the related Agreement, DTC will be required to notify all
Participants of the availability through DTC of Definitive Certificates. Upon
surrender by DTC of the certificates representing the Certificates and
instruction for re-registration, the Trustee will issue the Certificates in the
form of Definitive Certificates, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders. Thereafter,
payments of principal of and interest on the Certificates will be made by the
Trustee directly to Certificateholders in accordance with the procedures set
forth herein and in the Agreement. The final distribution of any Certificate
(whether Definitive Certificates or Certificates registered in the name of
Cede), however, will be made only upon presentation and surrender of such
Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of (i) the subordination of
one or more classes of the Certificates of such Series, (ii) the use of a Pool
Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond, FHA
Insurance, VA Guarantees, Reserve Accounts, a letter of credit, a limited
financial guaranty insurance policy, other third party guarantees, interest rate
or other swap agreements, caps, collars or floors, another method of credit
enhancement described in the related Prospectus Supplement, or the use of a
cross-support feature, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, holders of one or more
classes of Certificates will bear their allocable share of deficiencies. If a
form of credit enhancement applies to several classes of Certificates, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Unless otherwise
specified in the Prospectus Supplement, coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Seller if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates.
SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination thereof
that otherwise would have been payable to one or more classes of Subordinated
Certificates of a Series will instead be payable to holders of one or more
classes of Senior Certificates under the circumstances and to the extent
specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Loans and
losses on defaulted Mortgage Loans will be borne first by the various classes of
Subordinated Certificates and thereafter by the various classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans which must be borne by the Subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Loans or aggregate losses in respect of such Mortgage
Loans were to exceed the total amounts payable and available for distribution to
holders of Subordinated Certificates or, if applicable, were to exceed the
specified maximum amount, holders of Senior Certificates would experience losses
on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee. If so
specified in the Prospectus Supplement, such deposits may be made on each
Distribution Date, on each Distribution Date for specified periods or until the
balance in the Reserve Account has reached a specified amount and, following
payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the Prospectus Supplement, amounts on deposit in
the Reserve Account may be released to the holders of the class of Certificates
specified in the Prospectus Supplement at the times and under the circumstances
specified in the Prospectus Supplement.
If so specified in the Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool of
Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy will
be obtained for the Mortgage Pool and issued by the insurer (the "Pool Insurer")
named in such Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Single Family Loans or Cooperative Loans in the Mortgage Pool in an amount
specified in such Prospectus Supplement. As more fully described below, the
Master Servicer will present claims thereunder to the Pool Insurer on behalf of
itself, the Trustee and the holders of the Certificates. The Mortgage Pool
Insurance Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the Prospectus Supplement, a Pool Insurance Policy will
not cover losses due to a failure to pay or denial of a claim under a Primary
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each Pool
Insurance Policy will provide that no claims may be validly presented unless (i)
any required Primary Insurance Policy is in effect for the defaulted Mortgage
Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Mortgaged Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Mortgaged Property, it
has been restored to its physical condition (reasonable wear and tear excepted)
at the time of issuance of the policy; and (iv) the insured has acquired good
and merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the Mortgaged Property at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Mortgage Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Certificateholders, or (b) to pay
the amount by which the sum of the principal balance of the defaulted Mortgage
Loan plus accrued and unpaid interest at the Mortgage Rate to the date of
payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under the related Primary
Insurance Policy. If any Mortgaged Property securing a defaulted Mortgage Loan
is damaged and proceeds, if any, from the related hazard insurance policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged Mortgaged Property to a condition sufficient to permit recovery under
the Pool Insurance Policy, the Master Servicer will not be required to expend
its own funds to restore the damaged Mortgaged Property unless it determines
that (i) such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (ii) such expenses will be recoverable by it through proceeds
of the sale of the Mortgaged Property or proceeds of the related Pool Insurance
Policy or any related Primary Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the related Prospectus supplement, an endorsement to the Pool
Insurance Policy, a bond or other credit support may cover fraud in connection
with the origination of Mortgage Loans. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to an event specified
in clause (i) or (ii) above might result in a breach of the related Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan if
the breach cannot be cured by such Lender. No Pool Insurance Policy will cover
(and many Primary Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Certificates by the aggregate dollar amount of
claims paid less the aggregate of the net dollar amounts realized by the Pool
Insurer upon disposition of all foreclosed properties covered thereby. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any Pool
Insurance Policy reach the original policy limit, coverage under that Pool
Insurance Policy will be exhausted and any further losses will be borne by the
Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a flood
insurance policy if the Mortgaged Property is located in a federally designated
flood area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Pooling and Servicing
Agreement-Hazard Insurance". Each Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is located in
a federally designated flood area), chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
will provide that where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by such amount. So long
as a Pool Insurance Policy remains in effect, the payment by the Special Hazard
Insurer of the cost of repair or of the unpaid principal balance of the related
Mortgage Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Certificateholders, but will affect the
relative amounts of coverage remaining under the related Special Hazard
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, since each
Special Hazard Insurance Policy will be designed to permit full recovery under
the Pool Insurance Policy in circumstances in which such recoveries would
otherwise be unavailable because property has been damaged by a cause not
insured against by a standard hazard policy and thus would not be restored, each
Agreement will provide that, if the related Pool Insurance Policy shall have
been terminated or been exhausted through payment of claims, the Master Servicer
will be under no further obligation to maintain such Special Hazard Insurance
Policy.
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account in lieu thereof relating to such Certificates may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust Fund to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account in lieu thereof
relating to such Certificates may be reduced so long as any such reduction will
not result in a downgrading of the rating of such Certificates by any such
rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a Series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such loan.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHAinsured Single Family Loan,
the Master Servicer or any SubServicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master Servicer or
any Sub-Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the mortgagor. Such plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with such payments to be made up on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or beyond the maturity
date. In addition, when a default caused by such circumstances is accompanied by
certain other criteria, HUD may provide relief by making payments to the Master
Servicer or any Sub-Servicer in partial or full satisfaction of amounts due
under the Mortgage Loan (which payments are to be repaid by the mortgagor to
HUD) or by accepting assignment of the loan from the Master Servicer or any
Sub-Servicer. With certain exceptions, at least three full monthly installments
must be due and unpaid under the Mortgage Loan, and HUD must have rejected any
request for relief from the mortgagor before the Master Servicer or any
Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Single Family Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
and, upon assignment, from the date of assignment, to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Single Family Loan guaranteed by the VA
will have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As of
January 1, 1993, the maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on the
guarantee is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guarantee
exceed the amount of the original guarantee. The VA may, at its option and
without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such
a mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, a dollar amount per apartment unit established from time to time by
HUD or, at the discretion of the Secretary of HUD, 25% of the value of the
property. In general the loan term may not exceed 35 years and a loan to value
ratio of no more than 85% is required for the purchase of a project and 70% for
the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of interest
from the date of the default.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
demand notes, certificates of deposit or a combination thereof in the aggregate
amount specified in the Prospectus Supplement will be deposited by the Master
Servicer or Seller on the date specified in the Prospectus Supplement in one or
more Reserve Accounts established with the Trustee. Such cash and the principal
and interest payments on such other instruments will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust Fund, to pay the expenses
of the Trust Fund or for such other purposes specified in the Prospectus
Supplement. Whether or not the Master Servicer or Seller has any obligation to
make such a deposit, certain amounts to which the Subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Unless otherwise specified in the
Prospectus Supplement, any instrument deposited in the Reserve Account will name
the Trustee, in its capacity as trustee for the holders of the Certificates, as
beneficiary and will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may include
in lieu of some or all of the foregoing or in addition thereto letters of
credit, financial guaranty insurance policies, third party guarantees, and other
arrangements for maintaining timely payments or providing additional protection
against losses on the assets included in such Trust Fund, paying administrative
expenses, or accomplishing such other purpose as may be described in the
Prospectus Supplement. The Trust Fund may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. If any class of Certificates has
a floating interest rate, or if any of the Mortgage Assets has a floating
interest rate, the Trust Fund may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
CROSS SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund. The Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided hereby and of the application of such coverage
to the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Mortgage
Pool will vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise
specified in the related Prospectus Supplement, Single Family Loans, Cooperative
Loans and Contracts may be prepaid without penalty in full or in part at any
time. Multifamily Loans may prohibit prepayment for a specified period after
origination, may prohibit partial prepayments entirely, and may require the
payment of a prepayment penalty upon prepayment in full or in part.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans, Cooperative Loans and Contracts will contain
due-on-sale provisions permitting the mortgagee or holder of the Contract to
accelerate the maturity of the Mortgage Loan or Contract upon sale or certain
transfers by the mortgagor or obligor of the underlying Mortgaged Property. As
described in the related Prospectus Supplement, conventional Multifamily Loans
may contain due-on-sale provisions, due-on-encumbrance provisions, or both.
