PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 24, 1998)
$245,226,989
(APPROXIMATE)
STRUCTURED ASSET MORTGAGE INVESTMENTS INC.
Depositor
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Master Servicer
PROVIDENT FUNDING ASSOCIATES, L.P.
Seller and Servicer
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-11
The Certificates will represent the entire beneficial interest in a
trust fund (the "Trust" or "Trust Fund") consisting primarily of fixed rate
mortgage loans secured by first liens on one- to four-family residential
properties. Cashflow from the mortgage loans and certain other proceeds related
to such mortgage loans will pay the classes of Certificates. Only the
Certificates identified below are offered hereby.
Capitalized terms used herein are defined where indicated in the Index
of Principal Definitions.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-15 OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE 19 OF THE PROSPECTUS BEFORE PURCHASING ANY
CERTIFICATES. In addition, if you are purchasing a class that pays only
principal, you should consider the risk that a slower than anticipated rate of
principal payments on the applicable mortgage loans will result in an actual
yield that is lower than you anticipate. If you are purchasing a class that pays
only interest, you should consider the risk that a faster than anticipated rate
of principal payments on the applicable mortgage loans will result in a yield
that is lower than you anticipate and a rapid rate of such payments could result
in a failure to fully recover your initial investment.
The Certificates are obligations only of the Trust. Neither the
Certificates nor the mortgage loans are insured or guaranteed by any person.
Distributions on the Certificates will be payable solely from the assets
transferred to the Trust for the benefit of
Certificateholders.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
$ 152,789,379 6.75% Class A-1 Certificates $ 20,000,000 6.75% Class A-13 Certificates
$ 8,996,934 6.75% Class A-2 Certificates $ 546,386 6.50% Class A-14 Certificates
$ 3,142,585 6.75% Class A-3 Certificates $ 540,367 6.50% Class A-15 Certificates
$ 1,000,000 6.50% Class A-4 Certificates $ 540,366 7.00% Class A-16 Certificates
$ 1,000,000 7.00% Class A-5 Certificates $ 546,386 7.00% Class A-17 Certificates
$ 3,014,797 6.75% Class A-6 Certificates $ 24,757,903 6.75% Class A-18 Certificates
$ 197,146 6.75% Class A-7 Certificates $ (2) (2) Class X Certificates
$ 8,951,364 7.00% Class A-8 Certificates $ 347,489 (1) Class PO Certificates
$ 5,116,537 7.00% Class A-9 Certificates $ 100 6.75% Class R Certificates
$ 2,999,527 7.00% Class A-10 Certificates $ 4,704,000 6.75% Class B-1 Certificates(3)
$ 1,271,407 7.00% Class A-11 Certificates $ 2,599,600 6.75% Class B-2 Certificates(3)
$ 679,216 (1) Class A-12 Certificates $ 1,485,500 6.75% Class B-3 Certificates(3)
</TABLE>
- -------------
(1) This class pays only principal.
(2) Notional amount. This class pays only interest, calculated on a notional
amount which is not paid, at a variable rate described under "Summary of
Terms--The Certificates--Offered Certificates" herein.
(3) The pass-through rate for the initial interest accrual period is
approximately 0.2612% per annum.
(4) This class is a subordinate certificate.
----------
Bear, Stearns & Co. Inc. (the "Underwriter") will offer the
Certificates listed on the cover hereof (other than the Class X Certificates)
(the "Underwritten Certificates") set forth above, subject to certain
conditions, from time to time in negotiated transactions at varying prices to be
determined at the time of sale. See "Method of Distribution" herein.
The Underwriter will deliver to purchasers the Class R Certificates,
and Structure Asset Mortgage Investments Inc. (the "Depositor") will deliver to
purchasers the Class X and Class PO Certificates, in physical form, and the
Underwriter will deliver the remaining Certificates set forth above in
book-entry form through The Depository Trust Company, in each case on or about
November 30, 1998.
----------
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is November 24, 1998
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
The Depositor provides information to you about the Certificates in two
separate documents that progressively provide more detail: (a) the accompanying
Prospectus, which provides general information, some of which may not apply to
your Certificates and (b) this Prospectus Supplement, which describes the
specific terms of your Certificates.
If the terms of your Certificates vary between this Prospectus
Supplement and the accompanying Prospectus, you should rely on the information
in this Prospectus Supplement.
The Depositor includes cross-references in this Prospectus Supplement
and the accompanying Prospectus to captions in these materials where you can
find further related discussions. The following Tables of Contents provide the
pages on which these captions are located.
The Depositor may have filed preliminary information regarding the
Trust's assets and the Certificates with the SEC. If so, the information
contained in this document supersedes all of that preliminary information, which
was prepared by the Underwriter for prospective investors.
Statements contained herein which do not relate to historic or current
information 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"). Actual results could differ materially from those contained in such
statements as a result of the matters set forth under "Summary of Terms--Yield
and Prepayment Considerations" and "Yield and Prepayment Considerations" and
elsewhere in this Prospectus Supplement.
The Depositor's principal offices are located at 245 Park Avenue, New
York, New York 10167 and its telephone number is (212) 272-2000.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Caption Page
- ------- ----
Summary of Terms.............................................................S-4
Risk Factors................................................................S-15
Geographic Concentration................................................S-15
Other Risks.............................................................S-15
Description of the Mortgage Pool............................................S-16
General.................................................................S-16
The Master Servicer and Servicer........................................S-16
Norwest.................................................................S-16
Provident...............................................................S-16
Underwriting Standards......................................................S-17
General.................................................................S-17
Standard Underwriting Guidelines........................................S-18
Expanded Underwriting Guidelines........................................S-19
Mortgage Loan Production................................................S-20
Description of the Certificates.............................................S-20
General.................................................................S-20
Book-Entry Registration.................................................S-22
Available Distribution Amount...........................................S-22
Interest Distributions..................................................S-22
Principal Distributions on the Senior Certificates......................S-24
Principal Distributions on the Retail Lottery Certificates..............S-28
Principal Distributions on the Offered Subordinate Certificates.........S-31
Allocation of Losses; Subordination ....................................S-33
Certain Yield and Prepayment Considerations.................................S-36
General.................................................................S-36
Variable Strip Certificate and
Principal Only Certificate Yield Considerations....................S-45
Additional Yield Considerations Applicable
Solely to the Residual Certificates................................S-46
The Pooling and Servicing Agreement.........................................S-46
General.................................................................S-46
Servicing...............................................................S-47
Voting Rights...........................................................S-47
Assignment of Mortgage Loans............................................S-47
Representations and Warranties..........................................S-48
Collection and Other Servicing Procedures...............................S-49
Hazard Insurance........................................................S-50
Realization Upon Defaulted Mortgage Loans; Purchases of Defaulted
Mortgage Loans..........................................................S-51
Servicing Compensation and Payment of Expenses..........................S-51
Protected Account; Custodial Account and Certificate Account............S-52
Certain Matters Regarding the Master Servicer and the Servicer..........S-52
Events of Default.......................................................S-53
Servicer Events of Default..............................................S-54
Monthly Advances........................................................S-55
Reports to Certificateholders...........................................S-55
Termination.............................................................S-55
The Trustee.............................................................S-55
Year 2000 Issue.........................................................S-56
Federal Income Tax Consequences.............................................S-56
Restrictions on Purchase and Transfer
of the Residual Certificates..............................................S-57
ERISA Considerations........................................................S-57
Method of Distribution......................................................S-59
Legal Opinions..............................................................S-59
Ratings.....................................................................S-59
Legal Investment............................................................S-60
Index of Principal Definitions..............................................S-61
Schedule A-Certain Characteristics of the Mortgage Loans.....................A-1
<PAGE>
PROSPECTUS
Caption Page
- ------- ----
Prospectus Supplement.........................................................2
Available Information.........................................................2
Incorporation of Certain Documents By Reference...............................3
Reports to Securityholders....................................................3
Summary of Terms..............................................................4
Risk Factors.................................................................19
The Trust Fund...............................................................21
The Mortgage Loans - General.............................................22
Single Family and Cooperative Loans......................................24
Multi-family Loans.......................................................25
Contracts................................................................25
Agency Securities........................................................26
Private Mortgage-Backed Securities.......................................30
U.S. Government Securities...............................................32
FASITs...................................................................32
Substitution of Mortgage Assets..........................................32
Use of Proceeds..............................................................32
The Depositor................................................................32
The Mortgage Loans...........................................................33
Underwriting Standards...................................................33
Qualifications of Lenders................................................34
Representations by Lenders; Repurchases..................................34
Optional Purchase of Defaulted Loans.....................................35
Description of the Securities................................................36
General..................................................................36
Distributions on Securities..............................................37
Advances.................................................................39
Reports to Securityholders...............................................39
Book-Entry Registration..................................................40
Exchangeable Securities......................................................43
General..................................................................43
Exchanges................................................................44
Procedures and Exchange Proportions......................................47
Credit Enhancement...........................................................48
General..................................................................48
Subordination............................................................48
Pool Insurance Policies..................................................49
Special Hazard Insurance Policies........................................50
Bankruptcy Bonds.........................................................51
FHA Insurance; VA Guarantees.............................................51
FHA Insurance on Multi-family Loans......................................53
Reserve and Other Accounts...............................................53
Other Insurance, Guarantees and Similar Instruments or
Agreements..........................................................54
Cross Support............................................................54
Yield and Prepayment Considerations..........................................54
Administration...............................................................56
Assignment of Mortgage Assets............................................56
Payments on Mortgage Loans; Deposits to
Accounts............................................................58
Sub-Servicing by Lenders.................................................59
Collection Procedures....................................................60
Hazard Insurance.........................................................61
Realization Upon Defaulted Mortgage Loan.................................62
Servicing and Other Compensation and Payment
of Expenses.........................................................63
Evidence as to Compliance................................................64
Certain Matters Regarding the Master Servicer
and the Depositor...................................................64
Events of Default; Rights Upon Event of
Default.............................................................65
The Trustee..............................................................67
Duties of the Trustee....................................................67
Resignation of Trustee...................................................68
Amendment................................................................68
Termination; Optional Termination........................................68
Legal Aspects of the Mortgage Loans..........................................69
General..................................................................69
Foreclosure/Repossession.................................................72
Rights of Redemption.....................................................74
Anti-Deficiency Legislation and Other
Limitations on Lenders..............................................74
Due-on-Sale Clauses......................................................75
Prepayment Charges.......................................................76
Applicability of Usury Laws..............................................76
Soldiers' and Sailors' Civil Relief Act..................................76
Product Liability and Related Litigation.................................76
Environmental Considerations.............................................77
Federal Income Tax Consequences..............................................77
General..................................................................77
REMIC and FASIT Elections................................................78
REMIC Securities.........................................................78
Tiered REMIC Structures..................................................79
REMIC Regular Securities.................................................79
Tax Treatment of Yield Supplement
Agreements..........................................................85
REMIC Residual Certificates..............................................86
Transfers of REMIC Residual Certificates.................................88
Deductibility of Trust Fund Expenses.....................................90
Foreign Investors in REMIC Securities....................................90
Backup Withholding on REMIC Securities...................................91
REMIC Administrative Matters.............................................92
FASIT Securities.........................................................92
Qualification as a FASIT.................................................92
Tiered FASIT Structures..................................................93
FASIT Regular Securities.................................................94
Tax Treatment of Yield Supplement
Agreements..........................................................95
FASIT Ownership Certificate..............................................95
Grantor Trusts...........................................................96
Tax Characterization of the Trust as a
Partnership........................................................100
Tax Consequences to Holders of Debt
Securities Issued by a Partnership................................100
Tax Consequences to Holders of Notes Issued
by a Partnership..................................................102
Tax Consequences to Holders of Certificates
Issued by a Partnership............................................102
Taxation of Classes of Exchangeable
Securities.........................................................106
Callable Classes........................................................108
State Tax Consequences......................................................108
ERISA Considerations........................................................108
Legal Investment............................................................113
SMMEA...................................................................113
FFIEC Policy Statement..................................................113
Generally...............................................................114
Method of Distribution......................................................115
Legal Matters...............................................................115
Financial Information.......................................................116
Rating......................................................................116
Glossary....................................................................117
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION APPEARING IN GREATER DETAIL
ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS. TO
UNDERSTAND THE OFFERING, YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS
SUPPLEMENT AND PROSPECTUS. YOU CAN FIND THE LOCATION OF THE MEANING ASSIGNED TO
CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS SUMMARY IN THE INDEX OF PRINCIPAL
DEFINITIONS HEREIN.
DEPOSITOR..........................Structured Asset Mortgage Investments Inc.
("SAMI") (formerly known as Bear Stearns
Mortgage Securities Inc.). See
"Structured Asset Mortgage Investments
Inc." in the Prospectus.
MASTER SERVICER....................Norwest Bank Minnesota, National Association
("Norwest").
SELLER AND SERVICER................Provident Funding Associates, L.P.
("Provident").
TRUSTEE............................The First National Bank of Chicago.
CUT-OFF DATE.......................November 1, 1998.
CLOSING DATE.......................On or about November 30, 1998.
THE CERTIFICATES
TITLE........................Mortgage Pass-Through Certificates, Series
1998-11 (the "Certificates"). The Trust
will issue the Certificates pursuant to
a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") to be
dated as of the Cut-off Date among SAMI,
the Master Servicer, the Servicer and
the Trustee.
OFFERED CERTIFICATES.........The Classes of Certificates in the
approximate principal or notional
amounts set forth, and bearing interest,
if applicable, at the rates set forth on
the cover page hereto and as follows:
o the Class X Certificates bear interest
on their notional amount (equal to
the aggregate Stated Principal
Balance of the Mortgage Loans with
Net Mortgage Rates equal to or
greater than 6.75% per annum) at a
variable pass-through rate equal to
the weighted average of the excess
of (a) the Net Mortgage Rates on
each such Mortgage Loan over (b)
6.75% per annum. The initial
notional amount for the Class X
Certificates is approximately
$226,292,064 and the pass-through
rate for the initial interest
accrual period is approximately
0.2612% per annum.
OTHER CERTIFICATES...........The following Classes of "Other
Certificates" will be issued in the
indicated approximate original principal
amounts and bearing the indicated rates
of interest, which will provide credit
support to the Offered Certificates, but
which are not offered by this Prospectus
Supplement:
S-4
<PAGE>
Class B-4 Certificates $ 866,500 6.75%
Class B-5 Certificates $ 619,000 6.75%
Class B-6 Certificates $ 866,541 6.75%
The information contained herein with
respect to the Other Certificates is
provided only to permit you to better
understand the Offered Certificates.
OTHER DESIGNATIONS
CERTIFICATES.................Offered Certificates and Other Certificates.
SENIOR CERTIFICATES..........The Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6, Class A-7,
Class A-8, Class A-9, Class A-10, Class
A- 11, Class A-12, Class A-13, Class
A-14, Class A-15, Class A-16, Class
A-17, Class A-18, Class PO, Class X and
Class R Certificates.
SUBORDINATE CERTIFICATES.....The Class B-1, Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6
Certificates.
OFFERED SUBORDINATE
CERTIFICATES.................The Class B-1, Class B-2, and Class B-3
Certificates.
INTEREST ONLY CERTIFICATES...The Class X Certificates.
PRINCIPAL ONLY CERTIFICATES..The Class A-12 and Class PO Certificates.
LOCKOUT CERTIFICATES.........The Class A-18 Certificates.
RETAIL LOTTERY CERTIFICATES..The Class A-9, Class A-10, Class A-14, Class
A-15, Class A-16 and Class A-17
Certificates.
REGULAR CERTIFICATES.........All Classes of Certificates other than the
Residual Certificates.
RESIDUAL CERTIFICATES........The Class R Certificates.
PHYSICAL CERTIFICATES........The Class PO Certificates, Class X
Certificates, the Other Certificates and
the Residual Certificates.
BOOK-ENTRY CERTIFICATES......All Certificates other than the Physical
Certificates.
DENOMINATIONS................Senior Certificates (other than the Residual
Classes), $1,000 and increments of $1.00
(or $1,000 in the case of the Retail
Lottery Certificates) in excess thereof;
Class R, a single Certificate of $100;
and Offered Subordinate Certificates,
$25,000 and increments of $1.00 in
excess thereof.
REGISTRATION.................Each investor in a Class of Book-Entry
Certificates will hold beneficial
interests in such Certificates through
DTC. Each Class of Physical Certificates
will be issued in certificated
fully-registered form.
DISTRIBUTION DATES...........The 25th day of each month, or if such day
is not a business day, then the next
succeeding Business Day, beginning in
December 1998 (each, a "Distribution
Date").
S-5
<PAGE>
RECORD DATE..................The "Record Date" for each Distribution Date
will be the close of business on the
last Business Day of the month preceding
the month in which the related
Distribution Date occurs.
INTEREST ACCRUAL PERIOD......With respect to each Distribution Date, the
calendar month preceding the month in
which the Distribution Date occurs,
beginning in November.
THE MORTGAGE POOL..................Conventional first lien, fixed rate mortgage
loans secured by one- to four-family
residences and individual condominium
units located primarily in California.
Provident originated and will service the
Mortgage Loans, and Norwest will act as
Master Servicer of the Mortgage Loans.
All of the Mortgage Loans with Loan-to-Value
Ratios at origination in excess of 80%
have primary mortgage insurance.
The Depositor has set forth below certain
information regarding the Mortgage Loans
and the related Mortgaged Properties as
of the Cut-off Date. All such
information is provided on an
approximate basis. The assumptions made
and the bases of the calculations are
set forth together with the more
detailed statistical information
relating to the Mortgage Loans in
Schedule A which is attached hereto and
is a part of this Prospectus Supplement.
You should also refer to "Description of
the Mortgage Loans" herein.
Number of Mortgage Loans........... 783
Aggregate
Stated Principal Balance..............$247,579,030
Minimum Stated Principal Balance........$54,000
Maximum Stated Principal Balance........$809,000
Average Stated Principal Balance........$316,193
Minimum Mortgage Rate...................6.500% per annum
Maximum Mortgage Rate...................9.500% per annum
Weighted Average Mortgage Rate..........7.290% per annum
Weighted Average Net Mortgage Rate......6.979% per annum
Minimum Remaining Term
to Stated Maturity ...................177 months
Maximum Remaining Term
to Stated Maturity ...................360 months
Weighted Average Remaining
Term to Stated Maturity...............358 months
Weighted Average Original Loan-to-Value
Ratio.................................72.94%
Location of Mortgaged Property
California...........................89.92%
Other................................10.08%
S-6
<PAGE>
DISTRIBUTIONS ON THE CERTIFICATES..GENERAL. The Trustee will make distributions
with respect to each Class of
Certificates primarily from certain
collections and other recoveries on the
Mortgage Loans. On each Distribution
Date with respect to either payments of
interest or principal: (i) the Senior
Certificates will be entitled to receive
all amounts distributable to them for
such Distribution Date before any
distributions are made to the
Subordinate Certificates on such date,
and (ii) the Subordinate Certificates
will be entitled to receive all amounts
distributable to them for such
Distribution Date before any
distributions are made on such date on
any Class of Subordinate Certificates
with a higher numerical class
designation.
The Servicer will collect monthly payments of
principal and interest on the Mortgage
Loans. After retaining fees due to it
and amounts that reimburse it for
reimbursable expenses and advances, the
Servicer will forward all such
collections, together with any advances
that it makes for delinquent mortgage
payments, to the Master Servicer who
will in turn forward such amounts to the
Trustee. The aggregate amount of such
monthly collections and advances is
described under the heading "Description
of the Certificates--Available Funds" in
this Prospectus Supplement.
Distributions to Certificateholders will be
made as follows:
S-7
<PAGE>
- --------------------------------------------------------------
STEP 1
Distribution of interest to the interest
bearing Senior Certificates
- --------------------------------------------------------------
STEP 2
Distribution of principal to the Class PO Certificates (1)
- --------------------------------------------------------------
STEP 3
- --------------------------------------------------------------
Distribution of principal to the Senior Certificates
(other than the Class PO Certificates)
- --------------------------------------------------------------
STEP 4
Distribution to the Subordinate Certificates as follows:
o Interest to the Class B-1 Certificates
o Principal to the Class B-1 Certificates
o Interest to the Class B-2 Certificates
o Principal to the Class B-2 Certificates
o Interest to the Class B-3 Certificates
o Principal to the Class B-3 Certificates
- --------------------------------------------------------------
STEP 5
Distribution of interest and
principal to the Other Certificates
- --------------------------------------------------------------
STEP 6
Any remaining funds to the
Class R Certificates(2)
- --------------------------------------------------------------
- ------------------
(1) The Class PO receives only a certain portion of the principal received in
respect of each Mortgage Loan that has a Net Mortgage Rate of less than
6.75%, as described in "Description of the Certificates--Distributions on
the Certificates--Principal."
(2) It is very unlikely that any distribution will be made to the Class R
Certificates under this Step 6.
S-8
<PAGE>
As a Certificateholder, you will generally
be entitled to receive on each
Distribution Date interest on the
Certificates of each Class you hold
(other than the Class A-12 and Class PO
Certificates), which will accrue during
the preceding Interest Accrual Period,
in an amount equal to:
o 1/12th
MULTIPLIED BY
o the pass-through rate for such Class set
forth herein
MULTIPLIED BY
o the Certificate Principal Balance or
Notional Amount of such Class
immediately prior to such Distribution
Date.
You will also be entitled to receive any
previously accrued and unpaid interest
on such Classes.
Interest distributions may be reduced by
shortfalls of interest payments received
on the Mortgage Loans. Certain interest
shortfalls will be made up by
compensating interest payments made by
the Master Servicer and the Servicer
from their respective servicing fees.
See "The Pooling and Servicing
Agreement--Servicing Compensation and
Payment of Expenses." Interest will be
calculated on the basis of a 360- day
year comprised of twelve 30-day months.
The Class A-12 Certificates and Class PO
Certificates are principal only
Certificates and will not bear interest.