Mortgage Loans insured by the FHA, and Single Family Loans and Contracts
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on such Mortgage Loans may
be lower than that of conventional Mortgage Loans bearing comparable interest
rates. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes that it is entitled to do so under applicable
law; provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Pooling and Servicing Agreement--Collection
Procedures" and "Certain Legal Aspects of the Mortgage Loans" for a description
of certain provisions of each Agreement and certain legal developments that may
affect the prepayment experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative Loan,
the Mortgagor is charged interest on the principal amount of the Mortgage Loan
so prepaid only for the number of days in the month actually elapsed up to the
date of the prepayment rather than for a full month. Similarly, upon liquidation
of a Mortgage Loan, interest accrues on the principal amount of the Mortgage
Loan only for the number of days in the month actually elapsed up to the date of
liquidation rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, the effect of prepayments in full and
liquidations will be to reduce the amount of interest passed through in the
following month to holders of Certificates because interest on the principal
amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment or liquidation. Interest shortfalls also could result from the
application of the Solders' and Sailors' Civil Relief Act of 1940, as amended,
as described under "Certain Legal Aspects of the Mortgage Loans-Soldiers' and
Sailors' Civil Relief Act" herein. Partial prepayments in a given month may be
applied to the outstanding principal balances of the Mortgage Loans so prepaid
on the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through in such month. Prepayment penalties collected with respect to
Multifamily Loans will be distributed to the holders of Certificates, or to
other persons entitled thereto, as described in the related Prospectus
Supplement.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or another person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust Fund
thereby effecting earlier retirement of the related Series of Certificates. See
"The Pooling and Servicing Agreement--Termination; Optional Termination."
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical, social,
tax, legal and additional factors. The rate of prepayment on Single Family
Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the enforcement of due-on-sale clauses and other
servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage loans,
graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage loans.
The rate of prepayment on Multifamily Loans may be affected by other factors,
including Mortgage Loan terms (e.g., the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and the relative tax benefits
associated with the ownership of income-producing real property.
The timing of payments on the Mortgage Assets may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on each Mortgage Loan from the
first day of the month, the distribution of such interest will not be made
earlier than a specified date in the month following the month of accrual.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Certificates purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Certificate will yield
its Pass-Through Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the Prospectus Supplement
could significantly affect principal prepayments at any time and over the lives
of the Certificates. The relative contribution of the various factors affecting
prepayment may also vary from time to time. There can be no assurance as to the
rate of payment of principal of the Mortgage Assets at any time or over the
lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates of a Series, the Seller will cause the Mortgage Loans comprising
the related Trust Fund to be sold and assigned to the Trustee, together with all
principal and interest received by or on behalf of the Seller on or with respect
to such Mortgage Loans after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date and other than any Retained Interest specified
in the Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Seller in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Agreement. Such schedule will include information as to
the outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate or APR, the current scheduled monthly payment of principal and interest,
the maturity of the loan, the Loan-to-Value Ratio at origination and certain
other information.
In addition, unless otherwise specified in the Prospectus Supplement, the
Seller will deliver or cause to be delivered to the Trustee (or to the custodian
hereinafter referred to) as to each Mortgage Loan, among other things, (i) the
mortgage note or Contract endorsed without recourse in blank or to the order of
the Trustee, (ii) in the case of Single Family Loans or Multifamily Loans, the
mortgage, deed of trust or similar instrument (a "Mortgage") with evidence of
recording indicated thereon (except for any Mortgage not returned from the
public recording office, in which case the Seller will deliver or cause to be
delivered a copy of such Mortgage together with a certificate that the original
of such Mortgage was or will be delivered to such recording office), (iii) an
assignment of the Mortgage or Contract to the Trustee, which assignment will be
in recordable form in the case of a Mortgage assignment, and (iv) such other
security documents as may be specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, (i) in the case
of Single Family Loans or Multifamily Loans, the Seller or Master Servicer will
promptly cause the assignments of the related Mortgage Loans to be recorded in
the appropriate public office for real property records, except in the
discretion of the Seller in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such loans against the claim of any subsequent transferee
or any successor to or creditor of the Seller or the originator of such loans,
and (ii) in the case of Contracts, the Seller or Master Servicer will promptly
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the Seller
will cause to be delivered to the Trustee (or to the custodian hereinafter
referred to), the related original cooperative note endorsed without recourse in
blank or to the order of the Trustee, the original security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Seller will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the Trustee's security interest
in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Seller, and the Master Servicer will
notify the related Lender. Unless otherwise specified in the related Prospectus
Supplement, if the Lender or an entity which sold the Mortgage Loan to the
Lender cannot cure the omission or defect within 60 days after receipt of such
notice, the Lender or such entity will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price. There can be no assurance
that a Lender or such entity will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under "Mortgage Loan Program--Representations by Lenders;
Repurchases," neither the Master Servicer nor the Seller will be obligated to
purchase such Mortgage Loan if the Lender or such entity defaults on its
purchase obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Seller, as the case
may be. Unless otherwise specified in the related Prospectus Supplement, this
purchase obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. Certain rights of substitution for defective Mortgage
Loans may be provided with respect to a Series in the related Prospectus
Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Assignment of Agency Securities. The Seller will cause Agency Securities to
be registered in the name of the Trustee or its nominee, and the Trustee
concurrently will execute, countersign and deliver the Certificates. Each Agency
Security will be identified in a schedule appearing as an exhibit to the
Agreement, which will specify as to each Agency Security the original principal
amount and outstanding principal balance as of the Cut-off Date, the annual
pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Seller will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund-Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement or provided
in the Agreement, each Master Servicer and Sub-Servicer servicing the Mortgage
Loans will be required to establish and maintain for one or more Series of
Certificates a separate account or accounts for the collection of payments on
the related Mortgage Assets (the "Protected Account"), which must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of such holding company) are rated in one of
the two highest rating categories by each Rating Agency rating the Series of
Certificates, (ii) an account or accounts the deposits in which are fully
insured by the FDIC, (iii) an account or accounts the deposits in which are
insured by the FDIC (to the limits established by the FDIC), and the uninsured
deposits in which are invested in Permitted Investments held in the name of the
Trustee, or (iv) an account or accounts otherwise acceptable to each Rating
Agency. A Protected Account may be maintained as an interest bearing account or
the funds held therein may be invested pending each succeeding Distribution Date
in Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the related Master Servicer or SubServicer or its designee will be
entitled to receive any such interest or other income earned on funds in the
Protected Account as additional compensation and will be obligated to deposit in
the Protected Account the amount of any loss immediately as realized. The
Protected Account may be maintained with the Master Servicer or Sub-Servicer or
with a depository institution that is an affiliate of the Master Servicer or
Sub-Servicer, provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer will be required to deposit or cause
to be deposited in the Protected Account for each Trust Fund on a daily basis,
to the extent applicable and unless otherwise specified in the related
Prospectus Supplement or provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage
Loans, net of applicable servicing compensation;
(iii) to the extent specified in the related Agreement, all proceeds
(net of unreimbursed payments of property taxes, insurance premiums and similar
items ("Insured Expenses") incurred, and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) of the title insurance
policies, the hazard insurance policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation or
foreclosure ("Liquidation Expenses") and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received with
respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "Mortgage Loan Program--Representations by Lenders;
Repurchases" or "--Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described under
"--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or SubServicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the
Protected Account pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Certificates, a
Protected Account maintained by a Master Servicer or Sub-Servicer may commingle
funds from the Mortgage Loans deposited in the Trust Fund with similar funds
relating to other mortgage loans which are serviced or owned by the Master
Servicer or Sub-Servicer. The Agreement may require that certain payments
related to the Mortgage Assets be transferred from a Protected Account
maintained by a Master Servicer or Sub-Servicer into another Account maintained
under conditions acceptable to each Rating Agency.
The Trustee will be required to establish in its name as Trustee for one or
more Series of Certificates a trust account or another account acceptable to
each Rating Agency (the "Certificate Account"). The Certificate Account may be
maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. If
there is more than one Master Servicer for the rated Series of Certificates,
there may be a separate Certificate Account or a separate subaccount in a single
Certificate Account for funds received from each Master Servicer. Unless
otherwise specified in the Prospectus Supplement, the related Master Servicer or
its designee will be entitled to receive any interest or other income earned on
funds in the Certificate Account or subaccount of the Certificate Account as
additional compensation and will be obligated to deposit in the Certificate
Account or subaccount the amount of any loss immediately as realized. The
Trustee will be required to deposit into the Certificate Account on the business
day received all funds received from the Master Servicer for deposit into the
Certificate Account and any other amounts required to be deposited into the
Certificate Account pursuant to the Agreement. In addition to other purposes
specified in the Agreement, the Trustee will be required to make withdrawals
from the Certificate Account to make distributions to Certificateholders. If the
Series includes one Trust Fund which contains a beneficial ownership interest in
another Trust Fund, funds from the Mortgage Assets may be withdrawn from the
Certificate Account included in the latter Trust Fund and deposited into another
Account included in the former Trust Fund prior to transmittal to Certificate-
holders with a beneficial ownership interest in the former Trust Fund. If
specified in the related Prospectus Supplement, the Protected Account and the
Certificate Account may be combined into a single Certificate Account.
SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing entity
may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant to which a Series of Certificates
is issued will provide that, if for any reason the Master Servicer for such
Series of Certificates is no longer the Master Servicer of the related Mortgage
Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but, unless otherwise specified
in the Prospectus Supplement, such Sub-Servicer will remain obligated under the
related Sub-Servicing Agreement. Each Sub-Servicer will be required to perform
the customary functions of a servicer of mortgage loans. Such functions
generally include collecting payments from mortgagors or obligors and remitting
such collections to the Master Servicer; maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of mortgagors or obligors for payment of taxes, insurance
and other items required to be paid by the mortgagor or obligor pursuant to the
related Mortgage Loan; processing assumptions or substitutions, although, unless
otherwise specified in the related Prospectus Supplement, the Master Servicer is
generally required to exercise due-on-sale clauses to the extent such exercise
is permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; maintaining
accounting records relating to the Mortgage Loans; and, to the extent specified
in the related Prospectus Supplement, maintaining additional insurance policies
or credit support instruments and filing and settling claims thereunder. A
Sub-Servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on Mortgage Loans, as described more
fully above under "--Payments on Mortgage Loans; Deposits to Accounts", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the mortgage note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Mortgage Loans if
the Sub-Servicer elects to release the servicing of such Mortgage Loans to the
Master Servicer. See "--Servicing and Other Compensation and Payment of
Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Sub-Servicer in its servicing capacity.
Each Sub-Servicer will be required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Sub-Servicing Agreement for the entire term of such Mortgage
Loan, unless the Sub-Servicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
may terminate a Sub-Servicing Agreement without cause, upon written notice to
the Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement or, upon termination of the Sub-Servicing Agreement, the Master
Servicer may act as servicer of the related Mortgage Loans or enter into new
Sub-Servicing Agreements with other sub-servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and warranties
of the Sub-Servicer which it replaces. Each Sub-Servicer must be a Lender or
meet the standards for becoming a Lender or have such servicing experience as to
be otherwise satisfactory to the Master Servicer and the Seller. The Master
Servicer will make reasonable efforts to have the new Sub-Servicer assume
liability for the representations and warranties of the terminated Sub-Servicer,
but no assurance can be given that such an assumption will occur. In the event
of such an assumption, the Master Servicer may in the exercise of its business
judgment release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement or
new Sub-Servicing Agreements may contain provisions different from those which
are in effect in the original Sub-Servicing Agreement. However, each Agreement
will provide that any such amendment or new agreement may not be inconsistent
with or violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Mortgage
Loans and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to mortgage loans that are comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Pool Insurance Policy, Primary Insurance
Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance Policy, Bankruptcy
Bond or alternative arrangements, if applicable, arrange with a Mortgagor a
schedule for the liquidation of delinquencies running for no more than 125 days
after the applicable due date for each payment or such other period as is
specified in the Agreement. Both the Sub-Servicer and the Master Servicer remain
obligated to make advances during any period of such an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will, to
the extent it has knowledge of such conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten to
impair any recovery under any related Primary Insurance Policy. If these
conditions are not met or if such Mortgage Loan is insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Mortgage Loan and, to the extent permitted
by applicable law, the mortgagor remains liable thereon; provided, however, that
the Master Servicer will not enter into such an agreement if it would jeopardize
the tax status of the Trust Fund. Any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by or
on behalf of the Master Servicer as additional servicing compensation. In the
case of Multifamily Loans, and unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will agree to exercise any right it
may have to accelerate the maturity of a Multifamily Loan to the extent it has
knowledge of any further encumbrance of the related Mortgaged Property effected
in violation of any due-on-encumbrance clause applicable thereto. See "Certain
Legal Aspects of the Mortgage Loans--Due-on-Sale Clauses." In connection with
any such assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans." This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each Single
Family Loan, Multifamily Loan or Contract to maintain a hazard insurance policy
providing for no less than the coverage of the standard form of fire insurance
policy with extended coverage customary for the type of Mortgaged Property in
the state in which such Mortgaged Property is located. Such coverage will be in
an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Mortgage Loans comprising part of a Trust Fund, it will conclusively be deemed
to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements or Manufactured Home
securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm and
hail, riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the Mortgage
Loans may have been underwritten by different insurers under different state
laws in accordance with different applicable forms and therefore may not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the Mortgaged Property
securing a Mortgage Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss, without
deduction for depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements. Since
the amount of hazard insurance the Master Servicer may cause to be maintained on
the improvements securing the Mortgage Loans declines as the principal balances
owing thereon decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related Prospectus
Supplement, a special hazard insurance policy or an alternative form of credit
enhancement will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement--Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Insurance Policies. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master Servicer will be required not to cancel or
refuse to renew any such Primary Insurance Policy in effect at the time of the
initial issuance of a Series of Certificates that is required to be kept in
force under the applicable Agreement unless the replacement Primary Insurance
Policy for such canceled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Insurance Policies reimburse certain losses sustained by reason of
defaults in payments by borrowers. Primary Insurance Policies will not insure
against, and exclude from coverage, a loss sustained by reason of a default
arising from or involving certain matters, including (i) fraud or negligence in
origination or servicing of the Mortgage Loans, including misrepresentation by
the originator, borrower or other persons involved in the origination of the
Mortgage Loan; (ii) failure to construct the Mortgaged Property subject to the
Mortgage Loan in accordance with specified plans; (iii) physical damage to the
Mortgaged Property; and (d) the related Master Servicer not being approved as a
servicer by the Primary Insurer.
Recoveries Under a Primary Insurance Policy. As conditions precedent to the
filing of or payment of a claim under a Primary Insurance Policy covering a
Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a Sub-Servicer,
the Sub-Servicer, on behalf of itself, the Trustee and Certificateholders, will
present claims to the Primary Insurer, and all collections thereunder will be
deposited in the Protected Account maintained by the Sub-Servicer. In all other
cases, the Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the Primary Insurer under each
Primary Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Insurance Policy and, when the Mortgaged
Property has not been restored, the hazard insurance policy, are to be deposited
in the Protected Account, subject to withdrawal as heretofore described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Insurance Policy, if any, the Master Servicer
is not required to expend its own funds to restore the damaged Mortgaged
Property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of such Mortgage Loan plus interest accrued thereon that is
payable to Certificateholders, the Trust Fund will realize a loss in the amount
of such difference plus the aggregate of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Protected Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Protected Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. See "Credit Enhancement."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
described in the Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Mortgage Loan, such amounts will decrease
as the Mortgage Loans amortize. In addition to primary compensation, the Master
Servicer or the Sub-Servicers will be entitled to retain all assumption fees and
late payment charges, to the extent collected from Mortgagors, and, unless
otherwise provided in the related Prospectus Supplement or Agreement, any
prepayment penalties and any interest or other income which may be earned on
funds held in any Accounts. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent specified
in the related Agreement, the Master Servicer will pay from its servicing
compensation certain expenses incurred in connection with its servicing of the
Mortgage Loans, including, without limitation, payment in certain cases of
premiums for insurance policies, guarantees, sureties or other forms of credit
enhancement, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Certificateholders, and payment of certain other
expenses. The Master Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and Sellers under certain
limited circumstances. In addition, as indicated in the preceding section, the
Master Servicer will be entitled to reimbursement for certain expenses incurred
by it in connection with any defaulted Mortgage Loan as to which it has
determined that all recoverable Liquidation Proceeds and Insurance Proceeds have
been received.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans, agency
securities or private mortgage-backed securities, under pooling and servicing
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Uniform
single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans,
agency securities or private mortgage-backed securities by SubServicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC or FNMA (rendered within one year of such
statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by an officer of
each Master Servicer to the effect that such Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of each Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer at the address
set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that a Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, in
certain instances, the Seller nor any director, officer, employee, or agent of
the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer, the Seller nor any such person will be protected against any breach of
warranties or representations made in the Agreement or any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each Agreement will further
provide that the Master Servicer, in certain instances, the Seller and any
director, officer, employee or agent of the Master Servicer or the Seller will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer nor, in certain instances, the Seller will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Seller may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Certificateholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Seller, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Certificateholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the class or classes of Certificates of such Series that
have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement or
Agreement, "Events of Default" under each Agreement will include (i) any failure
by the Master Servicer to cause to be deposited in the Certificate Account any
amount so required to be deposited pursuant to the Agreement, and such failure
continues unremedied for two business days or such other time period as is
specified in the Agreement; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for sixty days or such
other time period as is specified in the Agreement after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the holders of Certificates of any class evidencing
not less than 25% of the aggregate principal amount or interests ("Percentage
Interests") evidenced by such class; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceeding and certain actions by or on behalf of the Master Servicer indicating
its insolvency, reorganization or inability to pay its obligations.
If specified in the Prospectus Supplement, the Agreement will permit the
Trustee to sell the Mortgage Assets and the other assets of the Trust Fund in
the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only under
the circumstances and in the manner specified in the Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
Except as otherwise specified in the related Agreement, so long as an Event
of Default under an Agreement remains unremedied, the Trustee may, and at the
direction of holders of Certificates evidencing Percentage Interests aggregating
not less than 25% of the principal of the related Trust Fund and under such
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of the rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Mortgage Loans,
whereupon, unless otherwise specified in the related Prospectus Supplement, the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement, including, if specified in the
Prospectus Supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, a Mortgage Loan servicing institution with a net worth
of at least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
Except as otherwise specified in the related Agreement, no
Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
AMENDMENT
Unless otherwise specified in the Prospectus Supplement, each Agreement may
be amended by the Seller, each Master Servicer and the Trustee, without the
consent of any of the Certificateholders, (i) to cure any ambiguity; (ii) to
correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Certificateholder. In addition, to the extent provided in the related Agreement,
an Agreement may be amended without the consent of any of the
Certificateholders, to change the manner in which the Certificate Account, the
Protected Account or any other Accounts are maintained, provided that any such
change does not adversely affect the then current rating on the class or classes
of Certificates of such Series that have been rated. In addition, if a REMIC
election is made with respect to a Trust Fund, the related Agreement may be
amended to modify, eliminate or add to any of its provisions to such extent as
may be necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such qualification.