Principal distributions on Certificates
entitled to principal distributions will
be allocated among the various classes
of Certificates as more fully described
under "Description of the
Certificates--Distributions on the
Certificates" in this Prospectus
Supplement. Not all Classes of Offered
Certificates will receive principal on
each Distribution Date.
CREDIT ENHANCEMENT --
GENERAL.........................The Subordinate Certificates will provide
credit enhancement for the Senior
Certificates. Each Class of Subordinate
Certificates with a higher numerical
Class designation will provide credit
enhancement for each Class of
Certificates with a lower numerical
Class designation.
CREDIT ENHANCEMENT --
SUBORDINATION; ALLOCATION
OF LOSSES.......................The Trustee will make distributions to
Senior Certificates prior to
distributions to the Subordinate
Certificates and as among the
Subordinate Certificates, to such
Classes in numerical order.
So long as the Subordinate Certificates are
outstanding, losses will be allocated
(other than extraordinary losses or
losses due to bankruptcy, special
hazards and fraud in excess of certain
limits) first to the Subordinate
Certificates, in reverse
S-9
<PAGE>
numerical order beginning with the Class
with the highest numerical designation,
before allocating them to the Senior
Certificates. A loss is allocated to a
Certificate by reducing its principal
balance by the amount of the loss.
Losses occur if:
o the Trust cannot dispose of a Mortgaged
Property upon liquidation for an amount
at least equal to the total amount owed
by the Mortgagor plus expenses of
liquidation and any unreimbursed
advances; or
o the Mortgagor's monthly payments are
reduced or the principal balance of the
Mortgage Loan is reduced following a
bankruptcy proceeding or default
modification.
If no Subordinate Certificates remain
outstanding, losses will be allocated
among the Senior Certificates in
proportion to their unpaid principal
balances prior to such allocation.
A portion of losses on each Mortgage Loan
having a Net Mortgage Rate of less than
6.75% that are allocated to the Senior
Certificates will be allocated first to
the Class PO Certificates in an amount
based on the percentage of each such
Mortgage Loan represented by the Class
PO Certificates. The remainder of such
losses will be allocated as described
above.
Such subordination will increase the
likelihood of timely receipt by the
holders of the Certificates with higher
relative payment priority of the maximum
amount to which they are entitled on any
Distribution Date and will provide such
holders protection against losses
resulting from defaults on Mortgage
Loans to the extent described herein.
See "Description of the
Certificates--Distributions on the
Certificates," "--Allocation of Losses;
Subordination" and "--Subordination"
herein.
As of the Closing Date, the aggregate
Certificate Principal Balance of the
Subordinate Certificates and of the
Other Certificates will equal
approximately 4.50% and 0.95%,
respectively, of the aggregate
Certificate Principal Balance of all the
Classes of Certificates.
In addition, to extend the period during
which the Subordinate Certificates
remain available as credit enhancement
to the Senior Certificates, the entire
amount of any prepayments and certain
other unscheduled recoveries of
principal with respect to the Mortgage
Loans will be allocated to the Senior
Certificates to the extent described
herein during the first five years after
the Cut-off Date (with such allocation
being subject to reduction over an
additional five year period thereafter
as described herein). This will
accelerate the amortization of the
Senior Certificates as a whole while, in
the absence of losses in respect of the
Mortgage Loans, increasing the
percentage interest in the principal
balance of the Mortgage Loans evidenced
by the Subordinate Certificates.
S-10
<PAGE>
See "Description of the
Certificates--Distributions on the
Certificates" and "--Subordination"
herein.
MONTHLY ADVANCES...................The Servicer will be obligated to advance
delinquent scheduled payments of
principal and interest on Mortgage Loans
which it services under certain
circumstances. See "The Pooling and
Servicing Agreement--Monthly Advances"
herein.
YIELD AND PREPAYMENT
CONSIDERATIONS..................The yield to maturity of each Class of
Certificates will be affected by the
following:
o the amount and timing of principal
payments on the Mortgage Loans,
o the allocation of the Available
Distribution Amount to such Class of
Certificates,
o the applicable Pass-Through Rate for
such Class of Certificates,
o the purchase price paid for such Class
of Certificates, and
o losses and net interest shortfalls
allocated to such Class of Certificates.
The interaction of the foregoing factors may
have different effects on the various
Classes of Certificates and the effects
on any Class may vary at different times
during the life of such Class. No one
can currently determine the actual rate
of prepayments on the Mortgage Loans,
the amount and timing of losses or net
interest shortfalls or the yield to
maturity of any Certificates. You are
urged to consider your own estimates as
to the anticipated rate of future
prepayments on the Mortgage Loans and
the suitability of the Certificates to
your investment objectives. You should
carefully review the discussion under
"Yield and Prepayment Considerations"
herein and in the Prospectus.
LIQUIDITY..........................There is currently no secondary market for
the Certificates, and you cannot be
assured that one will develop. Bear,
Stearns & Co. Inc. intends to establish
a market in the Underwritten
Certificates, but it is not obligated to
do so. Even if such a market is
established it may not continue. Each
Certificateholder will receive monthly
reports pertaining to the Certificates
as described under
"Administration--Reports to
Certificateholders" in the Prospectus.
There are a limited number of sources
which provide certain information about
mortgage pass-through certificates in
the secondary market, and they may not
provide information about the
Certificates. Investors should consider
the effect of limited information on the
liquidity of the Certificates.
ASSUMED FINAL DISTRIBUTION DATE....January 25, 2029. It is likely that the
actual final Distribution Date will
occur earlier due to prepayments or the
exercise of the optional termination
right described below. See "Yield
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<PAGE>
and Prepayment Considerations--Assumed
Final Distribution Date" herein.
OPTIONAL TERMINATION...............SAMI or its designee may repurchase from the
Trust all Mortgage Loans at the purchase
price set forth in the Pooling and
Servicing Agreement when the Stated
Principal Balance of the Mortgage Loans
is less than 10% of their Stated
Principal Balance on the Cut-off Date.
If SAMI or its designee has not
exercised such option and the Stated
Principal Balance of the Mortgage Loans
is less than 5% of their Stated
Principal Balance on the Cut-off Date,
the Master Servicer shall also have such
option. Any such repurchase will result
in the retirement of the Certificates.
See "The Pooling and Servicing
Agreement--Termination" herein.
FEDERAL INCOME TAX
CONSEQUENCES....................An election will be made to treat the
Mortgage Loans and certain other assets
owned by the Trust as a real estate
mortgage investment conduit ("REMIC")
for federal income tax purposes,
creating a REMIC structure. The
Certificates (other than the Residual
Certificates) will be the regular
interests in the REMIC. The Residual
Certificates will be the residual
interest in the REMIC. See "Federal
Income Tax Considerations" herein and
"Federal Income Tax Consequences" in the
Prospectus and "Restrictions on Purchase
and Transfer of the Residual
Certificates" herein for further
information regarding the federal income
tax consequences of investing in these
Certificates.
ERISA CONSIDERATIONS...............Subject to the conditions and considerations
set forth under "ERISA Considerations"
herein and in the Prospectus, the
Underwritten Certificates that are
Senior Certificates may be purchased by
pension, profit-sharing or other
employee benefit plans as well as
individual retirement accounts and
certain types of Keogh Plans.
The Subordinate Certificates generally may be
purchased only if a prohibited
transaction class exemption issued by
the U.S. Department of Labor based on
the identity of the fiduciary making the
decision to so acquire such Certificates
is applicable as further described under
"ERISA Considerations" herein.
RESTRICTIONS ON PURCHASE AND
TRANSFER OF THE RESIDUAL
CERTIFICATES....................Holders of the Residual Certificates may be
required to report taxable income prior
to the receipt of payments on such
Residual Certificates. The initial
purchase and subsequent transfer of the
Residual Certificates is subject to
certain restrictions. See "Federal
Income Tax Consequences" and
"Restrictions on Purchase and Transfer
of the Residual Certificates" in this
Prospectus Supplement.
RATING.............................The Offered Certificates will receive the
ratings set forth below from Standard &
Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P") and Fitch IBCA,
Inc. ("Fitch
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<PAGE>
IBCA"). S&P and Fitch IBCA are referred to
herein as the "Rating Agencies."
Rating
Class S&p Fitch Ibca
- ----- --- ----------
Class A-1 AAA AAA
Class A-2 AAA AAA
Class A-3 AAA AAA
Class A-4 AAA AAA
Class A-5 AAA AAA
Class A-6 AAA AAA
Class A-7 AAA AAA
Class A-8 AAA AAA
Class A-9 AAA AAA
Class A-10 AAA AAA
Class A-11 AAA AAA
Class A-12 AAAr AAA
Class A-13 AAA AAA
Class A-14 AAA AAA
Class A-15 AAA AAA
Class A-16 AAA AAA
Class A-17 AAA AAA
Class A-18 AAA AAA
Class PO AAAr AAA
Class X AAAr AAA
Class R AAA AAA
Class B-1 -- AA
Class B-2 -- A
Class B-3 -- BBB
You should evaluate the ratings of the
Offered Certificates of any Class
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. The "r" symbol of
the "AAAr" rating of certain Classes of
Certificates by S&P is attached to
highlight certain obligations that S&P
believes may experience volatility or
variability in expected returns due to
non-credit risks, including interest
only and principal only mortgage
securities which provide for payment of
only principal or only interest. See
"Rating" herein.
LEGAL INVESTMENT...................The Senior Certificates and the Class B-1
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") so long as they
are rated in one of the two highest
rating categories by a nationally
recognized statistical rating
organization. It is not anticipated that
the remaining Classes of Certificates
will constitute "mortgage related
securities" under SMMEA.
S-13
<PAGE>
If your investment activities are subject
to legal investment laws and regulations
or to review by certain regulatory
authorities, you should consult your own
legal advisors to determine whether and
to what extent there may be restrictions
on your ability to invest in the
Certificates. See "Legal Investment"
herein and in the Prospectus.
S-14
<PAGE>
RISK FACTORS
GEOGRAPHIC CONCENTRATION. Approximately 89.92% of the Mortgage Loans as of the
Cut-off Date are secured by property in California. Property in California may
be more susceptible than properties located in other parts of the country to
certain types of hazards, such as earthquakes, floods, mudslides and other
natural disasters. In addition:
o economic conditions in California (which may or may not affect real
property values) may affect the ability of borrowers to repay their loans
on time;
o declines in the California residential real estate market may reduce the
values of properties located in California, which would result in an
increase in the loan-to-value ratios; and
o any increase in the market value of properties located in California would
reduce the loan-to-value ratios and could, therefore, make alternative
sources of financing available to the borrowers at lower interest rates,
which could result in an increased rate of prepayment of the Mortgage
Loans.
OTHER RISKS. You should also review the risk factors beginning on page 19 of the
Prospectus.
S-15
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of approximately $247,579,030. The Mortgage Pool
will consist of conventional, fixed-rate, first lien, fully amortizing mortgage
loans secured by one- to four-family residences and individual condominium units
located primarily in California, with terms to maturity of not more than 30
years from the date of origination or modification. All of the Mortgage Loans as
of the Cut-off Date with Loan-to- Value Ratios (as defined herein) at
origination in excess of 80% have primary mortgage insurance. All percentages of
the Mortgage Loans described herein are approximate percentages (except as
otherwise indicated) by aggregate principal balance as of the Cut-off Date.
On the Closing Date, the Mortgage Loans will be sold to SAMI by
Provident pursuant to a Mortgage Loan Purchase Agreement, dated November 30,
1998, between SAMI and Provident. All of the Mortgage Loans were originated by
Provident in accordance with the underwriting criteria described herein.
Pursuant to the terms of the Pooling and Servicing Agreement, SAMI will assign
the representations and warranties made with respect to the Mortgage Loans by
Provident to the Trustee for the benefit of the Certificateholders.
None of the Mortgage Loans will have been originated prior to June 30,
1998, or will have a maturity date later than December 1, 2028. No Mortgage Loan
will have a remaining term to maturity as of the Cut-off Date of less than 177
months. The weighted average remaining term to maturity of the Mortgage Loans as
of the Cut-off Date will be approximately 358 months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
approximately 358 months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
The tables set forth in Schedule A set forth additional information
with respect to the Mortgage Loans.
THE MASTER SERVICER AND SERVICER
Pursuant to the Pooling and Servicing Agreement, Norwest will act as
Master Servicer with respect to the Mortgage Loans and Provident will service
the Mortgage Loans (in such capacity, Provident is referred to as the
"Servicer"). The Master Servicer will not ultimately be responsible for the
performance of the servicing activities of the Servicer except as described
under "The Pooling and Servicing Agreement--Servicing Compensation and Payment
of Expenses" and "--Monthly Advances." If the Servicer fails to fulfill its
obligations under the Pooling and Servicing Agreement and such failure results
in a material breach, the Master Servicer is obligated to terminate the Servicer
and appoint a successor servicer. The Mortgage Loans were originated under the
applicable programs described below.
The information set forth in the following paragraphs with respect to
Norwest and Provident has been provided by the respective party. Neither SAMI,
the Underwriter, the Trustee, nor any of their respective affiliates have made
or will make any representation as to the accuracy or completeness of such
information.
NORWEST
Norwest is a national banking association, with executive offices
located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and
its master servicing offices located at 11000 Broken Land Parkway, Columbia,
Maryland 21044.
Norwest is engaged in the business of servicing single family
residential mortgage loans secured by properties located in all 50 states and
the District of Columbia. As of October 1, 1998, Norwest serviced more than
460,000 mortgage loans with an aggregate outstanding principal balance of
approximately $50 billion.
PROVIDENT
Provident is a California limited partnership that is a mortgage lender
engaged in the business of originating, selling and servicing mortgage loans
secured by one- to four-family residential properties. Provident was organized
in
S-16
<PAGE>
California in 1992 and currently is licensed as a mortgage lender or registered
to originate or purchase loans in 38 states. As of October 31, 1998, it had
approximately 673 employees including professionals and support staff.
As of September 30, 1998, Provident provided servicing for
approximately $1,468 million aggregate principal amount of mortgage loans. The
mortgage loans serviced by Provident consisted of 10,131 mortgage loans with an
average principal balance of approximately $145,000. With respect to mortgage
loans sold to Freddie Mac and serviced by Provident, the servicing portfolio
increased from approximately $372 million as of December 1997 to approximately
$1,221 million as of September 30, 1998.
Upon written request, Provident will make available its most recent
audited financial statements. Requests should be directed to Provident at 1633
Bayshore Highway #155, Burlingame, California 94010, Attention: Peter Ho.
Provident generally sells the loans that it originates on a servicing
released basis, except for loans sold to Fannie Mae or Freddie Mac, for which
all servicing is retained, and only acts as servicer for an interim period of
time from origination to the sale to investors. Servicing includes collecting
and remitting loan payments, accounting for principal and interest, holding
escrow (impound) funds for payment of taxes and insurance, making inspections as
required of the mortgaged premises, contacting delinquent mortgagors,
supervising foreclosures in the event of unremedied defaults and generally
administering the loans, for which Provident receives servicing fees. Provident
has not in the past but may in the future sell to other mortgage bankers a
portion of its portfolio of loan servicing rights.
Provident does not keep records of any foreclosure and delinquency
experience with respect to mortgage loans originated by Provident and sold on a
servicing released basis. Provident has only recently begun to retain the
servicing on mortgage loans similar to the Mortgage Loans underlying the
Certificates. Therefore, Provident does not have sufficient historical
delinquency, foreclosure or loss experience with respect to such similar
mortgage loans that may be referenced for the purpose of estimating the future
delinquency, foreclosure or loss experience on the Mortgage Loans. Furthermore,
Provident believes that the future delinquency, foreclosure and loss experience
on the Mortgage Loans will differ, and may be worse than, the future
delinquency, foreclosure and loss experience on mortgage loans serviced for
Fannie Mae or Freddie Mac.
UNDERWRITING STANDARDS
GENERAL
All mortgage loans must meet credit, appraisal and underwriting
standards acceptable to Provident. Provident's underwriting standards are
applied in accordance with applicable federal and state laws and regulations.
Except as otherwise provided herein, the underwriting procedures are consistent
with those identified under "The Mortgage Loans--Underwriting Standards" in the
Prospectus.
In certain cases, including with respect to mortgage loans originated
through a loan correspondent or mortgage broker, the data used by Provident to
complete the underwriting analysis may be obtained by a third party. In such
instances, the determination as to whether a mortgage loan complies with
Provident's underwriting guidelines is made by Provident. After originating
mortgage loans under such circumstances, Provident conducts a quality control
review of a sample of such mortgage loans to verify information obtained from
third parties.
Provident's underwriting standards are applied by or on behalf of
Provident to evaluate the prospective borrower's credit standing and repayment
ability and the value and adequacy of the mortgaged property as collateral.
Under such standards, a prospective borrower must generally demonstrate that the
ratio of the borrower's monthly housing expenses (including principal and
interest on the proposed mortgage loan and, as applicable, the related monthly
portion of property taxes, hazard insurance and mortgage insurance) to the
borrower's monthly gross income and the ratio of total monthly debt to the
monthly gross income (the "debt-to-income ratios") are within certain limits.
The maximum acceptable debt-to-income ratio, which is determined on a
loan-by-loan basis varies depending on a number of underwriting criteria,
including the Loan-to-Value Ratio, loan purpose, loan amount and credit history
of the borrower. In addition to meeting the debt-to-income ratio guidelines,
each prospective borrower is required to have sufficient cash resources to pay
the down payment and closing costs. Certain exceptions to Provident's
underwriting guidelines are made in the event that compensating factors are
demonstrated by a prospective borrower.
The nature of the information which a borrower is required to disclose
and whether such information is verified depends, in part, on the documentation
program used in the origination process. In general under Provident's Full
S-17
<PAGE>
Documentation Loan Program (the "Full Documentation Program"), each prospective
borrower is required to complete an application which includes information with
respect to the applicant's assets, liabilities, income, credit history,
employment history and other personal information. Self-employed individuals are
generally required to submit their two most recent federal income tax returns.
The underwriter generally verifies the information contained in the application
relating to employment, income, assets or mortgages.
Under certain circumstances, a prospective borrower may be eligible for
a loan approval process which limits or eliminates Provident's standard
disclosure and/or verification requirements. Provident offers the following
documentation programs as alternatives to its Full Documentation Program: an
Alternative Documentation Loan Program (the "Alternative Documentation
Program"), a Reduced Loan Documentation Program (the "Reduced Documentation
Program"), a No Income/No Asset Documentation Loan Program (the "No Income/No
Asset Documentation Program") and a No Ratio Documentation Program (the "No
Ratio Documentation Program").
Provident obtains a credit report relating to the applicant from a
credit reporting company. The credit report typically contains information
relating to such matters as credit history with local and national merchants and
lenders, installment debt payments and any record of defaults, bankruptcy,
dispossession, suits or judgments. All adverse information in the credit report
is required to be explained by the prospective borrower to the satisfaction of
the lending officer.
Provident obtains appraisals or updates of appraisals from independent
appraisers or appraisal services for properties that are to secure mortgage
loans. Such appraisers inspect and appraise the proposed mortgaged property and
verify that such property is in acceptable condition. Following each appraisal,
the appraiser prepares a report which includes a market data analysis based on
recent sales of comparable homes in the area and, when deemed appropriate, a
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to Fannie Mae or Freddie Mac
appraisal standards then in effect. Every independent appraisal is reviewed by
an underwriter of Provident before the loan is approved.
Provident requires title insurance on all of its mortgage loans secured
by first liens on real property. Provident also requires that fire and extended
coverage casualty insurance be maintained on the mortgaged property in an amount
at least equal to the principal balance of the related single-family mortgage
loan or the replacement cost of the
improvements on the mortgaged property, whichever is less.
In addition to Provident's standard underwriting guidelines (the
"Standard Underwriting Guidelines"), which, except for allowable loan amounts,
are consistent in many respects with the guidelines applied to mortgage loans
purchased by Fannie Mae and Freddie Mac, Provident uses underwriting guidelines
featuring expanded criteria (the "Expanded Underwriting Guidelines"). The
Standard Underwriting Guidelines and the Expanded Underwriting Guidelines are
described further below.
STANDARD UNDERWRITING GUIDELINES
Provident's Standard Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 95% for purchase money or rate and
term refinance mortgage loans with original principal balances of up to
$300,000, up to 90% for mortgage loans with original principal balances of up to
$400,000, up to 80% for mortgage loans with original principal balances of up to
$500,000, up to 75% for mortgage loans with original principal balances of up to
$650,000 and up to 60% for mortgage loans with original principal balances of up
to $1,000,000.
For cash out refinance mortgage loans with original principal balances
of up to $650,000, Provident's Standard Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 75%. The maximum "cash-out" amount
permitted is $75,000. As used herein, a refinance mortgage loan is classified as
a cash-out refinance mortgage loan by Provident if the borrower retains greater
than 1.0% of the entire amount of the proceeds from the refinancing of the
existing loan.
Under its Standard Underwriting Guidelines, Provident generally permits
a debt-to-income ratio based on the borrower's monthly housing expenses of up to
33% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 38%. In certain circumstances based in part on the original Loan-to-Value
Ratio and the borrower's assets, Provident permits a debt-to-income ratio based
on the borrower's monthly housing expenses of up to 40% and a debt-to- income
ratio based on the borrower's total monthly debt of up to 46%.
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<PAGE>
In connection with the Standard Underwriting Guidelines, Provident
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program or the Reduced Documentation Program.
The Alternative Documentation Program permits a borrower to provide W-2
forms instead of tax returns covering the most recent two years, permits bank
statements in lieu of verification of deposits and permits alternative methods
of employment verification.
Under the Reduced Documentation Program, certain underwriting
documentation concerning income verification is waived. Provident obtains from a
prospective borrower either a verification of deposit or bank statements for the
two-month period immediately prior to the date of the mortgage loan application.