Unless otherwise specified in the Prospectus Supplement, each Agreement may also
be amended by the Seller, each Master Servicer and the Trustee with consent of
holders of Certificates of such Series evidencing not less than 66% of the
aggregate Percentage Interests of each class affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Certificates; provided, however, that no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Mortgage Assets which are required to be distributed on any
Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any class of holders which
are required to consent to any such amendment without the consent of the holders
of all Certificates of such class covered by such Agreement then outstanding. If
a REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will not
cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in any
Accounts or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the later of (i) the final payment or other liquidation
of the last of the Mortgage Assets subject thereto or the disposition of all
property acquired upon foreclosure or deed in lieu of foreclosure of any such
Mortgage Assets remaining in the Trust Fund and (ii) the purchase by the Master
Servicer or other entity specified in the related Prospectus Supplement
including, if REMIC treatment has been elected, by the holder of the residual
interest in the REMIC (see "Certain Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Mortgage Assets and all
property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer or other entity at a price, and in accordance with the procedures,
specified in the Prospectus Supplement. The exercise of such right will effect
early retirement of the Certificates of that Series, but the right of the Master
Servicer or other entity to so purchase is subject to the principal balance of
the related Mortgage Assets being less than the percentage specified in the
related Prospectus Supplement of the aggregate principal balance of the Mortgage
Assets at the Cut-off Date for the Series. The foregoing is subject to the
provision that if a REMIC election is made with respect to a Trust Fund, any
repurchase pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Seller, each Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state, or to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
Single Family Loans and Multifamily Loans. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or (ii) leases the land generally by a long-term ground lease and
owns the apartment building. The Cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the Cooperative and/or
underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with the
construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust Fund including Cooperative Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Contracts. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such loan. The Contracts generally
are "chattel paper" as defined in the UCC in effect in the states in which the
Manufactured Homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Unless otherwise specified
in the Prospectus Supplement, under the Agreement, the Seller will transfer or
cause the transfer of physical possession of the Contracts to the Trustee or its
custodian. In addition the Seller will make or cause to be made an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Seller.
The Seller will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Seller,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Seller or the Lender will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title and the new secured party succeeds to the Seller's rights as the
secured party. However, in some states there exists a risk that, in the absence
of an amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Seller or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Seller and the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for value
of Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee, on behalf of the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans and Multifamily Loans. Foreclosure of a deed of trust
is generally accomplished by a non-judicial sale under a specific provision in
the deed of trust which authorizes the trustee to sell the property at public
auction upon any default by the borrower under the terms of the note or deed of
trust. In some states, the trustee must record a notice of default and send a
copy to the borrower-trustor, to any person who has recorded a request for a
copy of any notice of default and notice of sale, to any successor in interest
to the borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. Before such non-judicial sale takes place, typically a
notice of sale must be posted in a public place and published during a specific
period of time in one or more newspapers, posted on the property, and sent to
parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time- consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the mortgage is not reinstated, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
Contracts. The Master Servicer on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
Single Family Loans and Multifamily Loans. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
Contracts. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right of
the beneficiary or mortgagee to obtain a deficiency judgment against borrowers
financing the purchase of their residence or following sale under a deed of
trust or certain other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the Master Servicer will not seek deficiency
judgments against defaulting mortgagors. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Certificates and
possible reductions in the aggregate amount of such payments. Some states also
have homestead exemption laws which would protect a principal residence from a
liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgager
or secured party. The Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of Single Family Loans, Cooperative
Loans or Contracts with respect to prepayments on loans secured by liens
encumbering owner-occupied residential properties. Since many of the Mortgaged
Properties will be owner-occupied, it is anticipated that prepayment charges may
not be imposed with respect to many of the Single Family Loans, Cooperative
Loans and Contracts. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Single Family Loans, Cooperative Loans or Contracts
having higher Mortgage Rates or APR's, may increase the likelihood of
refinancing or other early retirement of such loans or contracts. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the mortgage loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted alleging
personal injury or property damage from the existence of certain chemical
substances which may be present in building materials. For example, formaldehyde
and asbestos have been and in some cases are incorporated into many building
materials utilized in manufactured and other housing. As a consequence, lawsuits
may arise from time to time asserting claims against manufacturers or builders
of the housing, suppliers of component parts, and related persons in the
distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by a
Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Lender, and the Certificateholders would
suffer a loss only to the extent that (i) the Lender breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Lender, the Seller or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Certificateholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde and certain other chemicals in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without the
benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances may
have claims and defenses against the builders which could be asserted against
the Trust Fund.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Mortgage Loan became the property of the Trust Fund in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
by statute impose a lien for any Cleanup Costs incurred by such state on the
property that is the subject of such Cleanup Costs (a "Superlien"). All
subsequent liens on such property are subordinated to such Superlien and, in
some states, even prior recorded liens are subordinated to such Superliens. In
the latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereby. The discussion, and the opinions referred to below,
are based on laws, regulations, rulings and decisions now in effect (or, in the
case of certain regulations, proposed), all of which are subject to change or
possibly differing interpretations. Because tax consequences may vary based upon
the status or tax attributes of the owner of a Certificate, prospective
investors should consult their own tax advisors in determining the federal,
state, local and other tax consequences to them of the purchase, ownership and
disposition of Certificates. For purposes of this tax discussion (except with
respect to information reporting, or where the context indicates otherwise), the
terms "Certificateholder" and "holder" mean the beneficial owner of a
Certificate and the term "Mortgage Loan" includes Agency Securities and Private
Mortgage-Backed Securities.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust Fund related to a series of
Certificates to treat such Trust Fund or certain assets of such Trust Fund as a
"real estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement
for each series of Certificates will indicate whether a REMIC election will be
made with respect to the related Trust Fund. To the extent provided in the
Prospectus Supplement for a series, Certificateholders may also have the benefit
of a Reserve Account and of certain agreements (each, a "Yield Supplement
Agreement") under which payment will be made from the Reserve Account in the
event that interest accrued on the Mortgage Loans at their Mortgage Rates is
insufficient to pay interest on the Certificates of such Series (a "Basis Risk
Shortfall"). If a REMIC election is to be made, the Prospectus Supplement will
designate the Certificates of such series or the interests composing such
Certificates as "regular interests" ("REMIC Regular Certificates", which where
the context so requires includes a reference to each interest composing a
Certificate where such interest has been designated as a regular interest, in
lieu of such Certificates) in the REMIC (within the meaning of Section
860G(a)(l) of the Code) or as the "residual interest" ("REMIC Residual
Certificates") in the REMIC (within the meaning of Section 860G(a)(2) of the
Code). The terms "REMIC Certificates" and "Non-REMIC Certificates" denote,
respectively, Certificates (or the interests composing Certificates) of a series
with respect to which a REMIC election will, or will not, be made. The
discussion below is divided into two parts, the first part applying only to
REMIC Certificates and the second part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust Fund or certain assets of
such Trust Fund as a REMIC. Qualification as a REMIC requires ongoing compliance
with certain conditions. Upon the issuance of each series of REMIC Certificates,
Stroock & Stroock & Lavan, counsel to the Seller, will deliver its opinion
generally to the effect that, with respect to each series of REMIC Certificates
for which a REMIC election is to be made, under then existing law, and assuming
a proper and timely REMIC election and ongoing compliance with the provisions of
the Agreement and applicable provisions of the Code and applicable Treasury
regulations, the related Trust Fund or certain assets of such Trust Fund will be
a REMIC and the REMIC Certificates will be considered to evidence ownership of
"regular interests" or "residual interests" within the meaning of the REMIC
provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, holders
of REMIC Regular Certificates who are entitled to payments from the Reserve
Account in the event of a Basis Risk Shortfall will be required to allocate
their purchase price between their beneficial ownership interests in the related
REMIC regular interests and Yield Supplement Agreements, and will be required to
report their income realized with respect to each, calculated taking into
account such allocation. In general, such allocation would be based on the
respective fair market values of the REMIC regular interests and the related
Yield Supplement Agreements on the date of purchase of the related REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. Holders of REMIC Regular
Certificates are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the Agreement, holders of
applicable REMIC Regular Certificates will agree that, for federal income tax
purposes, they will be treated as owners of the respective regular interests and
of the corresponding Yield Supplement Agreement.
Status of REMIC Certificates as Real Property Loans. The REMIC Certificates
will be "real estate assets" for purposes of Section 856(c)(5)(A) of the Code
and assets described in Section 7701(a)(19)(C) of the Code (assets qualifying
under one or both of those sections, applying each section separately,
"qualifying assets") to the extent that the REMIC's assets are qualifying
assets, but not to the extent that the REMIC's assets consist of Yield
Supplement Agreements. However, if at least 95 percent of the REMIC's assets are
qualifying assets, then 100 percent of the REMIC Certificates will be qualifying
assets. Similarly, income on the REMIC Certificates will be treated as "interest
on obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code, subject to the limitations of the preceding
two sentences. In addition to Mortgage Loans, the REMIC's assets will include
payments on Mortgage Loans held pending distribution to holders of REMIC
Certificates, amounts in Reserve Accounts (if any), other credit enhancements
(if any), and possibly buydown funds ("Buydown Funds"). The Mortgage Loans will
be qualifying assets under the foregoing sections of the Code except to the
extent provided in the Prospectus Supplement. The regulations under Sections
860A through 860G of the Code (the "REMIC Regulations") treat credit
enhancements as part of the mortgage or pool of mortgages to which they relate,
and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Mortgage Loans and held pending distribution to holders of REMIC
Certificates ("cash flow investments") will be treated as qualifying assets. It
is unclear whether amounts in a Reserve Account or Buydown Funds would also
constitute qualifying assets. The Prospectus Supplement for each series will
indicate (if applicable) that it has Buydown Funds. The REMIC Certificates will
not be "residential loans" for purposes of the residential loan requirement of
Section 593(g)(4)(B) of the Code.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust Fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Stroock & Stroock & Lavan will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the related
Agreement and applicable provisions of the Code and applicable Treasury
regulations and rulings, the Tiered REMICs will each qualify under then existing
law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise report
income under a cash method of accounting will be required to report income with
respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates--Current Income on REMIC Regular Certificates-Original Issue
Discount--Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates--Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate may also have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust Fund will report original issue discount, if any, to the holders
of REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such as
a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations," and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any de minimis original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although not entirely free from doubt, such a holder may be entitled to
deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such holder is entitled. It is unclear
whether the Prepayment Assumption is taken into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in gross
income, for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
Qualified Stated Interest. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includable in the stated redemption price at maturity of
the REMIC Regular Certificate. Accordingly, if the interest on a REMIC Regular
Certificate does not constitute "qualified stated interest," the REMIC Regular
Certificate will have original issue discount. Interest payments will not
qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Loans underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the de
minimis rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations, REMIC
Regular Certificates paying interest at a variable rate (a "Variable Rate REMIC
Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate, but which is subject to one or more restrictions such
as a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate REMIC
Regular Certificate will not constitute an objective rate if it is reasonably
expected that the average value of such rate during the first half of the
Variable Rate REMIC Regular Certificate's term will be either significantly less
than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates--Current Income
on REMIC Regular Certificates-Original Issue Discount" based on the following:
(i) stated interest on the Single Variable Rate REMIC Regular Certificate which
is unconditionally payable in cash or property (other than debt instruments of
the issuer) at least annually will constitute qualified stated interest; (ii) by
assuming that the variable rate on the Single Variable Rate REMIC Certificate is
a fixed rate equal to: (a) in the case of a Single Variable Rate REMIC Regular
Certificate with a qualified floating rate or a qualified inverse floating rate,
the value, as of the issue date, of the qualified floating rate or the qualified
inverse floating rate or (b) in the case of a Single Variable Rate REMIC Regular
Certificate with an objective rate (other than a qualified inverse floating
rate), a fixed rate which reflects the reasonably expected yield for such Single
Variable Rate REMIC Regular Certificate; and (iii) the qualified stated interest
allocable to an accrual period is increased (or decreased) if the interest
actually paid during an accrual period exceeds (or is less than) the interest
assumed to be paid under the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC Regular
Certificate") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. (A Multiple Variable Rate REMIC Regular
Certificate may not bear more than one objective rate.) In the case of a
Multiple Variable Rate REMIC Regular Certificate that qualifies as a "variable
rate debt instrument" and provides for stated interest at a fixed rate in
addition to either one or more qualified floating rates or a qualified inverse
floating rate, the fixed rate is initially converted into a qualified floating
rate (or a qualified inverse floating rate, if the Multiple Variable Rate REMIC
Regular Certificate provides for a qualified inverse floating rate). Under such
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate REMIC Regular Certificate as of the Multiple Variable
Rate REMIC Regular Certificate's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate REMIC Regular Certificate is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted into
an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amounts of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates--Current Income on REMIC
Regular Certificates-Original Issue Discount". A holder of the Multiple Variable
Rate REMIC Regular Certificate will account for such original issue discount and
qualified stated interest as if the holder held the "equivalent" fixed rate debt
instrument. In each accrual period, appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Multiple Variable Rate REMIC Regular Certificate during the
accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. It is not clear under current law how a Variable Rate REMIC Regular
Certificate would be taxed if such REMIC Regular Certificate were treated as a
contingent payment debt obligation since the OID Regulations relating to
contingent payment debt obligations do not apply to REMIC regular interests.
Interest-Only REMIC Regular Certificates. The Trust Fund intends to report
income from interest-only REMIC Regular Certificates to the Internal Revenue
Service and to holders of interest-only REMIC Regular Certificates based on the
assumption that the stated redemption price at maturity is equal to the sum of
all payments determined under the Prepayment Assumption. As a result, such
interest-only REMIC Regular Certificates will be treated as having original
issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates--Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate in proportion to the amounts of such principal
distributions, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Holders of REMIC Regular Certificates
should consult their own tax advisors regarding the availability or advisability
of such an election.
Single-Class REMICs. In the case of "single-class REMICs," certain expenses
of the REMIC will be allocated to the holders of the REMIC Regular Certificates.
The deductibility of such expenses may be subject to certain limitations. See
"Deductibility of Trust Fund Expenses" below.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includable in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includable in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate, if not earlier, shortly following
the REMIC's receipt of the final payment in respect of the underlying qualified
mortgages. The last distribution on a REMIC Regular Certificate should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Regulations determine the fair market value of the
contributed property by deeming it equal to the aggregate issue prices of all
regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Loans held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Loans or as principal on the Mortgage Loans is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. Although not entirely free from doubt, the related REMIC taxable
income may be recognized when the adjusted issue price of such REMIC Regular
Certificate would exceed the maximum amount of future payments with respect to
such REMIC Regular Certificate. It is unclear whether the Prepayment Assumption
is taken into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the purchase price of
the REMIC Residual Certificate), and will be reduced (but not below zero) by the
holder's share of cash distributions and losses and increased by its share of
taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable income
recognized by the holder of a REMIC Residual Certificate in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest and discount income (or deductions for amortization of
premium) with respect to qualified mortgages, on the one hand, and the timing of
deductions for interest (including original issue discount) on the REMIC Regular
Certificates, on the other. In the case of multiple classes of REMIC Regular
Certificates issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Loans may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Loans.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Loans (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust Fund will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a qualified mortgage other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a qualified mortgage or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the qualified mortgages pending distribution on the
REMIC Certificates. In addition, a tax is imposed on the REMIC equal to 100
percent of the value of certain property contributed to the REMIC after its
"startup day." No REMIC in which interests are offered hereunder will accept
contributions that would cause it to be subject to such tax. This provision will
not affect a REMIC's ability in accordance with the Agreement to accept
substitute Mortgage Loans or to sell defective Mortgage Loans.
A REMIC is subject to a tax (deductible from its income) on any "net income
from foreclosure property" (determined in accordance with Section 857(b)(4)(B)
of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust Fund initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificates, unless
otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark to Market REMIC Residual Certificates. Temporary
regulations provide that "negativevalue" REMIC Residual Certificates are not
securities and cannot be marked to market pursuant to Section 475 of the Code
(relating to the requirement that dealers in securities mark them to market). A
REMIC Residual Certificate is a negative-value REMIC Residual Certificate if on
the date the dealer acquires the REMIC Residual Certificate the present value of
the anticipated tax liabilities associated with holding the REMIC Residual
Certificate (net of the present value of the tax savings resulting from losses
associated with holding the REMIC Residual Certificate) exceeds the present
value of the expected future distributions on the REMIC Residual Certificate.
Proposed regulations would provide that all REMIC Residual Certificates acquired
on or after January 4, 1995 are not securities and cannot be marked to market
pursuant to Section 475 of the Code.
The anticipated and expected tax consequences and distributions are
determined by taking into account events that have occurred through the date of
acquisition, the Prepayment Assumption and reinvestment assumption adopted when
the residual was created, and by taking account of required liquidations and
required or permitted clean up calls.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although the tax treatment with respect to a REMIC Residual Certificate
that has unrecovered basis after all funds of the Trust Fund have been
distributed is unclear, the holder presumably would be entitled to claim a loss
in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as defined
in Section 7701(i) of the Code) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Section 1091 of the Code. In that event, any loss
realized by the seller on the sale generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions for periods after such transfer with respect to the interest
transferred multiplied by the highest corporate rate of tax. The transferor (or
agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a
REMIC Residual Certificate. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear. The preamble to the REMIC Regulations
indicates that the Internal Revenue Service is considering the tax treatment of
these types of residual interests. A transferee of such an interest should
consult its own tax advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. An entity or
segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(i.e., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring the
REMIC Residual Certificate is a disqualified organization. In addition, as to
the requirement that reasonable arrangements be made to ensure that disqualified
organizations do not hold a residual interest in the REMIC, the REMIC
Regulations require that notice of the prohibition be provided either through a
legend on the certificate that evidences ownership, or through a conspicuous
statement in the prospectus or other offering document used to offer the
residual interest for sale. As to the requirement that sufficient information be
made available to calculate the tax on transfers to disqualified organizations
(or the tax, discussed below, on pass-through entities, interests in which are
held by disqualified organizations), the REMIC Regulations further require that
such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Fund Expenses" below. No prediction can be made
regarding whether such legislation or similar legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate, and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions from the REMIC, at or after the time
at which taxes on such excess inclusion accrue, sufficient to pay the taxes
thereon. A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if (i) the transferor
conducts, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee represents to the transferor that (A) the transferee understands that
it might incur tax liabilities in excess of any cash received with respect to
the residual interest and (B) the transferee intends to pay the taxes associated
with owning the residual interest as they come due. Any transferee of a REMIC
Residual Certificate must execute and deliver to the transferor an affidavit
containing the representations described in (ii) above. A different formulation
of this rule applies to transfers of REMIC Residual Certificates by or to
foreign transferees. See "Foreign Investors" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Certificates that is an individual, estate or trust will
be subject to the limitation with respect to certain itemized deductions
described in Code Section 67, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the Master Servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trust Funds with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC", the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including REITs), the deductibility of such expenses will be subject to the
limitations described above. The reduction or disallowance of these deductions
may have a significant impact on the yield of REMIC Regular Certificates to such
a holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includable in gross income for United States federal income
taxation regardless of its source, and (iv) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax
years ending after August 20, 1996. Proposed Treasury regulations, which would
be effective with respect to payments made after December 31, 1997 if adopted in
their current form, would provide alternative certification requirements and
means by which a holder of REMIC Certificates could claim the exemption from
federal income and withholding tax.