Since information relating to a prospective borrower's income is not verified,
such borrower's debt-to-income ratios are calculated based on the information
provided by the borrower in the mortgage loan application. The maximum
Loan-to-Value Ratio (including secondary financing) ranges up to 70%.
Mortgage Loans comprising approximately 76.85% of the Mortgage Pool
were underwritten pursuant to Provident's Standard Underwriting Guidelines.
EXPANDED UNDERWRITING GUIDELINES
Mortgage loans which are underwritten pursuant to the Expanded
Underwriting Guidelines may have higher Loan-to-Value Ratios, higher loan
amounts and different documentation requirements than those associated with the
Standard Underwriting Guidelines. The Expanded Underwriting Guidelines also
permit higher debt-to-income ratios than mortgage loans underwritten pursuant to
the Standard Underwriting Guidelines.
Provident's Expanded Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 95% for purchase money or rate and
term refinance mortgage loans with original principal balances of up to
$400,000, up to 85% for mortgage loans with original principal balances of up to
$500,000, up to 80% for mortgage loans with original principal balances of up to
$650,000 and up to 70% for mortgage loans with original principal balances of up
to $1,000,000.
For cash-out refinance mortgage loans with original principal balances
of up to $1,000,000, Provident's Expanded Underwriting Guidelines generally
allow Loan-to-Value Ratios at origination of up to 65%. The maximum "cash-out"
amount permitted is $200,000 and is based in part on the original Loan-to-Value
Ratio of the related mortgage loan.
Under its Expanded Underwriting Guidelines, Provident generally permits
a debt-to-income ratio based on the borrower's monthly housing expenses of up to
33% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 38%. In certain circumstances based in part on the original Loan-to-Value
Ratio and the borrower's assets, Provident permits a debt-to-income ratio based
on the borrower's monthly housing expenses of up to 40% and a debt-to- income
ratio based on the borrower's total monthly debt of up to 46%; provided,
however, that if the Loan-to-Value Ratio exceeds 80%, such maximum permitted
debt-to-income ratios are 33% and 38%, respectively.
In connection with the Expanded Underwriting Guidelines, Provident
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program, the Reduced Documentation Loan Program, the
No Income/No Asset Documentation Program and the No Ratio Documentation Program.
The No Income/No Asset Documentation Program and the No Ratio Documentation
Program are not available under the Standard Underwriting Guidelines.
The same documentation and verification requirements apply to mortgage
loans documented under the Full Documentation Program, Alternative Documentation
Program and Reduced Documentation Program regardless of whether the loan has
been underwritten under the Expanded Underwriting Guidelines or the Standard
Underwriting Guidelines. However, under the Alternative Documentation Program,
mortgage loans that have been underwritten pursuant to the Expanded Underwriting
Guidelines may have higher loan balances and Loan-to-Value Ratios than those
permitted under the Standard Underwriting Guidelines.
Under the No Income/No Asset Documentation Program, no documentation
relating to a prospective borrower's income, employment or assets is required
and therefore debt-to-income ratios are not calculated or included in the
underwriting analysis. This program is limited to borrowers with excellent
credit histories. Under the No
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<PAGE>
Income/No Asset Documentation Program, the maximum Loan-to-Value Ratio
(including secondary financing) ranges up to 80%.
Under the No Ratio Documentation Program, the borrower is not required
to disclose any income information, and accordingly debt-to-income ratios are
not calculated or included in the underwriting analysis. Under the No Ratio
Documentation Program, the borrower is required to provide documentation to
verify that they have liquid assets equal to a minimum of 6 months of principal
and interest and taxes and insurance payments required under such mortgage loan.
With respect to such mortgage loans, the maximum Loan-to-Value Ratio (including
secondary financing) ranges up to 80%.
Mortgage Loans originated under either the No Income/No Asset
Documentation Program or the No Ratio Documentation Program pursuant to which
debt-to-income ratios are not calculated as described above are expected to
comprise approximately 4.53% of the Mortgage Pool.
Under the Expanded Underwriting Guidelines, Provident may also provide
mortgage loans to borrowers who are not U.S. citizens, including permanent and
non-permanent residents. The borrower is required to have a valid U.S. social
security number or a certificate of foreign status (IRS Form W-8). The
borrower's income and assets must be verified under the Full Documentation
Program or the Alternative Documentation Program. The maximum Loan-to- Value
Ratio (including secondary financing) is 80%.
Mortgage Loans comprising 23.15% of the Mortgage Pool were underwritten
pursuant to Provident's Expanded Underwriting Guidelines.
MORTGAGE LOAN PRODUCTION
The following table sets forth, by number and dollar amount of mortgage
loans, Provident's residential mortgage loan production for the periods
indicated.
<TABLE>
<CAPTION>
9 MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER-30,
---------------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AVERAGE LOAN BALANCE)
<S> <C> <C> <C> <C> <C>
FHA/VA Loans
Number of Loans 0 0 0 650 1,190
Volume of Loans ..... $ 0 $ 0 $ 0 $ 75,606 $ 149,103
Conventional Loans
Number of Loans 1,248 1,266 3,359 13,301 27,100
Volume of Loans ..... $ 222,158 $ 217,312 $ 587,640 $ 2,295,857 $ 4,732,143
Other Loans
Number of Loans 28 70 153 525 1,518
Volume of Loans ..... $ 5,129 $ 10,406 $ 23,604 $ 79,287 $ 210,019
Total Loans
Number of Loans 1,276 1,336 3,512 14,476 29,808
Volume of Loans ..... $ 227,287 $ 227,718 $ 611,244 $ 2,450,750 $ 5,091,265
Average Loan Balance ..... $ 178,125 $ 170,448 $ 174,044 $ 169,297 $ 170,802
</TABLE>
See "The Mortgage Loans--Underwriting Standards" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1998-11 Mortgage Pass-Through Certificates will include the
following twenty-one classes (the "Senior Certificates"): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates, Class A-6 Certificates, Class A-7
Certificates, Class A-8 Certificates, Class A-11 Certificates
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<PAGE>
and Class A-13 Certificates; (ii) Class A-9 Certificates, Class A-10
Certificates, Class A-14 Certificates, Class A-15 Certificates, Class A-16
Certificates and Class A-17 Certificates (the "Retail Lottery Certificates");
(iii) Class A-12 Certificates and Class PO Certificates (the "Principal Only
Certificates"); (iv) Class A-18 Certificates (the "Lockout Certificates"); (v)
Class X Certificates (the "Variable Strip Certificates"); and (vi) Class R
Certificates (the "Residual Certificates"). In addition to the Senior
Certificates, the Series 1998-11 Mortgage Pass-Through Certificates will also
include six classes of subordinate certificates which are designated as the
Class B-1 Certificates, Class B-2 Certificates, Class B-3 Certificates
(collectively, the "Offered Subordinate Certificates"), Class B-4 Certificates,
Class B-5 Certificates and Class B-6 Certificates (together with the Offered
Subordinate Certificates, the "Subordinate Certificates" and, together with the
Senior Certificates, the "Certificates"). Only the Senior Certificates, Class
B-1 Certificates, Class B-2 Certificates and Class B-3 Certificates
(collectively, the "Offered Certificates") are offered hereby.
The Certificates will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Protected Account (as defined below) established for the
collection of payments on the Mortgage Loans serviced by Provident, the
Custodial Account (as defined below) established by the Master Servicer, and in
the Certificate Account (as defined below)and belonging to the Trust Fund; (iii)
property acquired by foreclosure of such Mortgage Loans or deed in lieu of
foreclosure; (iv) any applicable Primary Mortgage Insurance Policies (as defined
below), flood insurance policies and standard hazard insurance policies; and (v)
all proceeds of the foregoing.
The Class PO Certificates will be entitled to payments based on the
Discount Fraction of the Discount Mortgage Loans. A "Discount Mortgage Loan" is
any Mortgage Loan with a Net Mortgage Rate less than 6.75% per annum. With
respect to each Discount Mortgage Loan, the "Discount Fraction" is equal to a
fraction, expressed as a percentage, the numerator of which is 6.75% minus the
Net Mortgage Rate for such Discount Mortgage Loan and the denominator of which
is 6.75%. The Mortgage Loans other than the Discount Mortgage Loans are referred
to herein as the "Non-Discount Mortgage Loans."
Each Class of Book-Entry Certificates will be represented initially by
a single certificate registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC") and beneficial interests will be
held by investors through the book-entry facilities of DTC in the United States
or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear")
in Europe in minimum denominations of (i) in the case of the Senior Certificates
(other than the Residual Certificates), $1,000 and increments of $1.00 (or
$1,000 in the case of the Retail Lottery Certificates) in excess thereof and
(ii) in the case of the Offered Subordinate Certificates, $25,000 and increments
of $1.00 in excess thereof. One Certificate of each such Class may be issued in
a different principal (or notional) amount to accommodate the remainder of the
initial principal (or notional) amount of the Certificates of such Class. The
Residual Certificate will be issued in certificated fully-registered form in a
single certificate of $100.
Distributions of principal and interest as set forth below initially
will be made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to each holder of the Physical Certificates. Upon the issuance
of Definitive Securities (as defined in "Description of the
Securities--Book-Entry Registration" in the Prospectus) to persons other than
Cede, distributions will be made by the Trustee to the persons in whose names
such Certificates are registered at the close of business on each Record Date,
which will be the last Business Day of the month preceding the month in which
the related Distribution Date occurs. Such distributions will be made (i) by
check mailed to each Certificateholder entitled thereto at the address appearing
in the Certificate Register to be maintained in accordance with the provisions
of the Pooling and Servicing Agreement or (ii) upon timely receipt by the
Trustee of written instructions from a Certificateholder holding Certificates
representing an initial aggregate Certificate Principal Balance or Notional
Amount of not less than $1,000,000, by wire transfer to a United States dollar
account maintained by the payee at any United States depository institution with
appropriate facilities for receiving such a wire transfer, provided, however,
that the final payment in respect of each Class of Certificates will be made
only upon presentation and surrender of such respective Certificates at the
office or agency of the Trustee specified in the notice to Certificateholders of
such final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City, Maryland, Illinois, Minnesota or California are
authorized or obligated by law or executive order to be closed.
The Certificates will not be listed on any securities exchange or
quoted in the automated quotation system of any registered securities
association. As a result, investors in the Certificates may experience limited
liquidity. See "Risk Factors--Limited Liquidity" in the Prospectus.
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BOOK-ENTRY REGISTRATION
The Book-Entry Certificates will be issued in one or more certificates
which equal the initial Certificate Principal Balance (or Notional Amount) of
the Offered Certificates (other than the Physical Certificates) and will
initially be registered in the name of Cede. Cedel and Euroclear will hold
omnibus positions on behalf of their Participants through customers' securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Book-Entry Certificates will be Cede &
Co. Beneficial owners of the Book-Entry Certificates will not be
Certificateholders, as that term is used in the Pooling and Servicing Agreement.
Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants. Monthly and annual reports
to the Trust provided to Cede, as nominee of DTC, may be made available to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting DTC and to Participants to whose DTC accounts
the Book- Entry Certificates are credited. For a description of the features of
the book-entry registration system, see "Description of the
Securities--Book-Entry Registration" in the Prospectus.
Physical Certificates and Definitive Certificates will be transferable
and exchangeable on a "Certificate Register" to be maintained by the Trustee at
the office or agency of the Trustee maintained for that purpose at 14 Wall
Street, 8th Floor, New York, New York 10005. Physical Certificates and
Definitive Certificates surrendered to the Trustee for registration or transfer
or exchange must be accompanied by a written instrument or transfer in form
satisfactory to the Trustee. No service charge may be made for any registration
of transfer or exchange of Physical Certificates and Definitive Certificates,
but payment of a sum sufficient to cover any tax or other governmental charge
may be required. Such office or agency of the Trustee is currently located at
One North State Street, 9th Floor, Chicago, Illinois 60602. Certain
representations will be required in connection with the transfer of REMIC
Residual Certificates or Subordinated Certificates. See "Restrictions on
Purchase and Transfer of the Residual Certificates."
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date is equal
to (i) the aggregate amount of scheduled payments on the Mortgage Loans due on
the related Due Date and received on or prior to the related Determination Date,
after deduction of the Master Servicing Fee and the Servicing Fee (each, as
defined herein), (ii) certain unscheduled payments, including Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
Master Servicer and the Servicer. With respect to any Distribution Date, (i) the
"Due Date" is the first day of the month in which such Distribution Date occurs
and (ii) the "Determination Date" is the 15th day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
preceding business day.
INTEREST DISTRIBUTIONS
Holders of each class of Senior Certificates (other than the Principal
Only Certificates) will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest on such class on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date. Holders of the Offered Subordinate Certificates will be
entitled to receive interest distributions in an amount equal to the Accrued
Certificate Interest on such class on each Distribution Date, to the extent of
the Available Distribution Amount for such Distribution Date after distributions
of interest and principal to the Senior Certificates and distributions of
interest and principal to any of the Offered Subordinate Certificates having a
higher payment priority.
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates (other
than the Variable Strip Certificates and Principal Only Certificates), interest
accrued for the prior calendar month on the Certificate Principal Balance of the
Certificates of such class immediately prior to such Distribution Date at the
related Pass-Through Rate and (b) in the case of the Variable Strip Certificates
interest accrued for the prior calendar month on the Notional Amount at the
then-applicable Pass-Through Rate; in each case less interest shortfalls, if
any, allocated thereto for such Distribution Date to the extent not covered with
respect to the Senior Certificates by the Subordination provided by the
Subordinate Certificates and, with respect to the Offered
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Subordinate Certificates to the extent not covered by the Subordination provided
by the Class B-4, Class B-5 and Class B-6 Certificates and any of the Offered
Subordinate Certificates having a lower payment priority, including in each
case:
(i) any Interest Shortfall (as defined below) to the extent
not covered by the Master Servicer or the Servicer as described below;
(ii) the interest portions of Realized Losses (including
Special Hazard Losses in excess of the Special Hazard Amount ("Excess
Special Hazard Losses"), Fraud Losses in excess of the Fraud Loss
Amount ("Excess Fraud Losses"), Bankruptcy Losses in excess of the
Bankruptcy Loss Amount ("Excess Bankruptcy Losses") and losses
occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks ("Extraordinary Losses")) not
allocated through Subordination; and
(iii) any other interest shortfalls not covered by
Subordination, including interest shortfalls relating to the Relief Act
(as defined in the Prospectus) or similar legislation or regulations,
all allocated as described below.
Such reductions resulting from clauses (i), (ii) and (iii) above will be
allocated among the holders of all classes of Certificates in proportion to the
respective amounts of Accrued Certificate Interest which would have been payable
on such Distribution Date absent such reductions. In the case of the Offered
Subordinate Certificates, Accrued Certificate Interest on such class will be
further reduced by the allocation of the interest portion of certain losses
thereto, if any, as described below under "--Allocation of Losses;
Subordination." Accrued Certificate Interest is calculated on the basis of a
360-day year consisting of twelve 30-day months. The Principal Only Certificates
are not entitled to distributions of interest.
With respect to any Distribution Date, the "Interest Shortfall" is
equal to the aggregate shortfall, if any, in collections of interest (adjusted
to the related Net Mortgage Rates) on Mortgage Loans resulting from (a)
prepayments in full received during the preceding calendar month, (b) partial
prepayments received during the preceding calendar month to the extent applied
prior to the Due Date in the month of the Distribution Date and (c) interest
payments on certain of the Mortgage Loans being limited pursuant to the
provisions of the Soldiers' and Sailors' Civil Relief Act of 1940 (the "Relief
Act"). Interest Shortfalls will result because (i) obligors on each Mortgage
Loan (each a "Mortgagor") are obligated to pay interest on prepayments in full
only to the date of prepayment by such Mortgagor, (ii) (a) partial prepayments
are generally not required to be accompanied by interest on the amount of such
partial prepayment and (b) partial prepayments applied prior to the Due Date in
the month of the Distribution Date will result in a reduction of the Stated
Principal Balance of the related Mortgage Loan without a corresponding reduction
of the Certificate Principal Balance of any Certificate and (iii) the Relief Act
limits, in certain circumstances, the interest rate required to be paid by a
Mortgagor in the military service, to 6% per annum. Interest Shortfalls
resulting from prepayments in full or in part in any calendar month will be
offset by the Servicer, or, to the extent not so offset by the Servicer, by the
Master Servicer on the Distribution Date in the following calendar month to the
extent that such Interest Shortfalls do not exceed the Servicing Fee or the
Master Servicing Fee, as applicable, in connection with such Distribution Date
(see "The Pooling and Servicing Agreement--Servicing Compensation and Payment of
Expenses" herein). The amount of the Servicing Fee or the Master Servicing Fee
used to offset such Interest Shortfalls is referred to herein as "Compensating
Interest Payments." Interest Shortfalls net of Compensating Interest Payments
are referred to herein as "Net Interest Shortfalls."
If on any Distribution Date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates, the shortfall will
be allocated among the holders of all classes of Senior Certificates in
proportion to the respective amounts of Accrued Certificate Interest. In
addition, the amount of any such interest shortfalls that are covered by
Subordination (specifically, interest shortfalls not described in clauses (i)
through (iii) in the second preceding paragraph) will be unpaid Accrued
Certificate Interest and will be distributable to holders of the Certificates of
such classes entitled to such amounts on subsequent Distribution Dates, to the
extent of available funds after interest distributions as required herein. Such
shortfalls could occur, for example, if delinquencies on the Mortgage Loans were
exceptionally high and were concentrated in a particular month and Monthly
Advances by the Master Servicer or the Servicer did not cover the shortfall. Any
such amounts so carried forward will not bear interest. Any interest shortfalls
will not be offset by a reduction in the servicing compensation of the Master
Servicer or the Servicer or otherwise, except to the limited extent described in
the preceding paragraph with respect to Interest Shortfalls resulting from
prepayments.
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The Pass-Through Rates on all classes of Offered Certificates (other
than the Principal Only Certificates, which are not entitled to distributions of
interest, and the Variable Strip Certificates) are fixed and are set forth on
the cover hereof. The Pass-Through Rate on the Variable Strip Certificates on
each Distribution Date will equal the weighted average, as of the Due Date in
the month preceding the month in which such Distribution Date occurs, of the
Pool Strip Rates on each of the Non-Discount Mortgage Loans in the Mortgage
Pool. The "Pool Strip Rate" on any Non-Discount Mortgage Loan is equal to the
Net Mortgage Rate thereon minus 6.75%. The "Non-Discount Mortgage Loans" are the
Mortgage Loans which have a Net Mortgage Rate equal to or greater than 6.75%.
The "Net Mortgage Rate" on each Mortgage Loan is equal to the Mortgage Rate
thereon minus 0.2125%, with respect to each Mortgage Loan with a Mortgage Rate
less than 7.00%, 0.2475%, with respect to each Mortgage Loan with a Mortgage
Rate equal to 7.00%, and 0.3375% with respect to each Mortgage Loan with a
Mortgage Rate greater than 7.00%, which are the respective sums of the rate per
annum at which the servicing fees accrue (the "Servicing Fee Rate") and the rate
per annum at which the Master Servicer's fee accrues (the "Master Servicing Fee
Rate"). The initial Pass-Through Rate on the Variable Strip Certificates is
0.2612% per annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Certificates (other than the Principal Only Certificates, which are not
entitled to any distributions in respect of interest) is based on the
Certificate Principal Balance thereof or, in the case of the Variable Strip
Certificates, on the Notional Amount thereof. The "Certificate Principal
Balance" of any Certificate as of any date of determination is equal to the
initial Certificate Principal Balance thereof, reduced by the aggregate of (a)
all amounts allocable to principal previously distributed with respect to such
Certificate and (b) any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of Realized Losses in the
manner described herein, provided that, after the Certificate Principal Balances
of the Class B-4, Class B-5 and Class B-6 Certificates have been reduced to
zero, the Certificate Principal Balance of any Certificate of the class of
Offered Subordinate Certificates outstanding with the lowest payment priority
shall equal the percentage interest evidenced thereby times the excess, if any,
of (a) the then aggregate Stated Principal Balance of all of the Mortgage Loans
over (b) the then aggregate Certificate Principal Balance of all other classes
of Certificates then outstanding. The Notional Amount of the Variable Strip
Certificates as of any Distribution Date is equal to the aggregate Stated
Principal Balance of the Non-Discount Mortgage Loans immediately prior to such
date.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Except as provided below, holders of the Senior Certificates (other
than the Variable Strip Certificates, which are not entitled to receive any
principal distributions, and the Class PO Certificates) will be entitled to
receive on each Distribution Date, in the priority set forth herein and to the
extent of the portion of the Available Distribution Amount remaining after the
aggregate amount of Accrued Certificate Interest to be distributed to the
holders of the Senior Certificates for such Distribution Date (the "Senior
Interest Distribution Amount") and the Class PO Distribution Amount (as defined
below) are distributed, a distribution allocable to principal equal to the sum
of the following:
(i) the product of (A) the then-applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans (other than the related Discount Fraction of the
principal portion of such payments, with respect to each Discount
Mortgage Loan) due on the related Due Date, whether or not received on
or prior to the related Determination Date;
(2) the principal portion of all proceeds of the repurchase of
a Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) (other than the related Discount
Fraction of the principal portion of such proceeds with respect to each
Discount Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Mortgagor prepayments made by the respective Mortgagors and any
amounts received in connection with a Final Disposition (as defined
below) of a Mortgage Loan described in clause (ii) below), to the
extent applied as recoveries of principal (other than the related
Discount Fraction of the principal portion of such unscheduled
collections with respect to each Discount Mortgage Loan);
(ii) in connection with the Final Disposition of a Mortgage Loan (x)
that occurred in the preceding calendar month and (y) that did not result in any
Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to the lesser of (a) the then-applicable
Senior Percentage of the Stated Principal Balance of such Mortgage Loan (other
than the related Discount Fraction of such Stated Principal Balance
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with respect to a Discount Mortgage Loan) and (b) the then-applicable Senior
Accelerated Distribution Percentage (as defined below) of the related
unscheduled collections, including Insurance Proceeds and Liquidation Proceeds,
to the extent applied as recoveries of principal (in each case other than the
Discount Fraction of such collection);
(iii) the then-applicable Senior Accelerated Distribution Percentage of
the aggregate of all full and partial Mortgagor prepayments made by the
respective Mortgagors of the Mortgage Loans (other than the related Discount
Fraction of such Mortgagor prepayments, with respect to each Discount Mortgage
Loan) during the preceding calendar month; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed to the extent that any such amounts are not attributable to
Realized Losses which were allocated to the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 or Class B-6 Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of
the Available Distribution Amount remaining after the Senior Interest
Distribution Amount and the Class PO Distribution Amount have been distributed
and (b) the sum of the amounts described in clauses (i) through (iv) of the
immediately preceding paragraph is hereinafter referred to as the "Senior
Principal Distribution Amount."
Holders of the Class PO Certificates will be entitled to receive on
each Distribution Date, to the extent of the excess, if any, of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, a distribution allocable to principal equal to the Class PO
Distribution Amount. The "Class PO Distribution Amount" is equal to the
aggregate of:
(i) the related Discount Fraction of the principal portion of
the scheduled monthly payment on each Discount Mortgage Loan due on the
related Due Date, whether or not received on or prior to the related
Determination Date;
(ii) the related Discount Fraction of the principal portion of
all unscheduled collections on each Discount Mortgage Loan received
during the preceding calendar month (other than amounts received in
connection with a Final Disposition of a Discount Mortgage Loan
described in clause (iii) below), including full and partial Mortgagor
prepayments, repurchases of Discount Mortgage Loans (or, in the case of
a substitution, certain amounts representing a principal adjustment) as
required by the Pooling and Servicing Agreement, Liquidation Proceeds
and Insurance Proceeds, to the extent applied as recoveries of
principal;
(iii) in connection with the Final Disposition of a Discount
Mortgage Loan that did not result in any Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses,
an amount equal to the lesser of (a) the applicable Discount Fraction
of the Stated Principal Balance of such Discount Mortgage Loan
immediately prior to such Distribution Date and (b) the applicable
Discount Fraction of the aggregate amount of collections on such
Discount Mortgage Loan to the extent applied as recoveries of
principal;
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above) that remain undistributed; and
(v) with respect to each Final Disposition of a Discount
Mortgage Loan in connection with such Distribution Date or any prior
Distribution Date, to the extent that the amount included under clause
(iii) above for such Distribution Date was less than the amount
described in (a) under clause (iii) above (each such shortfall, a
"Class PO Collection Shortfall"), an amount equal to the aggregate of
the Class PO Collection Shortfalls, less any amounts paid pursuant to
this clause on a prior Distribution Date, until paid in full; provided,
that distributions pursuant to this clause (v) shall only be made to
the extent of Eligible Funds (as described below) on any Distribution
Date.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Servicer that it has received all Insurance
Proceeds, Liquidation Proceeds and other payments or cash recoveries which the
Servicer reasonably and in good faith expects to be finally recoverable with
respect to such Mortgage Loan.
"Eligible Funds" on any Distribution Date means the portion, if any, of
the Available Distribution Amount remaining after reduction by the sum of the
Senior Interest Distribution Amount, the Senior Principal Distribution Amount,
the Class PO Distribution Amount (determined without regard to clause (v)
thereof) and the aggregate amount
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of Accrued Certificate Interest on the Subordinate Certificates. Notwithstanding
any other provision hereof, any distribution in respect of any Class PO
Collection Shortfall, to the extent not covered by any amounts otherwise
distributable to the Class B-6 Certificates, shall result in a reduction of the
amount of principal distributions on such Distribution Date on (i) first, the
Class B-4 Certificates and Class B-5 Certificates and (ii) second, the Class
B-1, Class B-2 and Class B-3 Certificates, in each case in reverse order of
their payment priority.
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more classes of
Certificates on or before the date of determination.
The "Senior Percentage," which initially will equal approximately
95.49% and will in no event exceed 100%, will be recalculated for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Senior Certificates (other than the Class PO
Certificates) immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans (other than the
Discount Fraction of the Discount Mortgage Loans) immediately prior to such
Distribution Date. The "Subordinate Percentage" as of any date of determination
is equal to 100% minus the Senior Percentage as of such date. The initial Senior
Percentage is less than the initial percentage interest in the Trust Fund
evidenced by the classes of Senior Certificates (including the Class PO
Certificates) in the aggregate, because such percentage is calculated without
regard to either the Certificate Principal Balance of the Class PO Certificates
or the Discount Fraction of the Stated Principal Balance of each Discount
Mortgage Loan.
The "Senior Accelerated Distribution Percentage" for any Distribution
Date occurring prior to the Distribution Date in December 2003 will equal 100%.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring after the first five years following the Closing Date will be as
follows:
(i) for any Distribution Date during the sixth year after the
Closing Date, the Senior Percentage for such Distribution Date plus 70%
of the Subordinate Percentage for such Distribution Date;
(ii) for any Distribution Date during the seventh year after
the Closing Date, the Senior Percentage for such Distribution Date plus
60% of the Subordinate Percentage for such Distribution Date;
(iii) for any Distribution Date during the eighth year after
the Closing Date, the Senior Percentage for such Distribution Date plus
40% of the Subordinate Percentage for such Distribution Date;
(iv) for any Distribution Date during the ninth year after the
Closing Date, the Senior Percentage for such Distribution Date plus 20%
of the Subordinate Percentage for such Distribution Date; and
(v) for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any such Distribution
Date the Senior Percentage exceeds the initial Senior Percentage, in
which case the Senior Accelerated Distribution Percentage for such
Distribution Date will once again equal 100%).
Any scheduled reduction to the Senior Accelerated Distribution Percentage
described above shall not be made as of any Distribution Date unless either:
(a)(i)(X) the outstanding principal balance of Mortgage Loans
delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding Certificate Principal Balance
of the Subordinate Certificates, is less than 50% or (Y) the
outstanding principal balance of Mortgage Loans delinquent 60 days or
more averaged over the last six months, as a percentage of the
aggregate outstanding principal balance of all Mortgage Loans averaged
over the last six months, does not exceed 2%, and
(ii) Realized Losses on the Mortgage Loans to date for such
Distribution Date, if occurring during the sixth, seventh, eighth,
ninth or tenth year (or any year thereafter) after the Closing Date,
are less than 30%, 35%, 40%, 45% or 50%, respectively, of the sum of
the initial Certificate Principal Balances of the Subordinate
Certificates; or
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(b)(i) the outstanding principal balance of Mortgage Loans
delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding principal balance of all
Mortgage Loans averaged over the last six months, does not exceed 4%,
and
(ii) Realized Losses on the Mortgage Loans to date for such
Distribution Date, if occurring during the sixth, seventh, eighth,
ninth or tenth year (or any year thereafter) after the Closing Date,
are less than 10%, 15%, 20%, 25% or 30%, respectively, of the sum of
the initial Certificate Principal Balances of the Subordinate
Certificates.
Notwithstanding the foregoing, upon reduction of the Certificate Principal
Balances of the Senior Certificates (other than the Class PO Certificates) to
zero, the Senior Accelerated Distribution Percentage will equal 0%. See "Credit
Enhancement--Subordination" in the Prospectus.
The "Lockout Distribution Percentage" for any Distribution Date
occurring prior to the Distribution Date in December 2003 will be equal to 0%.
The Lockout Distribution Percentage for any Distribution Date occurring after
the first five years following the Closing Date will be as follows: for any
Distribution Date during the sixth year after the Closing Date, 30%; for any
Distribution Date during the seventh year after the Closing Date, 40%; for any
Distribution Date during the eighth year after the Closing Date, 60%; for any
Distribution Date during the ninth year after the Closing Date, 80%; and for any
Distribution Date thereafter, 100%. Notwithstanding the foregoing, if on any
Distribution Date the Certificate Principal Balance of each class of Senior
Certificates (other than the Class PO Certificates) has been reduced to zero,
100% of the Senior Principal Distribution Amount to the extent not distributed
on such Distribution Date to the other classes of Senior Certificates will be
distributed to the Lockout Certificates.
Distributions of principal on the Senior Certificates on each
Distribution Date will be made (after distribution of the Senior Interest
Distribution Amount as described under "Interest Distributions"), as follows, in
each case to the extent of the amount remaining in the Certificate Account:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined below):
(i) the Class PO Distribution Amount shall be distributed to
the Class PO Certificates, in reduction of the Certificate Principal
Balance thereof, until such Certificate Principal Balance has been
reduced to zero;
(ii) SECOND, to the Lockout Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero, an amount equal to the Lockout
Distribution Percentage of such Certificate's pro rata share (based on
the aggregate Certificate Principal Balance thereof relative to the
aggregate Certificate Principal Balance of all classes of Certificates
(other than the Class PO Certificates)) of the aggregate of the amounts
described in clauses (i), (ii) and (iii) of the first paragraph under
"Principal Distributions on the Senior Certificates" (but without
application of either the Senior Percentage or the Senior Accelerated
Distribution Percentage described therein) shall be distributed to such
Certificates; provided that if the aggregate of the amounts set forth
in clauses (i), (ii) and (iii) of the first paragraph under "Principal
Distributions on the Senior Certificates" is more than the balance of
the Available Distribution Amount remaining after the Senior Interest
Distribution Amount and Class PO Distribution Amount have been
distributed, the amount paid to such Certificates pursuant to this
clause (ii) shall be reduced by an amount equal to such Certificate's
pro rata share, based on the aggregate Certificate Principal Balance
thereof relative to the aggregate Certificate Principal Balance of the
Senior Certificates (other than the Class PO Certificates) of such
difference;
(iii) THIRD, to the Class R Certificates, in reduction of the
Certificate Principal Balance thereof, until the Certificate Principal
Balance thereof has been reduced to zero;
(iv) FOURTH, the balance of the Senior Principal Distribution
Amount remaining after distributions, if any, described in clauses (ii)
and (iii) above shall be distributed concurrently as follows:
(A) 9.9808511612% of the amount available for
distribution under this clause (iv) shall be distributed,
first, to the Class A-13 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero, and then,
concurrently on a pro rata basis, to the Class A-14
Certificates and Class A-17 Certificates; and
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(B) 90.0191488388% of the amount available for
distribution under this clause (iv) shall be distributed in
the following order of priority:
(1) FIRST, to the Class A-1 Certificates,
until the Certificate Principal Balance thereof has
been reduced to zero; and
(2) SECOND, concurrently as follows:
(a) 1.8136489678% of the amount
available for distribution under this clause
(iv)(B)(2) shall be distributed to the Class
A-12 certificates, until the Certificate
Principal Balance thereof has been reduced
to zero; and
(b) 98.1863510322% of the amount
available for distribution under this clause
(iv)(B)(2) shall be distributed in the
following order of priority:
(1) FIRST, concurrently on
a pro rata basis, to the Class A-2
Certificates and Class A-8
Certificates, until the Certificate
Principal Balances thereof have been
reduced to zero;
(2) SECOND, concurrently on
a pro rata basis, to the Class A-3,
Class A-4, Class A-5 and Class A-9
Certificates, until the Certificate
Principal Balances thereof have been
reduced to zero;
(3) THIRD, concurrently on
a pro rata basis, to the Class A-6
Certificates and Class A-10
Certificates, until the Certificate
Principal Balances thereof have been
reduced to zero; and
(4) FOURTH, concurrently on
a pro rata basis, to the Class A-7,
Class A-11, Class A-15 and Class
A-16 Certificates, until the
Certificate Principal Balances
thereof have been reduced to zero.
The percentages and amounts set forth in the foregoing clause (iv) are
calculated on the basis of the Certificate Principal Balances of the related
Certificates set forth on the cover hereof. If such Certificate Principal
Balances are changed prior to the Closing Date, the approximate percentages and
amounts will be increased or decreased accordingly.
(b) On or after the occurrence of the Credit Support Depletion Date,
all priorities relating to distributions as described above in respect of
principal among the Senior Certificates (other than the Class PO Certificates)
will be disregarded and an amount equal to the Discount Fraction of the
principal portion of scheduled or unscheduled payments received or advanced in
respect of Discount Mortgage Loans will be distributed to the Class PO
Certificates, and the Senior Principal Distribution Amount will be distributed
to the Senior Certificates (other than the Class PO Certificates) pro rata in
accordance with their respective outstanding Certificate Principal Balances and
the Senior Interest Distribution Amount will be distributed as described under
"Interest Distributions".
The "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
PRINCIPAL DISTRIBUTIONS ON THE RETAIL LOTTERY CERTIFICATES
GENERAL. As to distributions of principal among holders of the Retail
Lottery Certificates, Deceased Holders (as defined below) who request
distributions as provided below of such class will be entitled to first priority
and beneficial owners other than Deceased Holders (the "Living Holders") who
request distributions as provided below of such class will be entitled to a
second priority. Beneficial owners of the Retail Lottery Certificates have the
right to request that distributions of principal be made with respect to their
Certificates ON ANY DISTRIBUTION DATE ON WHICH SUCH CLASS OF CERTIFICATES IS
ENTITLED TO RECEIVE DISTRIBUTIONS OF PRINCIPAL. Prospective Certificateholders
in the Retail Lottery Certificates should be aware that distributions of
principal on such Certificates may be significantly earlier or later than the
date that may be desired by such Certificateholder. All such requested
distributions are subject to the priorities described below under "--Priority of
Requested Distributions" and are further subject to the limitation that they be
made (i) only in lots equal to integral multiples of $1,000 of initial
Certificate Principal Balance (each $1,000 initial Certificate Principal
Balance, an "Individual Retail Lottery Certificate") and (ii) only to the extent
that the portion of the Senior
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Principal Distribution Amount allocated to the Retail Lottery Certificates on
the applicable Distribution Date (plus any amounts available from the Rounding
Account) provides sufficient funds for such requested distributions. To the
extent that amounts available for distributions in respect of principal on the
Retail Lottery Certificates on any Distribution Date exceed the aggregate amount
of the requests made by Deceased Holders and Living Holders for principal
distributions applicable to such Distribution Date, such excess amounts will be
distributed to the beneficial owners of Retail Lottery Certificates by random
lot, as described below under "--Mandatory Distributions of Principal on the
Retail Lottery Certificates."
On each Distribution Date on which amounts are available for
distributions in reduction of the Certificate Principal Balance of the Retail
Lottery Certificates, the aggregate amount allocable to such distributions for
such class will be rounded, as necessary, to an amount equal to an integral
multiple of $1,000, except as provided below, in accordance with the limitations
set forth herein. Such rounding will be accomplished on the first Distribution
Date on which distributions of principal on the Retail Lottery Certificates are
made by withdrawing, from a non-interest bearing account to be established on
the Closing Date for the Retail Lottery Certificates with a $999.99 deposit by
the Underwriter (the "Rounding Account"), the amount of funds, if any, needed to
round the amount otherwise available for such distribution with respect to the
Retail Lottery Certificates upward to the next higher integral multiple of
$1,000. On each succeeding Distribution Date on which distributions of principal
on the Retail Lottery Certificates are to be made, the aggregate amount
allocable to the Retail Lottery Certificates will be applied first to repay any
funds withdrawn from the Rounding Account on the prior Distribution Date, and
then the remainder of such allocable amount, if any, will be similarly rounded
upward through another withdrawal from the Rounding Account and distributed in
reduction of the Certificate Principal Balance of the Retail Lottery
Certificates. This process will continue on succeeding Distribution Dates until
the Certificate Principal Balance of the Retail Lottery Certificates has been
reduced to zero. Thus, the aggregate distribution made in reduction of the
Certificate Principal Balance of the Retail Lottery Certificates on each
Distribution Date may be slightly more or less than would be the case in the
absence of such rounding procedures, but such difference will be no more than
$999.99 on any Distribution Date. Under no circumstances will the sum of all
distributions made in reduction of the Certificate Principal Balance of the
Retail Lottery Certificates, through any Distribution Date, be less than the sum
of such distributions that would have resulted in the absence of such rounding
procedures.
There is no assurance that a beneficial owner of a Retail Lottery
Certificate who has submitted a request for such distribution will receive such
distribution at any particular time after such distribution is requested, since
there can be no assurance that funds will be available for making such
distributions on any particular Distribution Date, or, even if funds are
available for making principal distributions on the Retail Lottery Certificates,
that such distributions will be made to any particular beneficial owner whether
such beneficial owner is a Deceased Holder or a Living Holder. Also, due to the
procedure for mandatory distributions described below, there can be no assurance
that on any Distribution Date on which the funds available for distribution in
respect of principal of the Retail Lottery Certificates exceed the aggregate
amount of distributions requested by beneficial owners of Certificates of such
class, any particular beneficial owner will receive a principal distribution
from such excess funds. THUS, THE TIMING OF DISTRIBUTIONS IN REDUCTION OF THE
PRINCIPAL BALANCE WITH RESPECT TO ANY PARTICULAR RETAIL LOTTERY CERTIFICATE,
WHETHER OR NOT THE SUBJECT OF A REQUEST FOR DISTRIBUTION BY A DECEASED HOLDER OR
A LIVING HOLDER, IS HIGHLY UNCERTAIN AND MAY BE MADE EARLIER OR LATER THAN THE
DATE THAT MAY BE DESIRED BY A BENEFICIAL OWNER OF SUCH CERTIFICATE.
Notwithstanding any provisions herein to the contrary, on each
Distribution Date following the first Distribution Date on which any Realized
Losses are allocated to the Retail Lottery Certificates, distributions in
reduction of the Certificate Principal Balance of the Retail Lottery
Certificates will be made pro rata among the holders of the Retail Lottery
Certificates and will not be made in integral multiples of $1,000 or pursuant to
requested distributions or mandatory distributions by random lot.
PRIORITY OF REQUESTED DISTRIBUTIONS. Subject to the limitations
described herein, including the timing and the order of the receipt of the
request for distributions as described below under "--Procedure for Requested
Distributions," beneficial owners of the Retail Lottery Certificates have the
right to request that distributions be made in reduction of the Certificate
Principal Balance of such Certificates. On each Distribution Date on which
distributions in reduction of the Certificate Principal Balance of the Retail
Lottery Certificates are made, such distributions will be made in the following
order of priority: (i) any request by a Deceased Holder, in an amount up to but
not exceeding $100,000 per request; and (ii) any request by a Living Holder, in
an amount up to but not exceeding $10,000 per request. Thereafter, distributions
will be made as provided in clauses (i) and (ii) above up to a second $100,000
and $10,000, respectively. This sequence of priorities will be repeated for each
request for principal distributions made by the beneficial owners of such Retail
Lottery Certificates until all such requests have been honored.
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PROCEDURE FOR REQUESTED DISTRIBUTIONS. Under the current procedures of
DTC, a beneficial owner may request that distributions in reduction of the
Certificate Principal Balance of its Retail Lottery Certificates be made on a
Distribution Date by delivering a written request therefor to the Participant or
Indirect Participant that maintains the beneficial owner's account with respect
to the Retail Lottery Certificates so that such request is received by the
Trustee from DTC on DTC's "participant terminal system" on or before the Record
Date for such Distribution Date. In the case of a request on behalf of a
Deceased Holder, appropriate evidence of death and any tax waivers are required
to be forwarded to the Participant under separate cover. Furthermore, such
requests of Deceased Holders that are incomplete may not be honored by the
Participant. The Participant shall forward a certification satisfactory to the
Trustee certifying the death of the beneficial owner and the receipt of the
appropriate death and tax waivers. The Participant should in turn make the
request of DTC (or, in the case of an Indirect Participant, such firm must
notify the related Participant of such request, which Participant should make
the request of DTC) on DTC's participant terminal system. The Trustee will not
accept a request from a Person other than DTC. DTC may establish such procedures
as it deems fair and equitable to establish the order of receipt of requests for
such distributions received by it on the same day. None of the Master Servicer,
the Depositor or the Trustee shall be liable for any delay by DTC, any
Participant or any Indirect Participant in the delivery of requests for
distributions or withdrawals of such distributions to the Trustee or for any
changes made to the procedures described herein by DTC, any Participant or any
Indirect Participant. Requests for distributions are to be honored in the order
of their receipt (subject to the priorities described above). The exact
procedures to be followed by the Trustee for purposes of determining the order
of receipt of such requests will be those established from time to time by the
Trustee, acting in conjunction with DTC. Requests for distributions of principal
received by DTC and forwarded to the Trustee on DTC's participant terminal
system after the Record Date for such Distribution Date and requests for
principal distributions received in a timely manner but not accepted with
respect to a given Distribution Date, will be treated as requests for
distributions on the next succeeding Distribution Date and each succeeding
Distribution Date thereafter until each request is accepted or is withdrawn as
described below. Each request for distributions in reduction of the Certificate
Principal Balance of a Retail Lottery Certificate submitted by a beneficial
owner thereof will be held on DTC's participant terminal system until such
request has been accepted by the Trustee or has been withdrawn by the
Participant in writing. Each Individual Retail Lottery Certificate covered by
such request will continue to bear interest at the related Pass-Through Rate
through the Interest Accrual Period related to such Distribution Date.
With respect to Retail Lottery Certificates as to which beneficial
owners have requested distributions to be made on a particular Distribution Date
and on which distributions of principal are being made, the Trustee will notify
DTC prior to such Distribution Date whether, and the extent to which, such
Certificates have been accepted for distributions. Participants and Indirect
Participants holding Retail Lottery Certificates are required to forward such
notices to the beneficial owners of such Certificates. Individual Retail Lottery
Certificates that have been accepted for a distribution will be due and payable
on the applicable Distribution Date and will cease to bear interest after the
Interest Accrual Period related to such Distribution Date.