REMIC Residual Certificates. The Conference Report to the Tax Reform Act of
1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by a
Trust Fund will not qualify as portfolio interest, although interest on the
Private Mortgage-Backed Securities, other pass-through certificates, or REMIC
regular interests held by a Trust Fund may qualify. In any case, a holder of a
REMIC Residual Certificate will not be entitled to the portfolio interest
exception from the 30% withholding tax (or to any treaty exemption or rate
reduction) for that portion of a payment that constitutes excess inclusions.
Generally, the withholding tax will be imposed when REMIC gross income is paid
or distributed to the holder of a residual interest or there is a disposition of
the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Loans from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and Schedules Q
thereto) must be filed as if the Trust Fund were a partnership for federal
income tax purposes. Information on Schedule Q must be provided to holders of
REMIC Residual Certificates with respect to every calendar quarter. Each holder
of a REMIC Residual Certificate will be required to treat items on its federal
income tax returns consistently with their treatment on the Trust Fund's
information returns unless the holder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from an incorrect
schedule received from the Trust Fund. The Trust Fund also will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC taxable income by the Internal Revenue Service. Holders of REMIC Residual
Certificates will have certain rights and obligations with respect to any
administrative or judicial proceedings involving the Internal Revenue Service.
Under the Code and Regulations, a REMIC generally is required to designate a tax
matters person. Generally, subject to various limitations, the tax matters
person has authority to act on behalf of the REMIC and the holders of the REMIC
Residual Certificates in connection with administrative determinations and
judicial review respecting returns of taxable income of the REMIC. Treasury
regulations exempt from certain of these procedural rules REMICs having no more
than one residual interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Seller or its designee will act as the tax matters person for
each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance of
its interest in the REMIC Residual Certificate, agrees that the Seller or its
designee will act as the holder's fiduciary in the performance of any duties
required of the holder in the event that the holder is the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made.
Tax Status of the Trust Fund. Upon the issuance of each series of Non-REMIC
Certificates, Stroock & Stroock & Lavan, counsel to the Seller, will deliver its
opinion to the effect that, under then current law, assuming compliance with the
Agreement, the related Trust Fund will be classified for federal income tax
purposes as a grantor trust and not as an association taxable as a corporation
or a taxable mortgage pool. Accordingly, each holder of a Non-REMIC Certificate
will be treated for federal income tax purposes as the owner of an undivided
interest in the Mortgage Loans included in the Trust Fund. As further described
below, each holder of a Non-REMIC Certificate therefore must report on its
federal income tax return the gross income from the portion of the Mortgage
Loans that is allocable to such Non-REMIC Certificate and may deduct the portion
of the expenses incurred by the Trust Fund that is allocable to such Non-REMIC
Certificate, at the same time and to the same extent as such items would be
reported by such holder if it had purchased and held directly such interest in
the Mortgage Loans and received directly its share of the payments on the
Mortgage Loans and incurred directly its share of expenses incurred by the Trust
Fund when those amounts are received or incurred by the Trust Fund.
A holder of a Non-REMIC Certificate that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the "applicable amount" ($100,000 (or
$50,000 in the case of a separate return by a married individual), adjusted for
changes in the cost of living subsequent to 1990) will be reduced by the lesser
of (i) 3 percent of the excess of adjusted gross income over the applicable
amount, or (ii) 80 percent of the amount of itemized deductions otherwise
allowable for such taxable year. A holder of a Non-REMIC Certificate that is not
a corporation cannot deduct such expenses for purposes of the alternative
minimum tax (if applicable). Such deductions will include servicing, guarantee
and administrative fees paid to the servicer of the Mortgage Loans. As a result,
individuals, estates, or trusts holding Non-REMIC Certificates may have taxable
income in excess of the cash received.
Status of the Non-REMIC Certificates as Real Property Loans. The Non-REMIC
Certificates generally will be "real estate assets" for purposes of Section
856(c)(5)(A) of the Code and "loans... secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code, and interest income
on the Non-REMIC Certificates generally will be "interest on obligations secured
by mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. However, the Non-REMIC Certificates may not be qualifying assets under the
foregoing sections of the Code to the extent that the Trust Fund's assets
include Buydown Funds, amounts in a Reserve Account, or payments on mortgages
held pending distribution to Certificateholders. The Non-REMIC Certificates
should not be "residential loans made by the taxpayer" for purposes of the
residential loan requirement of Section 593(g)(4)(B) of the Code.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Master Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Master
Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Mortgage Loans. In Revenue Ruling 91-46, the Internal Revenue Service
concluded that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the NonREMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a NonREMIC Certificate will account for any discount on the
Non-REMIC Certificate (other than an interest treated as a "stripped coupon") as
market discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount de minimis rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates. See "REMIC Regular
Interests--Current Income on REMIC Regular Interests-Original Issue Discount"
and "--Market Discount" above.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Mortgage Loan underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate that, if
used in discounting the holder's share of the payments on the Mortgage Loans,
would cause the present value of those payments to equal the price at which the
holder purchased the Non-REMIC Certificate. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that original issue
discount be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. It is unclear whether such regulations
would apply this rule to the Non-REMIC Certificates, whether Section 1272(a)(6)
might apply to the NonREMIC Certificates in the absence of such regulations, or
whether the Internal Revenue Service could require use of a reasonable
prepayment assumption based on other tax law principles. If required to report
interest income on the Non-REMIC Certificates to the Internal Revenue Service
under the stripped bond rules, it is anticipated that the Trustee will calculate
the yield of the Non-REMIC Certificates based on a representative initial
offering price of the Non-REMIC Certificates and a reasonable assumed rate of
prepayment of the Mortgage Loans (although such yield may differ from the yield
to any particular holder that would be used in calculating the interest income
of such holder). The Prospectus Supplement for each series of Non-REMIC
Certificates will describe the prepayment assumption that will be used for this
purpose, but no representation is made that the Mortgage Loans will prepay at
that rate or at any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Loans allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Non-REMIC Certificate acquired at a discount or
premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a NonREMIC Certificate
acquired at a discount or premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-through Rate based on the weighted average
of the interest rates of the Mortgage Loans held by the Trust Fund, which
interest rates may be fixed or variable. In the case of a Variable Rate
Non-REMIC Certificate that is subject to the original issue discount rules, the
daily portions of original issue discount generally will be calculated in the
same manner as discussed above except the principles discussed in "REMIC Regular
Certificates--Current Income on REMIC Regular Certificates--Original Issue
Discounts-Variable Rate REMIC Regular Certificates" will be applied.
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a NonREMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Mortgage Loans in accordance with its tax accounting method. In addition, if the
holder purchased the Non-REMIC Certificate at a discount or premium, the holder
will be required to account for such discount or premium in the manner described
below, as if it had purchased the Mortgage Loans directly. The treatment of any
discount will depend on whether the discount with respect to the Mortgage Loans
is original issue discount as defined in the Code and, in the case of discount
other than original issue discount, whether such other discount exceeds a de
minimis amount. In the case of original issue discount, the holder (whether a
cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Mortgage Loans. However, original issue discount could arise with respect to
a Mortgage Loan ("ARM") that provides for interest at a rate equal to the sum of
an index of market interest rates and a fixed number. The original issue
discount for ARMs generally will be determined under the principals discussed in
"REMIC Regular Certificates--Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
If discount on the Mortgage Loans other than original issue discount
exceeds a de minimis amount (described below), the holder will also generally be
required to include in income in each month the amount of such discount accrued
through such month and not previously included in income, but limited, with
respect to the portion of such discount allocable to any Mortgage Loan, to the
amount of principal on such Mortgage Loan received by the Trust Fund in that
month. Because the Mortgage Loans will provide for monthly principal payments,
such discount may be required to be included in income at a rate that is not
significantly slower (and, under certain circumstances, faster) than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-REMIC Certificate to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the de minimis rule,
market discount with respect to a Non-REMIC Certificate will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Mortgage Loans allocable to the Non-REMIC Certificate and (ii) the weighted
average life (determined using complete years) of the Mortgage Loans remaining
at the time of purchase of the Non-REMIC Certificate. See "REMIC Regular
Certificates--Current Income on REMIC Regular Certificates-Market Discount."
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize, as an offset to interest
income, the portion of such premium that is allocable to a Mortgage Loan under a
constant yield method based on the yield of the Mortgage Loan to such holder,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should be
allocated among the principal payments on the Mortgage Loan and allowed as an
ordinary deduction as principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a NonREMIC Certificate
acquired at a discount or premium will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
Mortgage Loan that is allocable to the Non-REMIC Certificate and the portion of
the adjusted basis of the Non-REMIC Certificate (see "Sales of Non-REMIC
Certificates" below) that is allocable to the Mortgage Loan.