Any beneficial owner of a Retail Lottery Certificate who has requested
a distribution may withdraw its request by so notifying in writing the
Participant or Indirect Participant that maintains such beneficial owner's
account. In the event that such account is maintained by an Indirect
Participant, such Indirect Participant must notify the related Participant which
in turn must forward the withdrawal of such request, on DTC's participant
terminal system. If such notice of withdrawal of a request for distribution has
not been received on DTC's participant terminal system on or before the Record
Date for such Distribution Date, the previously made request for distribution
will be irrevocable with respect to the making of distributions in reduction of
the Certificate Principal Balance of such Retail Lottery Certificate on the
applicable Distribution Date.
MANDATORY DISTRIBUTIONS OF PRINCIPAL ON THE RETAIL LOTTERY
CERTIFICATES. To the extent, if any, that distributions in reduction of the
Certificate Principal Balance of the Retail Lottery Certificates on a
Distribution Date exceed the outstanding Certificate Principal Balance of Retail
Lottery Certificates with respect to which distribution requests have been
received by the applicable Record Date, additional Retail Lottery Certificates
in lots equal to Individual Retail Lottery Certificates will be selected to
receive principal distributions in accordance with the then-applicable
established random lot procedures of DTC, and the then-applicable established
procedures of the Participants and Indirect Participants, which may or may not
be by random lot. Investors may ask such Participants or Indirect Participants
what allocation procedures they use. Participants and Indirect Participants
holding Retail Lottery Certificates selected for mandatory distributions of
principal are required to provide notice of such mandatory distributions to the
affected beneficial owners.
A "Deceased Holder" is a beneficial owner of a Retail Lottery
Certificate who was a natural person living at the time such holder's interest
was acquired and whose executor or other authorized representative causes to be
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furnished to the Participant, evidence of death satisfactory to the Participant,
and any tax waivers requested by the Participant. The Participant shall forward
certification satisfactory to the Trustee certifying the death of the beneficial
owner and the receipt of the appropriate death and tax waivers. Retail Lottery
Certificates beneficially owned by tenants by the entirety, joint tenants or
tenants in common will be considered to be beneficially owned by a single owner.
The death of a tenant by the entirety, joint tenant or tenant in common will be
deemed to be the death of the beneficial owner, and the Retail Lottery
Certificates so beneficially owned will be eligible to request priority with
respect to distributions in reduction of the Certificate Principal Balance
thereof, subject to the limitations stated herein. The Retail Lottery
Certificates beneficially owned by a trust will be considered to be beneficially
owned by each beneficiary of the trust to the extent of such beneficiary's
beneficial interest therein, but in no event will a trust's beneficiaries
collectively be deemed to be beneficial owners of a number of Individual Retail
Lottery Certificates greater than the number of Individual Retail Lottery
Certificates of which such trust is the owner. The death of a beneficiary of a
trust will be deemed to be the death of a beneficial owner of the Retail Lottery
Certificates beneficially owned by the trust but only to the extent of such
beneficiary's beneficial interest in such trust. The death of an individual who
was a tenant by the entirety, joint tenant or tenant in common in a tenancy
which is the beneficiary of a trust will be deemed to be the death of the
beneficiary of the trust. The death of a person who, during his or her lifetime,
was entitled to substantially all of the beneficial ownership interests in
Retail Lottery Certificates will be deemed to be the death of the beneficial
owner of such Certificates regardless of the registration of ownership, if such
beneficial interest can be established to the satisfaction of the Participant.
Such beneficial interest will be deemed to exist in typical cases of street name
or nominee ownership, ownership by a trustee, ownership under the Uniform Gift
to Minors Act and community property or other joint ownership arrangements
between a husband and wife. Beneficial interest shall include the power to sell,
transfer or otherwise dispose of a Retail Lottery Certificate and the right to
receive the proceeds therefrom, as well as interest and distributions of
principal with respect thereto. As used in this Prospectus Supplement, a request
for a distribution in reduction of the Certificate Principal Balance of a Retail
Lottery Certificate by a Deceased Holder shall mean a request by the personal
representative, surviving tenant by the entirety, surviving joint tenant or a
surviving tenant in common of the Deceased Holder.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED SUBORDINATE CERTIFICATES
Holders of each of the Offered Subordinate Certificates will be
entitled to receive on each Distribution Date, to the extent of the portion of
the Available Distribution Amount remaining after (a) the sum of the Senior
Interest Distribution Amount, the Class PO Distribution Amount and the Senior
Principal Distribution Amount is distributed to holders of the Senior
Certificates, (b) the aggregate amount of Accrued Certificate Interest and
principal required to be distributed on any of the Offered Subordinate
Certificates having a higher payment priority on such Distribution Date is
distributed to holders of such Offered Subordinate Certificates and (c) the
aggregate amount of Accrued Certificate Interest required to be distributed on
such Offered Subordinate Certificates on such Distribution Date is distributed
to such Offered Subordinate Certificates, a distribution allocable to principal
in the sum of the following:
(i) the product of (A) the then-applicable related Offered Subordinate
Percentage (as defined below) and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the Mortgage Loans (other than the related
Discount Fraction of the principal portion of such payments
with respect to a Discount Mortgage Loan) due on the related
Due Date, whether or not received on or prior to the related
Determination Date;
(2) the principal portion of all proceeds of the
repurchase of a Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal
adjustment) (other than the related Discount Fraction of the
principal portion of such proceeds with respect to a Discount
Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month
(other than full and partial Mortgagor prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition of a Mortgage Loan described in
clause (ii) below), to the extent applied as recoveries of
principal (other than the related Discount Fraction of the
principal amount of such unscheduled collections, with respect
to a Discount Mortgage Loan);
(ii) such class's pro rata share, based on the Certificate
Principal Balance of each class of Subordinate Certificates then
outstanding, of all amounts received in connection with the Final
Disposition of a Mortgage
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Loan (other than the related Discount Fraction of such amounts with
respect to a Discount Mortgage Loan) (x) that occurred during the
preceding calendar month and (y) that did not result in any Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses, to the extent applied as recoveries of principal
and to the extent not otherwise payable to the Senior Certificates;
(iii) the portion of full and partial Mortgagor prepayments
(other than the Discount Fraction of such Mortgagor prepayments with
respect to a Discount Mortgage Loan) made by the respective Mortgagors
during the preceding calendar month allocable to such Offered
Subordinate Certificates as described below; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above) that remain undistributed to the extent that any such amounts
are not attributable to Realized Losses which were allocated to any of
the Offered Subordinate Certificates with a lower payment priority or
the Class B-4, Class B-5 and Class B-6 Certificates.
References herein to "payment priority" of the Offered Subordinate
Certificates refer to a payment priority among such classes as follows: first,
to the Class B-1 Certificates; second, to the Class B-2 Certificates; and third,
to the Class B-3 Certificates.
As to each of the Offered Subordinate Certificates, on any Distribution
Date, any Accrued Certificate Interest thereon remaining unpaid from any
previous Distribution Date will be distributable to the extent of available
funds. Notwithstanding the foregoing, if the Certificate Principal Balances of
the Class B-4, Class B-5 and Class B-6 Certificates have been reduced to zero,
on any Distribution Date, with respect to the Offered Subordinate Certificates
outstanding on such Distribution Date with the lowest payment priority, Accrued
Certificate Interest thereon remaining unpaid from any previous Distribution
Date (except in the limited circumstances provided in the Pooling and Servicing
Agreement) will not be distributable.
All Mortgagor prepayments not otherwise distributable to the Senior
Certificates will be allocated on a pro rata basis among the Offered Subordinate
Certificates with the highest payment priority then outstanding and each other
class of Subordinate Certificates for which certain loss levels established for
such class in the Pooling and Servicing Agreement have not been exceeded. The
related loss level on any Distribution Date would be satisfied as to any Class
B-2, Class B-3, Class B-4, Class B-5 or Class B-6 Certificates, respectively,
only if the sum of the current percentage interests in the Mortgage Pool
evidenced by such class and each class, if any, subordinate thereto were at
least equal to the sum of the initial percentage interests in the Mortgage Pool
evidenced by such class and each class, if any, subordinate thereto.
The Class B-1, Class B-2 and Class B-3 Percentages, which initially
will equal approximately 1.90%, 1.05% and 0.60%, respectively (each, an "Offered
Subordinate Percentage"), and will in no event exceed 100%, will each be
adjusted for each Distribution Date to be the percentage equal to the
Certificate Principal Balance of the related Offered Subordinate Certificates
immediately prior to such Distribution Date divided by the aggregate Stated
Principal Balance of all of the Mortgage Loans (other than the related Discount
Fraction of each Discount Mortgage Loan) immediately prior to such Distribution
Date. The initial Class B-1, Class B-2 and Class B-3 Percentages are greater
than the initial percentage interests in the Trust Fund evidenced by the Class
B-1, Class B-2 and Class B-3 Certificates, respectively, because the Class B-1,
Class B-2 and Class B-3 Percentages are calculated without regard to the
Discount Fraction of the Stated Principal Balance of each Discount Mortgage
Loan.
As stated above under "--Principal Distributions on the Senior
Certificates," the Senior Accelerated Distribution Percentage will be 100%
during the first five years after the Closing Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Class PO
Certificates) are reduced to zero before the end of such period), and will
thereafter equal 100% whenever the Senior Percentage exceeds the initial Senior
Percentage. Furthermore, as set forth herein, the Senior Accelerated
Distribution Percentage will exceed the Senior Percentage during the sixth
through ninth years following the Closing Date, and scheduled reductions to the
Senior Accelerated Distribution Percentage are subject to postponement based on
the loss and delinquency experience of the Mortgage Loans. Accordingly, each of
the Offered Subordinate Certificates will not be entitled to any prepayments for
at least the first five years after the Closing Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Class PO
Certificates) have been reduced to zero before the end of such period), and may
receive no prepayments or a disproportionately small portion of prepayments
relative to the related Offered Subordinate Percentage during certain periods
thereafter. See "--Principal Distributions on the Senior Certificates" herein.
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ALLOCATION OF LOSSES; SUBORDINATION
The Subordination provided to the Senior Certificates by the
Subordinate Certificates and the Subordination provided to each of the Offered
Subordinate Certificates by the Class B-4, Class B-5 and Class B-6 Certificates
and by any of the Offered Subordinate Certificates subordinate thereto will
cover Realized Losses on the Mortgage Loans that are Defaulted Mortgage Losses,
Fraud Losses, Bankruptcy Losses (each as defined in the Prospectus) and Special
Hazard Losses (as defined herein). Any such Realized Losses which are not Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses will be allocated as follows: first, to the Other
Certificates in the reverse order of their numerical designation; second, to the
Class B-3 Certificates; third, to the Class B-2 Certificates; and fourth, to the
Class B-1 Certificates, in each case until the Certificate Principal Balance of
such class of Certificates has been reduced to zero; and thereafter, if any such
Realized Loss is on a Discount Mortgage Loan, to the Class PO Certificates in an
amount equal to the related Discount Fraction of the principal portion of such
Realized Loss, and the remainder of such Realized Losses and the entire amount
of such Realized Losses on Non-Discount Mortgage Loans among all the remaining
classes of Senior Certificates (other than the Class PO Certificates) on a pro
rata basis. Any allocation of a Realized Loss to a Certificate will be made by
reducing the Certificate Principal Balance thereof, in the case of the principal
portion of such Realized Loss, in each case until the Certificate Principal
Balance of such class has been reduced to zero, and the Accrued Certificate
Interest thereon, in the case of the interest portion of such Realized Loss, by
the amount so allocated as of the Distribution Date occurring in the month
following the calendar month in which such Realized Loss was incurred. In
addition, any such allocation of a Realized Loss to a Offered Subordinate
Certificate may also be made by operation of the payment priority to the Senior
Certificates set forth under "--Principal Distributions on the Senior
Certificates" and of the Offered Subordinate Certificates with a higher payment
priority. As used herein, "Debt Service Reduction" means a reduction in the
amount of the monthly payment due to certain bankruptcy proceedings, but does
not include any permanent forgiveness of principal. As used herein,
"Subordination" refers to the provisions discussed above for the sequential
allocation of Realized Losses among the various classes, as well as all
provisions effecting such allocations including the priorities for distribution
of cash flows in the amounts described herein.
An allocation of the interest portion of a Realized Loss will not
reduce the level of Subordination, as such term is defined herein, until an
amount in respect thereof has been actually disbursed to the Senior
Certificateholders or the Offered Subordinate Certificateholders, as applicable.
The holders of the Offered Certificates will not be entitled to any additional
payments with respect to Realized Losses from amounts otherwise distributable on
any classes of Certificates subordinate thereto (except in limited circumstances
in the case of Class PO Collection Shortfalls, to the extent of Eligible Funds).
Accordingly, the Subordination provided to the Senior Certificates (other than
the Class PO Certificates) and to each of the Offered Subordinate Certificates
by the respective classes of Certificates subordinate thereto with respect to
Realized Losses allocated on any Distribution Date will be effected primarily by
increasing the Senior Percentage, or the respective Offered Subordinate
Percentage, of future distributions of principal of the remaining Mortgage
Loans. Because the Discount Fraction of each Discount Mortgage Loan will not
change over time, the protection from losses provided to the Class PO
Certificates by the Subordinate Certificates is limited to the prior right of
the Class PO Certificates to receive distributions in respect of principal as
described herein. Furthermore, principal losses on the Mortgage Loans will be
allocated to the Class PO Certificates only to the extent they occur on a
Discount Mortgage Loan and only to the extent of the related Discount Fraction
of such losses. Such allocation of principal losses on the Discount Mortgage
Loans may result in such losses being allocated in an amount that is greater or
less than would have been the case had such losses been allocated in proportion
to the Certificate Principal Balance of the Class PO Certificates. Thus, the
Senior Certificates (other than the Class PO Certificates) will bear the entire
amount of losses that are not allocated to the Subordinate Certificates (other
than the amount allocable to the Class PO Certificates), which losses will be
allocated among all classes of Senior Certificates (other than the Class PO
Certificates) as described herein.
Because the Class PO Certificates are entitled to receive in connection
with the Final Disposition of a Discount Mortgage Loan, on any Distribution
Date, an amount equal to all unpaid Class PO Collection Shortfalls to the extent
of Eligible Funds on such Distribution Date, shortfalls in distributions of
principal on any of the Offered Subordinate Certificates could occur under
certain circumstances, even if such class is not the most subordinate class of
Certificates then outstanding.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, Extraordinary Losses or other losses of a type not covered by
Subordination on Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Senior Certificates (other than the Class PO Certificates),
Subordinate Certificates (any such Realized Losses so allocated to the Senior
Certificates or Offered Subordinate Certificates will be allocated without
priority among the various classes of Senior Certificates (other than the Class
PO Certificates) or Offered Subordinate
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Certificates). The principal portion of such losses on Discount Mortgage Loans
will be allocated to the Class PO Certificates in an amount equal to the related
Discount Fraction thereof, and the remainder of such losses on Discount Mortgage
Loans will be allocated among the remaining Certificates on a pro rata basis. An
allocation of a Realized Loss on a "pro rata basis" among two or more classes of
Certificates means an allocation to each such class of Certificates on the basis
of its then outstanding Certificate Principal Balance prior to giving effect to
distributions to be made on such Distribution Date in the case of an allocation
of the principal portion of a Realized Loss, or based on the Accrued Certificate
Interest thereon in respect of such Distribution Date in the case of an
allocation of the interest portion of a Realized Loss.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer and the Servicer for Advances and expenses, including attorneys' fees)
towards interest and principal owing on the Mortgage Loan. Such amount of loss
realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses are
referred to herein as "Realized Losses."
In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount, Class PO Distribution Amount and Senior
Principal Distribution Amount, on each Distribution Date, holders of Senior
Certificates have a right to distributions of the Available Distribution Amount
that is prior to the rights of the holders of the Subordinate Certificates, to
the extent necessary to satisfy the Senior Interest Distribution Amount, Class
PO Distribution Amount and Senior Principal Distribution Amount. Similarly,
holders of the Offered Subordinate Certificates have a right to distributions of
the Available Distribution Amount prior to the rights of holders of the Class
B-4, Class B-5 and Class B-6 Certificates, and holders of any of the Class B-4,
Class B-5 and Class B-6 Certificates with a higher payment priority have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of any of the Subordinate Certificates with a lower payment priority.
The application of the Senior Accelerated Distribution Percentage (when
it exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Class PO Certificates) relative to the actual amortization of the Mortgage
Loans. The Class PO Certificates will not receive more than the Discount
Fraction of any unscheduled payment relating to a Discount Mortgage Loan. To the
extent that the Senior Certificates (other than the Class PO Certificates) are
amortized faster than the Mortgage Loans, in the absence of offsetting Realized
Losses allocated to the Subordinate Certificates, the percentage interest
evidenced by such Senior Certificates in the Trust Fund will be decreased (with
a corresponding increase in the interest in the Trust Fund evidenced by the
Subordinate Certificates), thereby increasing, relative to their respective
Certificate Principal Balances, the Subordination afforded the Senior
Certificates (other than the Class PO Certificates) by the Subordinate
Certificates collectively. In addition, if losses on the Mortgage Loans exceed
the amounts described above under "--Principal Distributions on the Senior
Certificates," a greater percentage of full and partial Mortgagor prepayments
will be allocated to the Senior Certificates (other than the Class PO
Certificates) than would otherwise be the case, thereby accelerating the
amortization of the Senior Certificates (other than the Class PO Certificates)
relative to the Subordinate Certificates.
The priority of payments (including Mortgagor prepayments) among the
Offered Subordinate Certificates, as described herein, also has the effect
during certain periods, in the absence of losses, of decreasing the percentage
interest evidenced by any of the Offered Subordinate Certificates with a higher
payment priority, thereby increasing, relative to its Certificate Principal
Balance, the Subordination afforded to such of the Offered Subordinate
Certificates by the Class B-4, Class B-5 and Class B-6 Certificates and any of
the Offered Subordinate Certificates with a lower payment priority.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $4,223,271. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$4,223,271 less the sum of (A) any amounts allocated through Subordination in
respect of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. A "Special Hazard Loss" is a Realized Loss
attributable to damage or a direct physical loss suffered by a Mortgaged
Property (including any Realized Loss due to the presence or suspected presence
of hazardous wastes or substances on a Mortgaged Property) other than any such
damage or loss covered by a hazard insurance policy or a flood insurance policy
required to be maintained in respect of such Mortgaged Property under the
Pooling and Servicing
S-34
<PAGE>
Agreement or any loss due to normal wear and tear or certain other causes.
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through Subordination
shall initially be equal to $2,475,790. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (X) prior to the third
anniversary of the Cut-off Date an amount equal to 1.00% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amounts allocated through Subordination with respect to Fraud Losses
up to such date of determination and (Y) from the third to the fifth anniversary
of the Cut-off Date, an amount equal to (1) the lesser of (a) the Fraud Loss
Amount as of the most recent anniversary of the Cut-off Date and (b) 0.50% of
the aggregate principal balance of all of the Mortgage Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate amounts allocated
through Subordination with respect to Fraud Losses since the most recent
anniversary of the Cut-off Date up to such date of determination. On and after
the fifth anniversary of the Cut-off Date, the Fraud Loss Amount shall be zero
and Fraud Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
Subordination will initially be equal to $100,000. As of any date of
determination, the Bankruptcy Amount will equal $100,000 less the sum of any
amounts allocated through Subordination for such losses up to such date of
determination.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Servicer has notified the Trustee in writing that the Servicer is diligently
pursuing any remedies that may exist in connection with the representations and
warranties made regarding the related Mortgage Loan and either (A) the related
Mortgage Loan is not in default with regard to payments due thereunder or (B)
delinquent payments of principal and interest under the related Mortgage Loan
and any premiums on any applicable standard hazard insurance policy and any
related escrow payments in respect of such Mortgage Loan are being advanced on a
current basis by the Servicer.
The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount are
subject to further reduction as described in the Prospectus under "Credit
Enhancement."
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<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. Such yields may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans in
the Trust Fund. The rate of principal payments on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
and timing of Mortgagor prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans due to certain breaches
of representations and warranties. The timing of changes in the rate of
prepayments, liquidations and purchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described herein and in the Prospectus under "Yield and
Prepayment Considerations"), no assurance can be given as to such rate or the
timing of principal payments on the Offered Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any
time without payment of any prepayment fee or penalty. The Mortgage Loans
generally contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" and
"--Principal Distributions on the Offered Subordinate Certificates" herein,
during certain periods all or a disproportionately large percentage of Mortgagor
prepayments on the Mortgage Loans will be allocated among the Senior
Certificates (other than the Class PO Certificates), and during certain periods
no Mortgagor prepayments or, relative to their respective percentage interests
in the Trust Fund, a disproportionately small portion of Mortgagor prepayments
on the Mortgage Loans will be distributed on the Lockout Certificates or on each
of the Offered Subordinate Certificates. In addition to the foregoing, if on any
Distribution Date, the loss level established for the Class B-2 Certificates or
Class B-3 Certificates is exceeded and a class of Subordinate Certificates
having a higher payment priority is then outstanding, the Class B-2 Certificates
or Class B-3 Certificates, as the case may be, will not receive distributions in
respect of Mortgagor prepayments on such Distribution Date. Prepayments,
liquidations and purchases of the Mortgage Loans will result in distributions to
holders of the Offered Certificates of principal amounts which would otherwise
be distributed over the remaining terms of the Mortgage Loans. Factors affecting
prepayment (including defaults and liquidations) of mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates, solicitations and servicing
decisions. In addition, if prevailing mortgage rates fell significantly below
the Mortgage Rates on the Mortgage Loans, the rate of prepayments (including
refinancings) would be expected to increase. Conversely, if prevailing mortgage
rates rose significantly above the Mortgage Rates on the Mortgage Loans, the
rate of prepayments on the Mortgage Loans would be expected to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Yield and Prepayment
Considerations" in the Prospectus.
After the Certificate Principal Balances of the Class B-4, Class B-5
and Class B-6 Certificates have been reduced to zero, the yield to maturity on
the Offered Subordinate Certificates then outstanding with the lowest payment
priority will be extremely sensitive to losses on the Mortgage Loans (and the
timing thereof) because the entire amount of losses that are covered by
Subordination will be allocated to such Offered Subordinate Certificates.
Furthermore, because principal distributions are paid to certain classes of
Senior Certificates and Offered Subordinate Certificates before other classes,
holders of classes having a later priority of payment bear a greater risk of
losses than holders of classes having earlier priorities for distribution of
principal.
All classes of Senior Certificates entitled to payments of principal
are subject to various priorities for payment of principal as described herein.
Distributions of principal on classes having an earlier priority of payment will
be
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<PAGE>
affected by the rates of prepayment of the Mortgage Loans early in the life of
the Mortgage Pool. The timing of commencement of principal distributions and the
weighted average lives of classes of Certificates with a later priority of
payment will be affected by the rates of prepayment experienced both before and
after the commencement of principal distributions on such classes.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through
Rates on the Offered Certificates (other than the Variable Strip Certificates)
are fixed, such rates will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Offered Certificates were to rise, the market value of the
Offered Certificates may decline.
RETAIL LOTTERY CERTIFICATES. IN ADDITION TO THE CONSIDERATIONS SET
FORTH ABOVE, INVESTORS IN THE RETAIL LOTTERY CERTIFICATES SHOULD BE AWARE THAT
SUCH CERTIFICATES MAY NOT BE AN APPROPRIATE INVESTMENT FOR ALL PROSPECTIVE
INVESTORS. The Retail Lottery Certificates would not be an appropriate
investment for any investor requiring a distribution of a particular amount of
principal or interest on a specific date or dates or an otherwise predictable
stream of cash payments. The timing of such distributions may have a significant
effect on an investor's yield on such Certificates if the Certificate is
purchased at a discount or a premium.
Investors in the Retail Lottery Certificates also should be aware that
distributions of principal to the Retail Lottery Certificates will be allocated
by DTC according to a random lot procedure (except as provided herein under
"Description of the Certificates--Principal Distributions on the Retail Lottery
Certificates"). Due to this random lot procedure, there can be no assurance that
on any Distribution Date, any holder of a Retail Lottery Certificate will
receive a principal distribution. Thus, the timing of distributions in reduction
of the Certificate Principal Balance with respect to any particular Retail
Lottery Certificate, even if a request for distribution has been made as
provided herein under "Description of the Certificates--Principal Distributions
on the Retail Lottery Certificates," is highly uncertain and may be earlier or
later than the date that may be desired by such Certificateholder.
Furthermore, investors in the Retail Lottery Certificates should be
aware that because such Certificates have a later priority of payment with
respect to principal in relation to the other classes of Senior Certificates,
the effect on the market value of the Retail Lottery Certificates of changes in
market interest rates or market yields for similar securities will be greater
than would be the effect of such changes on other classes of Senior Certificates
entitled to principal distributions. Furthermore, this later payment priority
also makes the Retail Lottery Certificates particularly sensitive to the rate
and timing of principal prepayments on the Mortgage Loans. If prepayments on the
Mortgage Loans occur at a higher rate than anticipated, the weighted average
life of the Retail Lottery Certificates may be shortened. Conversely, if
prepayments on the Mortgage Loans occur at a lower rate than anticipated, the
weighted average life of the Retail Lottery Certificates may be extended.
LOCKOUT CERTIFICATES. Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any portion of
principal payments prior to the Distribution Date occurring in December 2003 and
prior to the Distribution Date occurring in December 2007 will receive a
disproportionately small portion of principal prepayments, the weighted average
life of the Lockout Certificates will be longer than would otherwise be the
case, and the effect on the market value of the Lockout Certificates of changes
in market interest rates or market yields for similar securities may be greater
than for other classes of Senior Certificates entitled to such distributions.
As described under "Description of the Certificates--Allocation of
Losses; Subordination" and "The Pooling and Servicing Agreement--Monthly
Advances," amounts otherwise distributable to holders of one or more of the
Offered Subordinate Certificates may be made available to protect the holders of
the Senior Certificates and holders of any Offered Subordinate Certificates with
a higher payment priority against interruptions in distributions due to certain
Mortgagor delinquencies, to the extent not covered by Advances. Such
delinquencies may affect the yields to investors on such of the Offered
Subordinate Certificates, and, even if subsequently cured, may affect the timing
of the receipt of distributions by the holders of such of the Offered
Subordinate Certificates. Furthermore, the Class PO Certificates will share in
the principal portion of Realized Losses on the Mortgage Loans only to the
extent that they are incurred with respect to Discount Mortgage Loans and only
to the extent of the related Discount Fraction; thus, after the Subordinate
Certificates are retired or in the case of Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses and Extraordinary Losses, the Senior
Certificates (other than the Class PO Certificates) may be affected to a greater
extent by losses on Non-Discount Mortgage Loans than losses on Discount Mortgage
Loans. In addition, a higher than expected rate of delinquencies or losses will
also affect the rate of principal payments on one
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<PAGE>
or more of the Offered Subordinate Certificates if it delays the scheduled
reduction of the Senior Accelerated Distribution Percentage or affects the
allocation of prepayments among the Subordinate Certificates.
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination or by the Servicer as described herein, including
Interest Shortfalls and, in the case of each of the Offered Subordinate
Certificates, the interest portions of Realized Losses allocated solely to such
class of Certificates. Such shortfalls will not be offset by a reduction in the
Servicing Fees payable to the Servicer or otherwise, except as described herein
with respect to certain Interest Shortfalls. See "Yield and Prepayment
Considerations" in the Prospectus and "Description of the Certificates--Interest
Distributions" herein for a discussion of the effect of Mortgagor prepayments on
the Mortgage Loans on the yield to maturity of the Offered Certificates and
certain possible shortfalls in the collection of interest.
The yield to investors in the Offered Certificates will be affected by
Interest Shortfalls allocable thereto in the month preceding any Distribution
Date to the extent that such shortfalls exceed the amount offset by the Master
Servicer or the Servicer. See "Description of the Certificates--Interest
Distributions" herein.
In addition, the yield to maturity on each class of the Offered
Certificates will depend on, among other things, the price paid by the holders
of the Offered Certificates and the related Pass-Through Rate. The extent to
which the yield to maturity of an Offered Certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of Offered Certificates is purchased
at a premium and principal distributions thereon occur at a rate faster than
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that anticipated at the time of purchase. Conversely, if a class of
Offered Certificates is purchased at a discount and principal distributions
thereon occur at a rate slower than that anticipated at the time of purchase,
the investor's actual yield to maturity will be lower than that assumed at the
time of purchase. For additional considerations relating to the yield on the
Certificates, see "Yield and Prepayment Considerations" in the Prospectus.
ASSUMED FINAL DISTRIBUTION DATE: The assumed final Distribution Date
with respect to each class of the Offered Certificates is January 25, 2029,
which is the Distribution Date in the month immediately following the latest
scheduled maturity date for any Mortgage Loan.
No event of default, change in the priorities for distribution among
the various classes or other provisions under the Pooling and Servicing
Agreement will arise or become applicable solely by reason of the failure to
retire the entire Certificate Principal Balance of any class of Certificates on
or before its assumed final Distribution Date.
WEIGHTED AVERAGE LIFE: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model ("SPA") used in this Prospectus
Supplement represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans. SPA DOES NOT
PURPORT TO BE EITHER A HISTORICAL DESCRIPTION OF THE PREPAYMENT EXPERIENCE OF
ANY POOL OF MORTGAGE LOANS OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT
OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE MORTGAGE LOANS IN THE MORTGAGE LOAN
GROUPS. 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 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, 250%
SPA assumes prepayment rates will be approximately 0.50% per annum in month one,
approximately 1% per annum in month two, reaching approximately 15% per annum in
month 30 and remaining constant at approximately 15% per annum thereafter. 0%
SPA assumes no prepayments.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust as described
under "Description of the Mortgage Pool" herein and the performance thereof. The
table assumes, among other things, that: (i) the Mortgage Loans have been
divided into two pools: (a) one pool of Non-Discount Mortgage Loans with an
aggregate principal balance as of the date of issuance of the Offered
Certificates of $226,292,064.48, a Mortgage Rate of 7.33119751%, a Net Mortgage
Rate of 7.01124080%, an original term of maturity of 359 months and a remaining
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<PAGE>
term to maturity of 358 months and (b) one pool of Discount Mortgage Loans with
an aggregate principal balance as of the date of issuance of the Offered
Certificates of $21,286,966.02, a Mortgage Rate of 6.85231268%, a Net Mortgage
Rate of 6.63981268%, an original term of maturity of 351 months and a remaining
term to maturity of 351 months; (ii) the scheduled monthly payment for each
Mortgage Loan has been based on its outstanding balance, interest rate and
remaining term to maturity, such that the Mortgage Loan will amortize in amounts
sufficient for repayment thereof over its remaining term to maturity; (iii)
Provident, the Master Servicer or SAMI will not repurchase any Mortgage Loan, as
described under "Mortgage Loans--Representations by Lenders; Repurchases" and
"Administration--Assignment of Mortgage Assets" in the Prospectus, and neither
the Master Servicer nor SAMI exercises any option to purchase the Mortgage Loans
and thereby cause a termination of the Trust; (iv) there are no delinquencies or
Realized Losses on the Mortgage Loans, and principal payments on the Mortgage
Loans will be timely received together with prepayments, if any, at the
respective constant percentages of SPA set forth in the table; (v) there is no
Interest Shortfall or any other interest shortfall in any month; (vi) payments
on the Certificates will be received on the 25th day of each month, commencing
in December 1998; (vii) payments on the Mortgage Loans earn no reinvestment
return; (viii) there are no additional ongoing Trust Fund expenses payable out
of the Trust Fund; and (ix) the Certificates will be purchased on November 30,
1998; ((i) through (ix) collectively, the "Structuring Assumptions").
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of each class of Offered Certificates,
and sets forth the percentages of the initial Certificate Principal Balance of
each such class of Offered Certificates that would be outstanding after each of
the dates shown at various percentages of SPA.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT OUTSTANDING
CLASS A-3, A-4, A-5
CLASS A-1 CERTIFICATES CLASS A-2 AND A-8 CERTIFICATES AND A-9 CERTIFICATES
---------------------- ------------------------------ --------------------
% OF SPA % OF SPA % OF SPA
-------- -------- --------
0% 125% 275% 425% 550% 0% 125% 275% 425% 550% 0% 125% 275% 425% 550%
-- ---- ---- ---- ---- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 1999.......... 99 96 93 89 87 100 100 100 100 100 100 100 100 100 100
November 2000.......... 97 88 77 66 57 100 100 100 100 100 100 100 100 100 100
November 2001.......... 96 77 56 37 24 100 100 100 100 100 100 100 100 100 100
November 2002.......... 94 66 38 16 * 100 100 100 100 100 100 100 100 100 100
November 2003.......... 92 56 24 0 0 100 100 100 96 0 100 100 100 100 54
November 2004.......... 90 48 13 0 0 100 100 100 12 0 100 100 100 100 0
November 2005.......... 88 41 4 0 0 100 100 100 0 0 100 100 100 26 0
November 2006.......... 86 34 0 0 0 100 100 81 0 0 100 100 100 0 0
November 2007.......... 84 28 0 0 0 100 100 43 0 0 100 100 100 0 0
November 2008.......... 82 23 0 0 0 100 100 16 0 0 100 100 100 0 0
November 2009.......... 79 19 0 0 0 100 100 0 0 0 100 100 89 0 0
November 2010.......... 76 14 0 0 0 100 100 0 0 0 100 100 56 0 0
November 2011.......... 74 10 0 0 0 100 100 0 0 0 100 100 30 0 0
November 2012.......... 70 7 0 0 0 100 100 0 0 0 100 100 8 0 0
November 2013.......... 67 3 0 0 0 100 100 0 0 0 100 100 0 0 0
November 2014.......... 64 * 0 0 0 100 100 0 0 0 100 100 0 0 0
November 2015.......... 60 0 0 0 0 100 78 0 0 0 100 100 0 0 0
November 2016.......... 56 0 0 0 0 100 56 0 0 0 100 100 0 0 0
November 2017.......... 51 0 0 0 0 100 36 0 0 0 100 100 0 0 0
November 2018.......... 46 0 0 0 0 100 17 0 0 0 100 100 0 0 0
November 2019.......... 41 0 0 0 0 100 0 0 0 0 100 100 0 0 0
November 2020.......... 36 0 0 0 0 100 0 0 0 0 100 72 0 0 0
November 2021.......... 30 0 0 0 0 100 0 0 0 0 100 46 0 0 0
November 2022.......... 23 0 0 0 0 100 0 0 0 0 100 22 0 0 0
November 2023.......... 16 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 2024.......... 9 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 2025.......... 1 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 2026.......... 0 0 0 0 0 37 0 0 0 0 100 0 0 0 0
November 2027.......... 0 0 0 0 0 0 0 0 0 0 29 0 0 0 0
November 2028.......... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
---- ----- ------ ------ ------ ----- ----- ------ ------ ------ ----- ------ ------ ------ ----
Weighted Average Life
(in years)**........ 17.6 6.6 3.6 2.6 2.2 27.8 18.4 8.9 5.6 4.4 28.9 22.9 12.4 6.8 5.1
==== ===== ===== ===== ===== ==== ==== ===== ===== ===== ==== ==== ==== ===== ====
</TABLE>
- -----------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance (or notional amount) of such Certificate from one Distribution
Date to the next Distribution Date by the number of years from the date
of issuance to the second such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
*** The weighted average life shown for the Class A-9, Class A-10, Class
A-14, Class A-15, Class A-16 or Class A-17 Certificates applies to such
Class taken as a whole. As a result of distribution priorities and
allocations described herein, the weighted average life of such Class
of Certificates beneficially owned by a Certificateholder may vary
significantly from the weighted average life of the applicable Class
taken as a whole.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT OUTSTANDING
CLASS A-7, A-11, A-15 AND A-16
CLASS A-6 AND A-10 CERTIFICATES CERTIFICATES CLASS A-12 CERTIFICATES
------------------------------- ------------ -----------------------
% OF SPA % OF SPA % OF SPA
-------- -------- --------
0% 125% 275% 425% 550% 0% 125% 275% 425% 550% 0% 125% 275% 425% 550%
-- ---- ---- ---- ---- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 1999..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 2000..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 2001..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 2002..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 2003..... 100 100 100 100 100 100 100 100 100 100 100 100 100 98 38
November 2004..... 100 100 100 100 0 100 100 100 100 95 100 100 100 57 7
November 2005..... 100 100 100 100 0 100 100 100 100 0 100 100 100 30 0
November 2006..... 100 100 100 54 0 100 100 100 100 0 100 100 91 16 0
November 2007..... 100 100 100 12 0 100 100 100 100 0 100 100 72 9 0
November 2008..... 100 100 100 0 0 100 100 100 93 0 100 100 59 6 0
November 2009..... 100 100 100 0 0 100 100 100 68 0 100 100 48 5 0
November 2010..... 100 100 100 0 0 100 100 100 49 0 100 100 39 3 0
November 2011..... 100 100 100 0 0 100 100 100 36 0 100 100 32 2 0
November 2012..... 100 100 100 0 0 100 100 100 26 0 100 100 26 2 0
November 2013..... 100 100 84 0 0 100 100 100 18 0 100 100 21 1 0
November 2014..... 100 100 59 0 0 100 100 100 13 0 100 100 17 1 0
November 2015..... 100 100 38 0 0 100 100 100 9 0 100 89 13 1 0
November 2016..... 100 100 22 0 0 100 100 100 7 0 100 79 10 * 0
November 2017..... 100 100 8 0 0 100 100 100 5 0 100 69 8 * 0
November 2018..... 100 100 0 0 0 100 100 93 3 0 100 60 6 * 0
November 2019..... 100 100 0 0 0 100 100 72 2 0 100 51 5 * 0
November 2020..... 100 100 0 0 0 100 100 55 2 0 100 43 4 * 0
November 2021..... 100 100 0 0 0 100 100 42 1 0 100 36 3 * 0
November 2022..... 100 100 0 0 0 100 100 31 1 0 100 29 2 * 0
November 2023..... 100 100 0 0 0 100 100 22 * 0 100 23 2 * 0
November 2024..... 100 65 0 0 0 100 100 15 * 0 100 18 1 * 0
November 2025..... 100 34 0 0 0 100 100 10 * 0 100 12 1 * 0
November 2026..... 100 4 0 0 0 100 100 5 * 0 69 8 * * 0
November 2027..... 100 0 0 0 0 100 46 2 * 0 31 3 * * 0
November 2028..... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Weighted Average
Life (in years)**.....29.5 26.5 16.6 8.2 5.7 29.8 29.0 23.0 12.9 6.2 28.5 21.7 12.1 6.8 4.9
==== ==== ==== === === ==== ==== ==== ==== === ==== ==== ==== === ===
</TABLE>
- -----------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance (or notional amount) of such Certificate from one Distribution
Date to the next Distribution Date by the number of years from the date
of issuance to the second such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
*** The weighted average life shown for the Class A-9, Class A-10, Class
A-14, Class A-15, Class A-16 or Class A-17 Certificates applies to such
Class taken as a whole. As a result of distribution priorities and
allocations described herein, the weighted average life of such Class
of Certificates beneficially owned by a Certificateholder may vary
significantly from the weighted average life of the applicable Class
taken as a whole.
S-41
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT OUTSTANDING
CLASS A-13 CERTIFICATES CLASS A-14 AND A-17 CERTIFICATES CLASS A-18 CERTIFICATES
----------------------- -------------------------------- -----------------------
% OF SPA % OF SPA % OF SPA
-------- -------- --------
0% 125% 275% 425% 550% 0% 125% 275% 425% 550% 0% 125% 275% 425% 550%
-- ---- ---- ---- ---- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 1999..... 99 97 94 91 89 100 100 100 100 100 100 100 100 100 100
November 2000..... 98 90 80 71 64 100 100 100 100 100 100 100 100 100 100
November 2001..... 96 80 63 47 35 100 100 100 100 100 100 100 100 100 100
November 2002..... 95 71 48 29 16 100 100 100 100 100 100 100 100 100 100
November 2003..... 93 63 35 15 3 100 100 100 100 100 100 100 100 100 100
November 2004..... 92 56 26 6 0 100 100 100 100 25 100 97 94 91 88
November 2005..... 90 50 19 1 0 100 100 100 100 0 99 94 87 81 59
November 2006..... 88 44 13 0 0 100 100 100 60 0 98 88 77 67 35
November 2007..... 86 39 9 0 0 100 100 100 34 0 96 82 66 52 22
November 2008..... 84 35 7 0 0 100 100 100 24 0 94 74 54 38 14
November 2009..... 82 31 5 0 0 100 100 100 18 0 92 67 44 28 9
November 2010..... 80 27 3 0 0 100 100 100 13 0 90 60 36 20 6
November 2011..... 78 24 1 0 0 100 100 100 9 0 87 54 29 15 4
November 2012..... 75 21 0 0 0 100 100 97 7 0 84 49 23 10 3
November 2013..... 72 18 0 0 0 100 100 78 5 0 81 43 19 8 2
November 2014..... 69 16 0 0 0 100 100 63 3 0 78 38 15 5 1
November 2015..... 66 13 0 0 0 100 100 50 2 0 75 34 12 4 1
November 2016..... 62 11 0 0 0 100 100 40 2 0 71 30 10 3 *
November 2017..... 59 9 0 0 0 100 100 31 1 0 67 26 8 2 *
November 2018..... 54 7 0 0 0 100 100 25 1 0 63 23 6 1 *
November 2019..... 50 5 0 0 0 100 100 19 1 0 58 19 5 1 *
November 2020..... 45 4 0 0 0 100 100 15 * 0 53 16 4 1 *
November 2021..... 40 2 0 0 0 100 100 11 * 0 48 14 3 * *
November 2022..... 35 1 0 0 0 100 100 8 * 0 42 11 2 * *
November 2023..... 29 0 0 0 0 100 88 6 * 0 36 9 1 * *
November 2024..... 23 0 0 0 0 100 67 4 * 0 30 7 1 * *
November 2025..... 16 0 0 0 0 100 47 3 * 0 23 5 1 * *
November 2026..... 9 0 0 0 0 100 29 1 * 0 15 3 * * *
November 2027..... 1 0 0 0 0 100 12 1 * 0 7 1 * * *
November 2028..... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
---- --- --- --- --- ---- ---- ---- --- --- ---- ---- ---- --- ---
Weighted Average
Life (in years)**......19.2 8.7 4.6 3.1 2.6 29.5 27.0 18.0 9.4 5.8 21.4 15.0 11.5 9.8 8.0
==== === === === === ==== ==== ==== === === ==== ==== ==== === ===
</TABLE>
- -----------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance (or notional amount) of such Certificate from one Distribution
Date to the next Distribution Date by the number of years from the date
of issuance to the second such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
*** The weighted average life shown for the Class A-9, Class A-10, Class
A-14, Class A-15, Class A-16 or Class A-17 Certificates applies to such
Class taken as a whole. As a result of distribution priorities and
allocations described herein, the weighted average life of such Class
of Certificates beneficially owned by a Certificateholder may vary
significantly from the weighted average life of the applicable Class
taken as a whole.