Sales of Non-REMIC Certificates. A holder that sells a NonREMIC Certificate
will recognize gain or loss equal to the difference between the amount realized
in the sale and its adjusted basis in the Non-REMIC Certificate. In general,
such adjusted basis will equal the holder's cost for the Non-REMIC Certificate,
increased by the amount of any income previously reported with respect to the
Non-REMIC Certificate and decreased by the amount of any losses previously
reported with respect to the Non-REMIC Certificate and the amount of any
distributions received thereon. Any such gain or loss generally will be capital
gain or loss if the assets underlying the Non-REMIC Certificate were held as
capital assets, except that, for a NonREMIC Certificate to which the stripped
bond rules do not apply and that was acquired with more than a de minimis amount
of discount other than original issue discount (see "Taxation of Non-REMIC
Certificates if Stripped Bond Rules Do Not Apply" above), such gain will be
treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a "United
States person" (as defined below) and is not subject to federal income tax as a
result of any direct or indirect connection to the United States other than its
ownership of a Non-REMIC Certificate will not be subject to United States income
or withholding tax in respect of payments of interest or original issue discount
on a Non-REMIC Certificate to the extent attributable to Mortgage Loans that
were originated after July 18, 1984, provided that the holder complies to the
extent necessary with certain identification requirements (including delivery of
a statement, signed by the holder of the Non-REMIC Certificate under penalties
of perjury, certifying that such holder is not a United States person and
providing the name and address of such holder). Proposed Treasury regulations,
which would be effective with respect to payments made after December 31, 1997
if adopted in their current form, would provide alternative certification
requirements and means by which a holder of Non-REMIC Certificates could claim
the exemption from federal income and withholding tax. Interest or original
issue discount on a Non-REMIC Certificate attributable to Mortgage Loans that
were originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). For
these purposes, the term "United States person" means a citizen or a resident of
the United States, a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, and a trust for which one or
more United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. For years beginning before January
1, 1997, the term "United States person" shall include a trust whose income is
includible in gross income for United States federal income taxation regardless
of source, in lieu of trusts just described, unless the trust elects to have its
United States status determined under the criteria described in the previous
sentence for tax years ending after August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable mortgage
pools" are subject to corporate level tax on their net income. A "taxable
mortgage pool" is generally defined as an entity that meets the following
requirements: (i) the entity is not a REMIC, (ii) substantially all of the
assets of the entity are debt obligations, and more than 50 percent of such debt
obligations consists of real estate mortgages (or interests therein), (iii) the
entity is the obligor under debt obligations with two or more maturities, and
(iv) payments on the debt obligations on which the entity is the obligor bear a
relationship to the payments on the debt obligations which the entity holds as
assets. With respect to requirement (iii), the Code authorizes the Internal
Revenue Service to provide by regulations that equity interests may be treated
as debt for purposes of determining whether there are two or more maturities. If
a Series of Non-REMIC Certificates were treated as obligations of a taxable
mortgage pool, the Trust Fund would be ineligible to file consolidated returns
with any other corporation and could be liable for corporate tax. Treasury
regulations do not provide for the recharacterization of equity as debt for
purposes of determining whether an entity has issued debt with two maturities,
except in the case of transactions structured to avoid the taxable mortgage pool
rules.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes are imposed upon such
persons by Section 4975 of the Code. The Seller, Bear, Stearns & Co. Inc., each
Master Servicer or other servicer, any Pool Insurer, any Special Hazard Insurer,
the Trustee, and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition, holding or disposition of Certificates by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. Furthermore, if
an investing Plan's assets were deemed to include the Mortgage Assets and not
merely an interest in the Certificates, transactions occurring in the management
of Mortgage Assets might constitute prohibited transactions and the fiduciary
investment standards of ERISA could apply to the assets of the Trust Fund,
unless an administrative exemption applies.
In DOL Regulation { 2510.3-101 (the "Regulation"), the U.S. Department of
Labor has defined what constitutes Plan assets for purposes of ERISA and Section
4975 of the Code. The Regulation provides that if a Plan makes an investment in
an "equity interest" in an entity, the assets of the entity will be considered
the assets of such Plan unless certain exceptions apply. The Seller can give no
assurance that the Certificates will qualify for any of the exceptions under the
Regulation. As a result, the Mortgage Assets may be considered the assets of any
Plan which acquires a Certificate, unless some administrative exemption is
available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and the
Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Seller; and (iii) the payments made to
and retained by the Seller in connection with the Trust Fund, together with all
funds inuring to its benefit for administering the Trust Fund, represent no more
than "adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Seller, the Special Hazard Insurer, the Pool Insurer,
the Master Servicer, or other servicer, or the Trustee is a party in interest if
the Plan does not pay more than fair market value for such Certificate and the
rights and interests evidenced by such Certificate are not subordinated to the
rights and interests evidenced by other Certificates of the same pool. PTCE 83-1
also exempts from the prohibited transaction rules any transactions in
connection with the servicing and operation of the Mortgage Pool, provided that
any payments made to the Master Servicer in connection with the servicing of the
Trust Fund are made in accordance with a binding agreement, copies of which must
be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly approved
by an independent fiduciary who has authority to manage and control those plan
assets being invested in Certificates; (ii) the Plan pays no more for the
Certificates than would be paid in an arm's length transaction; (iii) no
investment management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Seller with regard to the sale, exchange or transfer
of Certificates to the Plan; (iv) the total value of the Certificates purchased
by such Plan does not exceed 25% of the amount issued; and (v) at least 50% of
the aggregate amount of Certificates is acquired by persons independent of the
Seller, the Trustee, the Master Servicer, and the Special Hazard Insurer or Pool
Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust Fund is a "mortgage pool", that the Certificates constitute "mortgage
pool pass-through certificates," and that the conditions set forth in PTCE 83-1
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should consider the availability of any other prohibited transaction exemptions.
The Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the following
general categories: single and multifamily residential or commercial mortgages,
motor vehicle receivables, consumer or commercial receivables and guaranteed
government mortgage pool certificates and the purchase, sale and holding of
mortgage-backed or asset- backed pass-through certificates representing
beneficial ownership interests in the assets of such investment trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by certain Plans must be on terms that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. Second,
the rights and interests evidenced by the Certificates must not be subordinated
to the rights and interests evidenced by other certificates of the same trust.
Third, the Certificates at the time of acquisition by the Plan must be rated in
one of the three highest generic rating categories by Standard & Poor's
Structured Rating Group, Moody's Investors Service Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Services, L.P. ("National Credit Rating
Agencies"). Fourth, the Trustee cannot be an affiliate of any member of the
"Restricted Group" which consists of any underwriter as defined in PTE 90-30,
the Seller, the Master Servicer, each servicer, the Pool Insurer, the Special
Hazard Insurer and any obligor with respect to obligations or receivables
constituting more than 5% of the aggregate unamortized principal balance of the
obligations or receivables as of the date of initial issuance of the
Certificates. Fifth, the sum of all payments made to and retained by such
underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained by
the Seller pursuant to the assignment of the obligations or receivables to the
related Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer and any servicer must represent not more than reasonable compensation
for such person's services under the Trust Agreement and reimbursement of such
person's reasonable expenses in connection therewith. Sixth, (i) the investment
pool consists only of assets of the type enumerated in the exemption and which
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools have been rated in one of the three
highest generic rating categories by one of the National Credit Rating Agencies
for at least one year prior to a Plan's acquisition of certificates; and (iii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to a Plan's
acquisition of certificates. Finally, the investing Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933, as amended. The Seller assumes that only Plans which
are accredited investors under the federal securities laws will be permitted to
purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption may
provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the Certificates,
no more than 25% of the assets over which the fiduciary has investment authority
are invested in Certificates of a trust containing assets which are sold or
serviced by the same entity. Finally, in the case of initial issuance (but not
secondary market transactions), at least 50% of each class of Certificates, and
at least 50% of the aggregate interests in the trust, must be acquired by
persons independent of the Restricted Group.
Before purchasing a Certificate in reliance on any of these exemptions or
any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain prohibited
transactions to which neither PTCE 83-1 nor PTE 90-30 is applicable, depending
in part upon the type of Plan fiduciary making the decision to acquire
Certificates and the circumstances under which such decision is made, including,
but not limited to PTCE 90-1 (regarding investments by insurance company pooled
separate accounts), PTCE 91-38 (regarding investments by bank collective
investments funds), PTCE 84-14 (regarding transactions effected by "qualified
professional asset managers"), PTCE 95-60 (regarding investments by insurance
company general accounts) and PTCE 96-23 (regarding transactions effected by
"in-house asset managers"). However, even if the conditions specified in either
of these exemptions are met, the scope of the relief provided by these
exemptions might or might not cover all acts which might be construed as
prohibited transactions.
Any Plan fiduciary considering whether to purchase a Certificate on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement and for so
long as they are rated in one of the two highest rating categories by a least
one nationally recognized statistical rating organization, the Certificates will
constitute "mortgage related securities" for purposes of SMMEA, and as such,
absent state legislation described below, will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that under applicable law obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
the Certificates will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Certain states adopted
legislation which limits the ability of insurance companies domiciled in these
states to purchase mortgage-related securities, such as the Certificates.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with Certificates
without limitation as to the percentage of their assets represented thereby,
federal credit unions may invest in Certificates, and national banks may
purchase Certificates for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. ss. 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which included
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities, and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), (whether or not the class of Certificates
under consideration for purchase constitutes a "mortgage related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is not
suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
A depository institution must ascertain and document prior to purchase and
no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative product
possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the character- istics of a mortgage derivative product
are such that the first two tests cannot be applied (such as interest-only
strips), the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i) the
mortgage derivative product has an expected weighted average life greater than
10.0 years; (ii) the expected weighted average life of the mortgage derivative
product: (a) extends by more than 4.0 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or (b) shortens by
more than 6.0 years, assuming an immediate and sustained parallel shift in the
yield curve of minus 300 basis points; and (iii) the estimated change in the
price of the mortgage derivative product is more than 17%, due to an immediate
and sustained parallel shift in the yield curve of plus or minus 300 basis
points.