S-42
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT OUTSTANDING
CLASS X CERTIFICATES+ CLASS PO CERTIFICATES CLASS R CERTIFICATES
--------------------- --------------------- --------------------
% OF SPA % OF SPA % OF SPA
-------- -------- --------
0% 125% 275% 425% 550% 0% 125% 275% 425% 550% 0% 125% 275% 425% 550%
-- ---- ---- ---- ---- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE..... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 1999..... 99 97 95 93 91 99 97 95 93 92 0 0 0 0 0
November 2000..... 98 91 84 76 70 98 92 85 78 72 0 0 0 0 0
November 2001..... 97 84 70 57 47 96 84 70 58 49 0 0 0 0 0
November 2002..... 96 77 57 42 31 95 77 58 43 32 0 0 0 0 0
November 2003..... 94 70 47 31 21 94 70 48 31 21 0 0 0 0 0
November 2004..... 93 64 39 23 14 92 63 39 23 14 0 0 0 0 0
November 2005..... 91 58 32 17 9 90 58 32 17 9 0 0 0 0 0
November 2006..... 90 53 26 12 6 89 52 26 12 6 0 0 0 0 0
November 2007..... 88 48 21 9 4 87 47 21 9 4 0 0 0 0 0
November 2008..... 86 43 18 6 3 85 43 17 6 3 0 0 0 0 0
November 2009..... 84 39 14 5 2 82 38 14 5 2 0 0 0 0 0
November 2010..... 82 35 12 3 1 80 35 12 3 1 0 0 0 0 0
November 2011..... 80 32 9 2 1 78 31 9 2 1 0 0 0 0 0
November 2012..... 77 28 8 2 * 75 28 8 2 * 0 0 0 0 0
November 2013..... 75 25 6 1 * 72 25 6 1 * 0 0 0 0 0
November 2014..... 72 23 5 1 * 69 22 5 1 * 0 0 0 0 0
November 2015..... 69 20 4 1 * 66 19 4 1 * 0 0 0 0 0
November 2016..... 65 18 3 * * 62 17 3 * * 0 0 0 0 0
November 2017..... 62 15 2 * * 58 15 2 * * 0 0 0 0 0
November 2018..... 58 13 2 * * 54 13 2 * * 0 0 0 0 0
November 2019..... 54 11 1 * * 50 11 1 * * 0 0 0 0 0
November 2020..... 49 10 1 * * 45 9 1 * * 0 0 0 0 0
November 2021..... 44 8 1 * * 40 7 1 * * 0 0 0 0 0
November 2022..... 39 7 1 * * 35 6 1 * * 0 0 0 0 0
November 2023..... 34 5 * * * 29 5 * * * 0 0 0 0 0
November 2024..... 28 4 * * * 23 3 * * * 0 0 0 0 0
November 2025..... 21 3 * * * 16 2 * * * 0 0 0 0 0
November 2026..... 14 2 * * * 9 1 * * * 0 0 0 0 0
November 2027..... 7 1 * * * 2 * * * * 0 0 0 0 0
November 2028..... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
---- --- --- --- --- ---- ---- --- --- --- ---- ---- ---- --- ---
Weighted Average
Life (in years)**.....20.0 10.4 6.1 4.3 3.5 19.2 10.2 6.1 4.4 3.6 0.1 0.1 0.1 0.1 0.1
==== ==== === === === ==== ==== === === === === === === === ===
</TABLE>
- -----------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance (or notional amount) of such Certificate from one Distribution
Date to the next Distribution Date by the number of years from the date
of issuance to the second such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
* Notional Amount.
S-43
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT OUTSTANDING
CLASS B-1, B-2 AND B-3 CERTIFICATES
-----------------------------------
% OF SPA
--------
0% 125% 275% 425% 550%
-- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE..................................... 100 100 100 100 100
November 1999.......................................... 99 99 99 99 99
November 2000.......................................... 98 98 98 98 98
November 2001.......................................... 97 97 97 97 97
November 2002.......................................... 96 96 96 96 96
November 2003.......................................... 94 94 94 94 94
November 2004.......................................... 93 91 88 85 83
November 2005.......................................... 91 87 81 74 69
November 2006.......................................... 90 81 71 61 54
November 2007.......................................... 88 75 60 48 38
November 2008.......................................... 86 68 49 35 25
November 2009.......................................... 84 61 40 25 16
November 2010.......................................... 82 55 33 18 11
November 2011.......................................... 80 49 27 13 7
November 2012.......................................... 77 44 21 10 5
November 2013.......................................... 74 40 17 7 3
November 2014.......................................... 71 35 14 5 2
November 2015.......................................... 68 31 11 4 1
November 2016.......................................... 65 27 9 2 1
November 2017.......................................... 61 24 7 2 *
November 2018.......................................... 57 21 5 1 *
November 2019.......................................... 53 18 4 1 *
November 2020.......................................... 49 15 3 1 *
November 2021.......................................... 44 13 2 * *
November 2022.......................................... 39 10 2 * *
November 2023.......................................... 33 8 1 * *
November 2024.......................................... 27 6 1 * *
November 2025.......................................... 21 4 1 * *
November 2026.......................................... 14 3 * * *
November 2027.......................................... 6 1 * * *
November 2028.......................................... 0 0 0 0 0
------ ------ ------ ---- ----
Weighted Average Life
(in years)**........................................ 19.9 14.0 10.8 9.3 8.5
==== ==== ==== === ===
</TABLE>
- -----------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance (or notional amount) of such Certificate from one Distribution
Date to the next Distribution Date by the number of years from the date
of issuance to the second such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
S-44
<PAGE>
VARIABLE STRIP CERTIFICATE AND PRINCIPAL ONLY CERTIFICATE YIELD CONSIDERATIONS
Because the Principal Only Certificates will be purchased at a
discount, the yield on the Principal Only Certificates will be adversely
affected by slower than expected payments of principal (including prepayments,
defaults, liquidations and purchases of Mortgage Loans due to a breach of a
representation and warranty) on the Mortgage Loans, with respect to the Class
A-12 Certificates, and on the Discount Mortgage Loans, with respect to the Class
PO Certificates.
The yield to maturity on the Variable Strip Certificates will be
extremely sensitive to both the timing of receipt of prepayments and the overall
rate of principal prepayments and defaults on the Non-Discount Mortgage Loans,
which rate may fluctuate significantly over time. Investors in the Variable
Strip Certificates should fully consider the risk that a rapid rate of
prepayments on the Mortgage Loans could result in the failure of such investors
to fully recover their investments. Because the Pool Strip Rates on the Discount
Mortgage Loans equal 0.00%, the yield to investors on the Variable Strip
Certificates will not be affected by prepayments on the Discount Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Variable Strip Certificates and Principal Only Certificates to
various constant rates of prepayment on the Mortgage Loans by projecting the
monthly aggregate payments on the Variable Strip Certificates and Principal Only
Certificates and computing the corresponding pre-tax yields to maturity on a
corporate bond equivalent basis, based on the Structuring Assumptions including
the assumptions regarding the characteristics and performance of the Mortgage
Loans which differ from the actual characteristics and performance thereof and
assuming the aggregate purchase price set forth below. Any differences between
such assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS A-12
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
ASSUMED PURCHASE PRICE 0% 125% 275% 425% 550%
---------------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
38.000000% ................... 3.4% 4.6% 8.6% 15.2% 20.8%
</TABLE>
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS PO
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
ASSUMED PURCHASE PRICE 0% 125% 275% 425% 550%
---------------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
60.000000% ..................... 2.8% 5.8% 10.0% 13.8% 16.7%
</TABLE>
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE VARIABLE STRIP
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
ASSUMED PURCHASE PRICE 0% 125% 275% 425% 550%
---------------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
0.703125% ................... 37.7% 31.7% 24.3% 16.8% 10.4%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Variable Strip Certificates and
Principal Only Certificates, as applicable, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
listed in the tables. With respect to the Variable Strip Certificates, accrued
interest is included in the assumed purchase price and is used in computing the
yields shown. These yields do not take into account the different interest rates
at which investors may be able to reinvest funds received by them as
distributions on the Variable Strip Certificates or Principal Only Certificates
and thus do not reflect the return on any investment in the Variable Strip
Certificates or Principal Only Certificates when any reinvestment rates other
than the discount rates set forth in the preceding tables are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Variable
Strip Certificates and Principal Only Certificates is likely to differ from
those shown in the tables above, even if the average prepayment rate on all of
the
S-45
<PAGE>
Mortgage Loans equals the constant percentages of SPA indicated in the tables
above over any given time period or over the entire life of the Certificates. A
lower than anticipated rate of principal prepayments on the Mortgage Loans will
have a material adverse effect on the yield to maturity of the Class A-12
Certificates, and a lower than anticipated rate of principal prepayments on the
Discount Mortgage Loans will have a material adverse effect on the yield to
maturity of the Class PO Certificates. The rate and timing of principal
prepayments on the Discount Mortgage Loans may differ from the rate and timing
of principal prepayments on the Mortgage Pool. In addition, because the Discount
Mortgage Loans have Mortgage Rates that are lower than the Mortgage Rates of the
Non-Discount Mortgage Loans, the Discount Mortgage Loans are generally likely to
prepay under most circumstances at a lower rate than the Non-Discount Mortgage
Loans. In addition, holders of the Variable Strip Certificates generally have
rights to relatively larger portions of interest payments on Non-Discount
Mortgage Loans with higher Mortgage Rates; thus, the yield on the Variable Strip
Certificates will be adversely affected to a greater extent than on the other
Offered Certificates if the Non-Discount Mortgage Loans with higher Mortgage
Rates prepay faster than the Non-Discount Mortgage Loans with lower Mortgage
Rates. Because Mortgage Loans having higher Pool Strip Rates have higher
Mortgage Rates, such Mortgage Loans are generally more likely to be prepaid
under most circumstances than are Mortgage Loans having lower Pool Strip Rates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Variable Strip Certificates and
Principal Only Certificates will conform to the yields described herein.
Moreover, the various remaining terms to maturity of the Mortgage Loans could
produce slower or faster principal distributions than indicated in the preceding
table at the various constant percentages of the Prepayment Assumption
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Investors are urged to make their investment
decisions based on their determinations as to anticipated rates of prepayment
under a variety of scenarios.
For additional considerations relating to the yield on the
Certificates, see "Yield and Prepayment Considerations" in the Prospectus.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the Trust Fund's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Pool.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement dated as of November 1, 1998, among SAMI, the Master Servicer, the
Servicer and The First National Bank of Chicago, as Trustee. Reference is made
to the Prospectus for important information in addition to that set forth herein
regarding the terms and conditions of the Pooling and Servicing Agreement and
the Offered Certificates. The Offered Certificates will be transferable and
exchangeable at the corporate trust office of the Trustee. The Depositor will
provide a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Pooling and Servicing Agreement.
Requests should be addressed to Structured Asset Mortgage Investments, Inc., 245
Park Avenue, New York, New York 10167. Pursuant to the Pooling and Servicing
Agreement, transfers of Residual Certificates are prohibited to any non-United
States person. Transfers of certain of the Certificates, including the Residual
Certificates, are also subject to additional transfer restrictions as set forth
in the Pooling and Servicing Agreement. See "Federal Income Tax Consequences"
herein and "Certain Federal Income Tax Consequences--Transfers of REMIC Residual
Certificates--Tax on Disposition of REMIC Residual Certificates" and
"--Restrictions on Transfer; Holding by Pass- Through Entities" in the
Prospectus. In addition to the circumstances described in the Prospectus, SAMI
may terminate
S-46
<PAGE>
the Trustee for cause under certain circumstances. See "The Pooling and
Servicing Agreement--The Trustee" in the Prospectus.
SERVICING
The Mortgage Loans will be serviced by the Servicer under the
supervision of the Master Servicer in accordance with the provisions of the
Pooling and Servicing Agreement.
Notwithstanding anything to the contrary in the Prospectus, the Master
Servicer will not ultimately be responsible for the performance of the servicing
activities by the Servicer, except as described under "--Servicing Compensation
and Payment of Expenses" and "--Monthly Advances" below. If the Servicer fails
to fulfill its obligations under the Pooling and Servicing Agreement and such
failure results in a material breach, the Master Servicer is obligated to
terminate the Servicer and appoint a successor servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled in
the aggregate to such percentage of the Voting Rights. 98% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Variable
Strip Certificates and Residual Certificates) in proportion to their then
outstanding Certificate Principal Balances, and 1% and 1% of all Voting Rights
will be allocated to the holders of the Variable Strip Certificates and Class R
Certificates, respectively, in proportion to the Percentage Interests (as
defined in the Prospectus) evidenced by their Certificates.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, SAMI will cause the
Mortgage Loans, together with all principal and interest due on or with respect
to such Mortgage Loans after the Cut-off Date, to be sold to the Trustee. The
Mortgage Loans will be identified in a separate schedule appearing as an exhibit
to the Pooling and Servicing Agreement. Such schedule will include information
as to the principal balance of each Mortgage Loan as of the Cut-off Date, as
well as information including, among other things, the Mortgage Rate, the
applicable Net Mortgage Rate, the Monthly Payment, the maturity date of each
Mortgage Note, the Servicing Fee Rate and the Loan-to-Value Ratio.
In addition, SAMI will cause Provident to deposit with the Trustee or
its designee (the "Custodian"), with respect to each Mortgage Loan, the original
Mortgage Note, endorsed without recourse to the order of the Trustee and showing
an unbroken chain of endorsements from the original payee thereof to the entity
endorsing it to the Trustee; the original Mortgage which shall have been
recorded, with evidence of such recording indicated thereon; the assignment
(which may be in the form of a blanket assignment) to the Trustee of the
Mortgage; all intervening assignments of the Mortgage, if any, with evidence of
recording thereon; originals of all assumption and modification agreements;
PROVIDED, HOWEVER, that in lieu of the foregoing, Provident may deliver certain
other documents, under the circumstances set forth in the Pooling and Servicing
Agreement. The documents delivered to the Custodian with respect to each
Mortgage Loan are referred to collectively as the "Mortgage File." Provident
will cause the Mortgage and intervening assignments, if any, and the assignment
of the Mortgage to be recorded promptly after the Closing Date.
The Custodian will review each item of the Mortgage File within 90 days
of the Closing Date (and will review each document permitted to be delivered to
the Custodian after the Closing Date, if received by the Custodian after the
initial 90-day period, promptly after its delivery to the Custodian). If, as a
result of its review, the Custodian determines that any document is missing,
does not appear regular on its face, or appears to be unrelated to the Mortgage
Loans identified in the Mortgage Loan schedule (a "Material Defect"), the
Custodian shall notify Provident and the Trustee of such Material Defect.
Provident shall correct or cure any such Material Defect within 60 days from the
date of notice from the Custodian of the Material Defect and if Provident does
not correct or cure such Material Defect within such period and such defect
materially and adversely affects the interests of the Certificateholders in the
related Mortgage Loan, Provident will, within 90 days of the date of notice,
purchase the related Mortgage Loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan
required to be repurchased, an amount equal to (i) 100% of the Outstanding
Principal Balance of such Mortgage Loan plus accrued but unpaid interest on the
Outstanding Principal Balance at the related Net Mortgage Rate through and
including the last day of the month of
S-47
<PAGE>
repurchase reduced by (ii) any portion of the applicable Servicing Fee or
advances payable to the purchaser of the Mortgage Loan.
As of any time of determination the "Outstanding Principal Balance" of
a Mortgage Loan is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor or, in the case of an REO Property, the principal balance
of the related Mortgage Loan remaining to be paid by the Mortgagor at the time
such property was transferred
to the Trust.
REPRESENTATIONS AND WARRANTIES
In the purchase agreement pursuant to which SAMI purchased the Mortgage
Loans from Provident, Provident made certain representations and warranties to
SAMI concerning the Mortgage Loans. SAMI will assign to the Trustee all of its
right, title and interest in such purchase agreement insofar as it relates to
such representations and warranties, as well as the remedies provided for breach
of such representations and warranties. The representations and warranties of
Provident include, among other things, that as of the Closing Date or such other
date as may be specified below:
(a) The information set forth in the Mortgage Loan Schedule is true, complete
and correct in all material respects as of the Cut-off Date;
(b) The Mortgage creates a first lien or a first priority ownership interest in
an estate in fee simple in real property securing the related Mortgage Note,
free and clear of all adverse claims, liens and encumbrances having priority
over the first lien of the Mortgage subject only to certain permitted
exceptions;
(c) The Mortgage Loan has not been delinquent thirty (30) days or more on more
than one occasion in the 12 months prior to the Cut-off Date for such Mortgage
Loan. As of the Closing Date, the Mortgage Loan is not delinquent in payment
more than 30 days; there are no defaults under the terms of the Mortgage Loan;
and Provident has not advanced funds, or induced, solicited or knowingly
received any advance of funds from a party other than the owner of the Mortgaged
Property subject to the Mortgage, directly or indirectly, for the payment of any
amount required by the Mortgage Loan;
(d) There are no delinquent taxes which are due and payable, ground rents,
assessments or other outstanding charges affecting the related Mortgaged
Property;
(e) The Mortgage Note and the Mortgage are not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
nor will the operation of any of the terms of the Mortgage Note and the
Mortgage, or the exercise of any right thereunder, render the Mortgage Note or
Mortgage unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(f) The Mortgage has not been satisfied, canceled or subordinated, in whole or
in part, or rescinded, and the Mortgaged Property has not been released from the
lien of the Mortgage, in whole or in part nor has any instrument been executed
that would effect any such satisfaction, release, cancellation, subordination or
rescission;
(g) Immediately prior to the transfer and assignment to the Purchaser, the
Mortgage Note and the Mortgage were not subject to an assignment or pledge, and
Provident had good and marketable title to and was the sole owner thereof and
had full right to transfer and sell the Mortgage Loan to SAMI free and clear of
any encumbrance, equity, lien, pledge, charge, claim or security interest;
(h) There is no default, breach, violation or event of acceleration existing
under the Mortgage or the related Mortgage Note and no event, which, with the
passage of time or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event permitting acceleration;
and neither Provident nor any prior mortgagee has waived any default, breach,
violation or event permitting acceleration;
(i) There are no mechanics, or similar liens or claims which have been filed for
work, labor or material affecting the related Mortgaged Property which are or
may be liens prior to or equal to the lien of the related Mortgage;
(j) All improvements subject to the Mortgage lie wholly within the boundaries
and building restriction lines of the Mortgaged Property (and wholly within the
project with respect to a condominium unit) and no improvements on
S-48
<PAGE>
adjoining properties encroach upon the Mortgaged Property except those which are
insured against by a title insurance policy and all improvements on the property
comply with all applicable zoning and subdivision laws and ordinances;
(k) At the time of origination, the Mortgaged Property was, and currently is,
free of damage and waste and no proceeding was or is currently pending for the
total or partial condemnation thereof; and
(l) No Mortgage Loan has a Loan-to-Value Ratio at origination in excess of
95.00%. The original Loan-to-Value Ratio of each Mortgage Loan either was not
more than 95.00% or the excess over 80.00% is insured by a Primary Mortgage
Insurance Policy issued by a primary mortgage insurer acceptable to Fannie Mae
and Freddie Mac until the Loan-to-Value Ratio of such Mortgage Loan is reduced
to an amount permitted by Fannie Mae or Freddie Mac.
Upon any substitution for a Mortgage Loan, the representations and
warranties set forth above shall be deemed to be made as to any substitute
Mortgage Loan as of the date of substitution.
Upon discovery or receipt of notice by the Servicer, the Master
Servicer, SAMI or the Trustee of a breach of any representation or warranty set
forth above which materially and adversely affects the value of the interests of
Certificateholders or the Trustee in any of the Mortgage Loans, the party
discovering or receiving notice of such breach shall give prompt written notice
to the others. In the case of any such breach, within 90 days from the date of
discovery by Provident, or the date Provident is notified by the party
discovering or receiving notice of such breach (whichever occurs earlier),
Provident will (i) cure such breach in all material respects or (ii) purchase
the affected Mortgage Loan at the applicable Repurchase Price. The obligations
of Provident to cure or purchase shall constitute the Trustee's sole and
exclusive remedy respecting a breach of such representations or warranties.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will use its reasonable efforts to ensure that all
payments required under the terms and provisions of the Mortgage Loans for which
it is acting as Servicer are collected, and shall follow collection procedures
comparable to the collection procedures of prudent mortgage lenders servicing
mortgage loans for their own account, to the extent such procedures shall be
consistent with the Pooling and Servicing Agreement. Consistent with the
foregoing, the Servicer may in its discretion (i) waive or permit to be waived
any late payment or prepayment charge, assumption fee or any penalty interest in
connection with the prepayment of a Mortgage Loan and (ii) suspend or
temporarily reduce or permit to be suspended or temporarily reduced regular
monthly payments for a period of up to six months or arrange or permit an
arrangement with a Mortgagor for a schedule for the liquidation of
delinquencies. In the event the Servicer shall consent to the deferment of due
dates for payments due on a Mortgage Note as described in clauses (i) and (ii)
of the previous sentence, the Servicer shall nonetheless continue to make
advances through liquidation of the Mortgaged Property as described herein to
the same extent as if such installment were due, owing and delinquent and had
not been deferred, but the obligation of the Servicer to advance shall apply
only to the extent that the Servicer believes, in good faith, that such advances
are recoverable from future payments on any Mortgage Loan.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor and the Servicer has knowledge thereof, the Servicer will accelerate
the maturity of the Mortgage Loan, to the extent permitted by the terms of the
related Mortgage and applicable law. If it reasonably believes that the
due-on-sale clause cannot be enforced under applicable law, the Servicer may
enter into an assumption agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and the Mortgagor, to the extent permitted by applicable
law, remains liable thereon. The Servicer will retain any fee collected for
entering into an assumption agreement as additional servicing compensation. In
regard to circumstances in which the Servicer may be unable to enforce
due-on-sale clauses, see "Certain Legal Aspects of Mortgage Loans--Due-on-Sale
Clauses" in the Prospectus. In connection with any such assumption, the Mortgage
Rate borne by the related Mortgage Note may not be changed. No Mortgage Loan may
be assumed unless coverage under any existing Primary Mortgage Insurance Policy
continues as to that Mortgage Loan after such assumption.
The Servicer will establish and maintain, in addition to the Protected
Account described below under "--Protected Account," one or more accounts (each,
a "Servicing Account") in a depository institution the deposits of which are
insured by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum
extent permitted by
law.