When performing the price sensitivity test, the same prepayment assumptions
and same cash flows that were used to estimate average life sensitivity must be
used. The discount rate assumptions should be determined by (i) assuming that
the discount rate for the security equals the yield on a comparable average life
U.S. Treasury security plus a constant spread, (ii) calculating the spread over
Treasury rates from the bid side of the market for the mortgage derivative
product, and (iii) assuming the spread remains constant when the Treasury curve
shifts up or down 300 basis points. Discounting the cash flows by their
respective discount rates estimates a price in the plus or minus 300 basis point
environments. The initial price must be determined by the offer side of the
market and used as the base price from which the 17% price sensitivity test will
be measured.
Generally, a floating-rate debt class will not be subject to the average
life and average life sensitivity tests described above if it bears a rate that,
at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Inter- bank Offered Rate (LIBOR). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to purchase
Certificates representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors and comply with any other applicable
requirements.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Bear, Stearns & Co. Inc. ("Bear, Stearns"), an affiliate of the Seller,
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Seller. In connection with the
sale of the Certificates, underwriters may receive compen- sation from the
Seller or from purchasers of the Certificates in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Seller.
Alternatively, the Prospectus Supplement may specify that the Certificates
will be distributed by Bear, Stearns acting as agent or in some cases as
principal with respect to Certificates that it has previously purchased or
agreed to purchase. If Bear, Stearns acts as agent in the sale of Certificates,
Bear, Stearns will receive a selling commission with respect to each Series of
Certificates, depending on market conditions, expressed as a percentage of the
aggregate principal balance of the Certificates sold hereunder as of the Cut-off
Date. The exact percentage for each Series of Certificates will be disclosed in
the related Prospectus Supplement. To the extent that Bear, Stearns elects to
purchase Certificates as principal, Bear, Stearns may realize losses or profits
based upon the difference between its purchase price and the sales price. The
Prospectus Supplement with respect to any Series offered other than through
underwriters will contain information regarding the nature of such offering and
any agreements to be entered into between the Seller and purchasers of
Certificates of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Seller anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the Seller
by Stroock & Stroock & Lavan, Seven Hanover Square, New York, New York 10004.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates under certain scenarios might fail to recoup
their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
<PAGE>
GLOSSARY
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
TERM PAGE
Accounts.................................................. 53
APR....................................................... 11
ARM....................................................... 135
Accrual Certificates...................................... 56
Agency Securities......................................... 1
Agreement................................................. 15
Available Funds........................................... 55
Bear, Stearns............................................. 146
Bankruptcy Bond........................................... 22
Buydown Funds ............................................ 112
Buydown Loans............................................. 39
CMO....................................................... 13
Cede...................................................... 61
Certificateholder......................................... 2
Certificate Account........................................ 81
Certificate Register....................................... 54
Certificates............................................... 1
Charter Act................................................ 39
Cleanup Costs.............................................. 110
Code........................................................ 25
Collateral Value............................................ 32
Commission.................................................. 4
Contracts................................................... 1
Cooperative Loans........................................... 1
Cooperatives................................................ 7
Current Principal Amount.................................... 56
Cut-off Date................................................ 18
Definitive Certificates..................................... 62
Detailed Description........................................ 30
Determination Date.......................................... 55
Distribution Dates.......................................... 4
DTC......................................................... 61
ERISA....................................................... 28
Events of Default............................................. 93
FDIC.......................................................... 50
FHA........................................................... 7
FHA Insurance................................................. 53
FHA Loans..................................................... 37
FHLMC......................................................... 1
FHLMC Act....................................................... 41
FHLMC Certificate group......................................... 41
FHLMC Certificates.............................................. 12
FNMA............................................................ 1
FNMA Certificates............................................... 12
FTC Rule........................................................ 106
GNMA............................................................ 1
GNMA Certificates.............................................. 12
GNMA Issuer.................................................... 37
Garn-St Germain Act............................................ 107
Guaranty Agreement............................................. 37
HUD............................................................. 45
Housing Act..................................................... 36
Index........................................................... 135
Indirect Participants............................................. 61
Insurance Proceeds................................................ 80
Insured Expenses.................................................. 80
Lender............................................................ 1
LIBOR............................................................. 146
Liquidation Expenses.............................................. 81
Liquidation Proceeds.............................................. 81
Loan-to-Value Ratio............................................... 32
Lower Tier REMIC.................................................. 123
Manufactured Homes................................................ 36
Manufacturer's Invoice Price...................................... 33
Margin ........................................................... 135
Master Servicer................................................... 2
Mortgage.......................................................... 77
Mortgage Assets................................................... 1
Mortgage Loans.................................................... 6
Mortgage Pool..................................................... 6
Mortgage Rate..................................................... 9
Mortgaged Property................................................ 30
Mortgagors........................................................ 55
Multifamily Loans................................................. 1
National Credit Rating Agencies................................... 141
Non-REMIC Certificates............................................ 27
Participants...................................................... 61
Pass-Through Rate................................................. 4
Plan.............................................................. 138
PMBS Agreement.................................................... 44
PMBS Issuer....................................................... 15
PMBS Servicer..................................................... 15
PMBS Trustee...................................................... 15
Percentage Interests ............................................. 93
Permitted Investments............................................. 72
Policy Statement................................................... 144
Pool Insurance Policy.............................................. 21
Pool Insurer....................................................... 65
Prepayment Assumption.............................................. 114
Primary Insurance Policy .......................................... 30
Primary Insurer.................................................... 88
Principal Prepayments.............................................. 57
Private Mortgage-Backed Securities................................. 1
Proposed OID Regulations........................................... 114
Protected Account.................................................. 79
PTCE 83-1.......................................................... 139
PTE 90-30.......................................................... 141
Purchase Price.................................................... 51
REMIC............................................................. 2
REMIC Certificates................................................ 111
REMIC Regular Certificates........................................ 26
REMIC Regulations................................................. 112
REMIC Residual Certificates........................................ 26
Rating Agency...................................................... 23
Record Date........................................................ 54
Refinance Loan..................................................... 32
Regulation......................................................... 139
Relief Act......................................................... 109
Reserve Account.................................................... 4
Retained Interest.................................................. 53
RICs .............................................................. 124
REITs ............................................................. 124
SMMEA.............................................................. 25
Seller............................................................. 1
Senior Certificates................................................ 15
Single Family Loans................................................ 1
Special Hazard Insurance Policy.................................... 21
Special Hazard Insurer............................................. 67
Sub-Servicer....................................................... 24
Sub-Servicing Agreement............................................ 82
Subordinated Certificates.......................................... 16
Superlien.......................................................... 110
Tiered REMICs...................................................... 113
Title V............................................................ 108
Trust Fund......................................................... 1
Trustee............................................................ 2
UCC................................................................ 61
United States person............................................... 129
VA................................................................. 7
VA Guarantees...................................................... 53
VA Loans........................................................... 37
Variable Rate Non-REMIC Certificates............................... 134
Variable Rate REMIC Regular Certificate............................ 117
Yield Supplement Agreement......................................... 111
<PAGE>
[This Page Intentionally Left Blank]
<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, the Underwriter or the
Certificate Insurer. This Prospectus Supplement and the accompanying Prospectus
do not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Certificates offered hereby nor an offer of such
Certificates to any person, in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus Supplement and the
accompanying Prospectus at any time does not imply that information herein is
correct as of any time subsequent to its date.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of dealers
to deliver a Prospectus Supplement and Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
Summary of Terms................................. S-4
Description of the Certificates................... S-13
Description of the Pooled Certificates............ S-15
Yield and Prepayment Considerations .............. S-22
The Pooling Agreement............................. S-31
Federal Income Tax Considerations ................ S-34
Certain State Tax Considerations ................. S-35
ERISA Considerations.............................. S-35
Legal Investment.................................. S-36
Method of Distribution............................ S-36
Legal Matters..................................... S-36
Certificate Rating................................ S-36
Glossary......................................... S-38
Annex 1-Pooled Certificate Current Information .. 1-1
Annex 2 - Pooled Certificate Information.......... 2-1
PROSPECTUS
Prospectus Supplement.......................... 2
Available Information.......................... 2
Incorporation of Certain Documents By Reference 2
Reports to Certificateholders.................. 3
Summary of Terms............................... 4
The Trust Fund................................. 16
Use of Proceeds................................ 26
The Seller .................................... 27
Mortgage Loan Program.......................... 27
Description of the Certificates................ 30
Credit Enhancement............................. 36
Yield and Prepayment Considerations ........... 43
The Pooling and Servicing Agreement ........... 45
Certain Legal Aspects of the Mortgage Loans.... 56
Certain Federal Income Tax Consequences........ 64
ERISA Considerations........................... 83
Legal Investment............................... 86
Method of Distribution......................... 88
Legal Matters.................................. 88
Financial Information.......................... 89
Ratings........................................ 89
Glossary....................................... 90
$54,672,353
BEAR STEARNS
MORTGAGE SECURITIES INC.
PASS-THROUGH
CERTIFICATES,
SERIES 1997-3
PROSPECTUS SUPPLEMENT
BEAR, STEARNS & CO. INC.
March 25, 1997