The Servicer will deposit and retain therein all collections from the Mortgagors
for the payment of taxes, assessments, insurance premiums, or comparable items
as agent of the Mortgagors and in trust as provided in the Pooling and Servicing
Agreement. Each Servicing Account shall be fully insured by the FDIC and to the
extent that the balance in such account exceeds the limits of such insurance,
such excess must be transferred to another fully-insured account in another
institution the accounts of which are insured by the FDIC or must be invested in
certain investments permitted
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by the Pooling and Servicing Agreement ("Permitted Investments"). In addition,
the Master Servicer may permit the Servicer to establish Servicing Accounts not
conforming to the foregoing requirements to the extent that such Servicing
Accounts meet the requirements of each of the Rating Agencies for the
maintenance of the ratings on the Certificates. Withdrawals of amounts from the
Servicing Accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse Servicer for
any advances made with respect to such items, to refund to any Mortgagors any
sums as may be determined to be overages, to pay interest, if required, to
Mortgagors on balances in the Servicing Accounts, to pay earnings not required
to be paid to Mortgagors to the Servicer or to clear and terminate the Servicing
Accounts as may be requested by the related Mortgagor in accordance with the
terms of the mortgage or applicable law or at any time after the termination of
the Pooling and Servicing Agreement.
For each Mortgage Loan which as of the Cut-off Date was covered by a
Primary Mortgage Insurance Policy, the Servicer will maintain and keep, or cause
to be maintained and kept, with respect to each such Mortgage Loan, in full
force and effect a Primary Mortgage Insurance Policy with respect to the portion
of each such Mortgage Loan, if any, which had a Loan-to-Value Ratio at
origination greater than 80.00%, at least until such excess has been eliminated.
Pursuant to applicable law, the Servicer may be required to permit the Primary
Mortgage Insurance Policy to be terminated if the ratio of the then outstanding
principal balance of the Mortgage Loan to the value of the Mortgaged Property
declines below a prescribed percentage. Primary Mortgage Insurance Policies may
be replaced by substantially equivalent insurance but such replacement is
subject to the condition, to be evidenced by a written notification from each
Rating Agency, that it would not cause the ratings on the Certificates to be
downgraded or withdrawn.
The Master Servicer and the Servicer will maintain errors and omissions
insurance and fidelity bonds in certain specified amounts.
HAZARD INSURANCE
The Servicer will maintain and keep, or cause to be maintained and
kept, with respect to each Mortgage Loan, in full force and effect for each
Mortgaged Property a hazard insurance policy equal to at least the lesser of the
Outstanding Principal Balance of the Mortgage Loan or the current replacement
cost of the improvements on the Mortgaged Property and containing a standard
mortgagee clause; PROVIDED, HOWEVER, that the amount of hazard insurance may not
be less than the amount necessary to prevent loss due to the application of any
co-insurance provision of the related policy. Unless a higher deductible is
required by law, the deductible on such hazard insurance policy maybe no more
than $1,000 or 1% of the applicable amount of coverage, whichever is less. In
the case of a condominium unit, required hazard insurance will take the form of
a multiple policy covering the entire condominium project, in an amount equal to
at least 100% of the insurable value based on replacement cost. Any amounts
collected by the Servicer under any such hazard insurance policy (other than
amounts to be applied to the restoration or repair of the Mortgaged Property or
amounts released to the Mortgagor in accordance with normal servicing
procedures) shall be deposited in a Protected Account. Any cost incurred in
maintaining any such hazard insurance policy shall be recoverable by the
Servicer out of related late payments by the Mortgagor or out of Insurance
Proceeds or Liquidation Proceeds or any other amounts in the Certificate
Account. The right of the Servicer to reimbursement for such costs incurred will
be prior to the right of Certificateholders to receive any related Insurance
Proceeds or Liquidation Proceeds or any other amounts in the Certificate
Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial
loss.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated
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in value over time, in the event of partial loss, hazard insurance proceeds may
be insufficient to restore fully the damaged property.
Where the Mortgaged Property securing a Mortgage Loan is located at the
time of origination in a federally designated flood hazard area, the Servicer
will cause with respect to each such Mortgage Loan flood insurance to the extent
available and in accordance with industry practices to be maintained. Such flood
insurance will be in an amount equal to the lesser of (i) the Outstanding
Principal Balance of the related Mortgage Loan and (ii) the minimum amount
required under the terms of coverage to compensate for any damage or loss on a
replacement cost basis, but not more than the maximum amount of such insurance
available for the related Mortgaged Property under either the regular or
emergency programs of the National Flood Insurance Program (assuming that the
area in which such Mortgaged Property is located is participating in such
program). Unless applicable state law requires a higher deductible, the
deductible on such flood insurance maybe not exceed $1,000 or 1% of the
applicable amount of coverage, whichever is less.
The Servicer, on behalf of the Trustee and Certificateholders, will
present claims to the insurer under any applicable Primary Mortgage Insurance
Policy, standard hazard insurance policy or flood insurance policy. As set forth
above, all collections under such policies that are not applied to the
restoration or repair of the related Mortgaged Property or released to the
Mortgagor in accordance with normal servicing procedures are to be deposited in
a Protected Account.
REALIZATION UPON DEFAULTED MORTGAGE LOANS; PURCHASES OF DEFAULTED MORTGAGE LOANS
The Servicer will use its reasonable efforts to maximize the receipt of
principal and interest on Defaulted Mortgage Loans and foreclose upon or
otherwise comparably convert the ownership of properties securing such Defaulted
Mortgage Loans as to which no satisfactory collection arrangements can be made.
The Servicer will service the property acquired by the Trust through liquidation
and use its reasonable efforts to maximize the receipt of principal and interest
on Defaulted Mortgage Loans; PROVIDED, HOWEVER, that the Servicer will not be
required to expend its own funds in connection with any foreclosure or towards
the restoration of any property unless it determines in good faith (i) that such
foreclosure or restoration will increase the proceeds of liquidation of the
Mortgage Loan to the Certificateholders after reimbursement to itself for such
expenses and (ii) that such expenses will be recoverable to it through
Liquidation Proceeds or Insurance Proceeds (respecting which it shall have
priority for purposes of reimbursements from the Certificate Account).
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to receive a fee equal to 0.2000% per
annum of the Outstanding Principal Balance of each Mortgage Loan with a Mortgage
Rate less than 7.0000%, 0.2350% per annum of the Outstanding Principal Balance
of each Mortgage Loan with a Mortgage Rate equal to 7.000%, and 0.3250% per
annum of the Outstanding Principal Balance of each Mortgage Loan with a Mortgage
Rate greater than 7.000% (each, a "Servicing Fee") from full payments of accrued
interest on each Mortgage Loan as compensation for its activities under the
Pooling and Servicing Agreement. However, Interest Shortfalls on Mortgage Loans
serviced by the Servicer resulting from prepayments in full or in part in any
calendar month will be offset by the Servicer on the Distribution Date in the
following calendar month to the extent such Interest Shortfalls do not exceed
the Servicing Fee in connection with such Distribution Date (the amount of the
Servicing Fee used to offset Interest Shortfalls is referred to herein as
"Compensating Interest Payments"). Any Compensating Interest Payments required
to be made by the Servicer and not made by the Servicer will be paid by the
Master Servicer, to the extent that such amount does not exceed the compensation
payable to the Master Servicer for the applicable Distribution Date, through a
reduction in the amount of such compensation. The Master Servicer will be
entitled to receive as compensation a fee equal to 0.0125% per annum (the
"Master Servicing Fee") of the Outstanding Principal Balance of the Mortgage
Loans and any income received from amounts on deposit in the Custodial Account
and the Certificate Account.
In addition to the primary compensation described above, the Servicer
will retain, with respect to each Mortgage Loan, all prepayment charges, if any,
assumption fees, tax service fees, fees for statement of account payoff and late
payment charges, all to the extent collected from Mortgagors. The Servicer will
also be entitled to retain, as additional servicing compensation with respect to
each Mortgage Loan it services, any Excess Liquidation Proceeds (i.e., the
amount, if any, by which Liquidation Proceeds with respect to a Liquidated
Mortgage Loan exceeds the sum of (i) the Outstanding Principal Balance of such
Mortgage Loan and accrued but unpaid interest at the related Mortgage Rate
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through the related Liquidation Date, plus (ii) related liquidation expenses, to
the extent that such amount is not required by law to be paid to the related
Mortgagor).
The Servicer will pay all expenses incurred in connection with its
servicing responsibilities (subject to limited reimbursement as described
herein). On an annual basis, the Master Servicer will pay to the Trustee the
Trustee's fee.
PROTECTED ACCOUNTS; CUSTODIAL ACCOUNT AND CERTIFICATE ACCOUNT
The Servicer will establish and maintain an account (each, a "Protected
Account") into which it will deposit all collections of principal and interest
on any Mortgage Loan, including Principal Prepayments, Insurance Proceeds,
Liquidation Proceeds, the Repurchase Price for any such Mortgage Loans
repurchased, and advances made from the Servicer's own funds (less servicing
compensation as permitted above). All Protected Accounts shall be held in a
depository institution, the accounts of which are insured by the FDIC to the
maximum extent permitted by law, segregated on the books of such institution and
held in trust. The amount at any time credited to a Protected Account shall be
fully insured by the FDIC to the maximum extent permitted by law or, to the
extent that such balance exceeds the limits of such insurance, such excess must
be transferred to an account or invested in Permitted Investments. In addition,
the Master Servicer may permit the Servicer to establish Protected Accounts not
conforming to the foregoing requirements to the extent that such Protected
Accounts meet the requirements of each of the Rating Agencies for the
maintenance of the ratings on the Certificates. Certain payments may be required
to be transferred into noncommingled accounts on an accelerated basis.
Seven Business Days prior to each Distribution Date, the Servicer shall
withdraw or shall cause to be withdrawn from the Protected Accounts and any
other permitted accounts and shall remit to the Master Servicer for deposit into
an account (the "Custodial Account") amounts on deposit in the Protected Account
as of the Determination Date, less the Servicer's compensation, any reimbursable
expenses and advances and other amounts, as permitted by the Pooling and
Servicing Agreement.
The Custodial Account shall be established and maintained in a
depository institution, the accounts of which are insured by the FDIC to the
maximum extent permitted by law, segregated on the books of such institution and
held in trust. The amount at any time credited to the Custodial Account shall be
fully insured by the FDIC to the maximum extent permitted by law or, to the
extent that such balance exceeds the limits of such insurance, such excess must
be transferred to an account or invested in Permitted Investments meeting the
requirement of the Rating Agencies.
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the Certificateholders, an account (the "Certificate
Account") as a non-interest bearing trust account. On the Business Day
immediately preceding the Distribution Date, the Master Servicer shall remit to
the Trustee for deposit in the Certificate Account, all amounts in the Custodial
Account constituting the Available Distribution Amount. All amounts deposited to
the Certificate Account shall be held by the Trustee in the name of the Trustee
in trust for the benefit of the Certificateholders in accordance with the terms
and provisions of the Pooling and Servicing Agreement. The amount at any time
credited to the Certificate Account shall be in general (i) fully insured by the
FDIC to the maximum coverage provided thereby or (ii) invested, in the name of
the Trustee, in such Permitted Investments as the Master Servicer may select or
deposited in demand deposits with such depository institutions as selected by
the Master Servicer, provided that time deposits of such depository institutions
would be a Permitted Investment.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SERVICER
The Pooling and Servicing Agreement will provide that neither the
Master Servicer nor the Servicer may resign from its obligations and duties
thereunder, except upon determination that the performance of such duties is no
longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor has assumed the obligations and
duties of the Master Servicer or the Servicer to the extent required under the
Pooling and Servicing Agreement. The Master Servicer, however, has the right,
with the written consent of the Trustee (which consent will not be unreasonably
withheld), to assign, sell or transfer its rights and delegate its duties and
obligations under the Pooling and Servicing Agreement; provided that the rating
of the Certificates in effect immediately prior to such assignment, sale,
transfer or delegation is not qualified, downgraded or withdrawn as a result of
such assignment, sale, transfer or delegation and the purchaser or transferee
accepting such assignment, sale, transfer or delegation (i) is qualified to
service mortgage loans for Fannie Mae or Freddie Mac, (ii) is reasonably
satisfactory to the Trustee, (iii) has a net worth of not less than $10,000,000
and (iv) executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, which contains an assumption
by such purchaser or transferee of the
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due and punctual performance and observance of each covenant and condition to be
performed or observed by the Master Servicer under the Pooling and Servicing
Agreement from and after the date of such agreement.
The Pooling and Servicing Agreement will further provide that neither
the Master Servicer, the Servicer nor any of its directors, officers, employees
and agents shall be under any liability to the Trustee, the Trust or the
Certificateholders for taking any action or for refraining from taking any
action in good faith pursuant to the Pooling and Servicing Agreement, or for
errors in judgment; PROVIDED, HOWEVER, that neither the Master Servicer, the
Servicer nor any such person will be protected against any breach of warranties
or representations made in the Pooling and Servicing Agreement or any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties or by reason of reckless disregard
of obligations and duties thereunder. The Pooling and Servicing Agreement will
further provide that the Master Servicer and the Servicer and its directors,
officers, employees and agents are entitled to indemnification from the
Certificate Account, and will be held harmless thereby against any loss,
liability or expense incurred in connection with any legal proceeding relating
to the Pooling and Servicing Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loans (except as otherwise
reimbursable under the Pooling and Servicing Agreement) or incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the Pooling and Servicing Agreement will provide that
neither the Master Servicer nor the Servicer is under any obligation to appear
in, prosecute or defend any legal action which is not incidental to their duties
under the Pooling and Servicing Agreement and which in their opinion may involve
it in any expense or liability. The Master Servicer and Servicer may, however,
in their discretion undertake any such action which they may deem necessary or
desirable in respect of the Pooling and Servicing 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, the Master Servicer and the Servicer will be entitled to be reimbursed
therefor from the Certificate Account.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer is a party, or any corporation
succeeding to the business of the Master Servicer will be the successor of the
Master Servicer under the Pooling and Servicing Agreement, PROVIDED that any
such successor to the Master Servicer shall be qualified to service Mortgage
Loans on behalf of Fannie Mae or Freddie Mac.
EVENTS OF DEFAULT
"Events of Default" under the Pooling and Servicing Agreement consist
of (i) failure by the Master Servicer to cause to be deposited in the
Certificate Account amounts required to be deposited by the Master Servicer
pursuant to the Pooling and Servicing Agreement, and such failure continues
unremedied for two Business Days, (ii) failure by the Master Servicer to observe
or perform in any material respect any other material covenants and agreements
set forth in the Pooling and Servicing Agreement to be performed by it, and such
failure continues unremedied for 60 days after the date on which written notice
of such failure has been given to the Master Servicer by the Trustee or to the
Master Servicer and the Trustee by the holders of Certificates aggregating
ownership of not less than 25% of the Trust, (iii) the entry against the Master
Servicer of a decree or order by a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of a conservator,
receiver or liquidator in any insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days, or the commencement
of an involuntary case against the Master Servicer under any applicable
insolvency or reorganization statute which case is not dismissed within 60 days,
(iv) consent by the Master Servicer to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings of or relating to the Master
Servicer or substantially all of its property, (v) admission by the Master
Servicer in writing of its inability to pay its debts generally as they become
due, filing of a petition to take advantage of any applicable insolvency or
reorganization statute, any assignment for the benefit of its creditors, or
voluntary suspension of payment of its obligations or (vi) the failure of the
Master Servicer to make any required Monthly Advance.
If an Event of Default described in clauses (i) through (v) above shall
have occurred, so long as such Event of Default with respect to the Master
Servicer shall not have been remedied, the Trustee or the holders of
Certificates aggregating ownership of not less than 51% of the Trust may (and
the Trustee shall in the case of an Event of Default pursuant to clause (vi)
above) in each case by notice in writing to the Master Servicer (and to the
Trustee if given by such Certificateholders), with a copy to the Rating
Agencies, terminate all of the rights and obligations (but not the liabilities)
of the Master Servicer under the Pooling and Servicing Agreement and in and to
the Mortgage Loans serviced
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by the Master Servicer and the proceeds thereof. Upon the receipt by the Master
Servicer of such written notice, all authority and power of the Master Servicer
under the Pooling and Servicing Agreement, whether with respect to the
Certificates, the Mortgage Loans or under any other related agreements (but only
to the extent that such other agreements relate to the Mortgage Loans) shall,
subject to the provisions of the Pooling and Servicing Agreement and to
bankruptcy insolvency or similar laws, if applicable, automatically and without
further action pass to and be vested in the Trustee.
Upon the receipt by the Master Servicer of a notice of termination or
an opinion of counsel to the effect that the Master Servicer is legally unable
to act or to delegate its duties to a person which is legally able to act, the
Trustee shall automatically become the successor in all respects to the Master
Servicer in its capacity under the Pooling and Servicing Agreement and the
transactions set forth or provided for therein and shall thereafter be subject
to all the responsibilities, duties, liabilities and limitations on liabilities
relating thereto placed on the Master Servicer by the terms and provisions
hereof; PROVIDED, HOWEVER, that the Trustee (i) shall be under no obligation to
repurchase any Mortgage Loan; and (ii) shall have no obligation whatsoever with
respect to any liability incurred by the Master Servicer at or prior to the time
of receipt by the Master Servicer of such notice or of such opinion of counsel.
As compensation therefor, the Trustee shall be entitled to all funds relating to
the Mortgage Loans which the Master Servicer would have been entitled to retain
if the Master Servicer had continued to act as such, except for those amounts
due the Master Servicer as reimbursement for advances previously made.
Notwithstanding the above, the Trustee may, if it shall be unwilling so to act,
or shall, if it is legally unable so to act, appoint, or petition a court of
competent jurisdiction to appoint, any established housing and home finance
institution which is a Fannie Mae or Freddie Mac approved servicer having a net
worth of not less than $10,000,000, as the successor to the Master Servicer
under the Pooling and Servicing Agreement in the assumption of all or any part
of the responsibilities, duties or liabilities of the Master Servicer under the
Pooling and Servicing Agreement. Pending appointment of a successor to the
Master Servicer under the Pooling and Servicing Agreement, the Trustee shall act
in such capacity as provided under the Pooling and Servicing Agreement. In
connection with such appointment and assumption, the Trustee may make such
arrangements for the compensation of such successor out of payments on Mortgage
Loans as it and such successor shall agree; PROVIDED, HOWEVER, that no such
compensation shall be in excess of that permitted the Trustee as provided above,
and that such successor shall undertake and assume the obligations of the
Trustee to pay compensation to any third person acting as an agent or
independent contractor in the performance of master servicing responsibilities
under the Pooling and Servicing Agreement.
SERVICER EVENTS OF DEFAULT
"Servicer Events of Default" under the Pooling and Servicing Agreement
consist of (i) failure by the Servicer to cause to be deposited in the Custodial
Account amounts required to be deposited by the Servicer pursuant to the Pooling
and Servicing Agreement, and such failure continues unremedied for one Business
Day, (ii) failure by the Servicer to observe or perform in any material respect
any other material covenants and agreements set forth in the Pooling and
Servicing Agreement to be performed by it, and such failure continues unremedied
for 30 days after the date on which written notice of such failure has been
given to the Servicer, (iii) the entry against the Servicer of a decree or order
by a court or agency or supervisory authority having jurisdiction in the
premises for the appointment of a conservator, receiver or liquidator in any
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings, or for the winding up or liquidation of its affairs, and
the continuance of any such decree or order unstayed and in effect for a period
of 60 consecutive days, or the commencement of an involuntary case against the
Servicer under any applicable insolvency or reorganization statute which case is
not dismissed within 60 days, (iv) consent by the Servicer to the appointment of
a conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Servicer or substantially all of its property, or (v) admission by the
Servicer in writing of its inability to pay its debts generally as they become
due, filing of a petition to take advantage of any applicable insolvency or
reorganization statute, any assignment for the benefit of its creditors, or
voluntary suspension of payment of its obligations.
In each and every such case, so long as such Event of Default with
respect to the Servicer shall not have been remedied, the Master Servicer may in
each case by notice in writing to the Servicer, terminate all of the rights and
obligations (but not the liabilities) of the Servicer under the Pooling and
Servicing Agreement and in and to the Mortgage Loans serviced by the Servicer
and the proceeds thereof. Upon the receipt by the Servicer of such written
notice, all authority and power of the Servicer under the Pooling and Servicing
Agreement, whether with respect to the Certificates, the Mortgage Loans or under
any other related agreements (but only to the extent that such other agreements
relate to the Mortgage Loans) shall, subject to the provisions of the Pooling
and Servicing Agreement and to bankruptcy insolvency or similar laws, if
applicable, automatically and without further action pass to and be vested in
the Master Servicer.
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MONTHLY ADVANCES
If the scheduled payment on a Mortgage Loan which was due on a related
Due Date is not received by the Servicer, the Servicer will remit to the Master
Servicer for deposit in the Custodial Account not later than seven Business Days
immediately preceding the Distribution Date an amount equal to such deficiency,
net of the Servicing Fee, except to the extent the Servicer determines any such
advance to be nonrecoverable from Liquidation Proceeds, Insurance Proceeds or
from future payments on the Mortgage Loan for which such advance was made. On
the Business Day preceding each Distribution Date, the Master Servicer will be
obligated to make any unpaid Monthly Advance required to be made by the
Servicer, except to the extent the Master Servicer determines any such advance
to be nonrecoverable from Liquidation Proceeds, Insurance Proceeds or from
future payments on the Mortgage Loan for which such advance was made. Subject to
the foregoing, such advances will be made through liquidation of the related
Mortgaged Property. Failure by the Master Servicer to deposit in the Certificate
Account any advance required to be deposited by the Servicer under the Pooling
and Servicing Agreement would constitute an Event of Default with respect to
such Master Servicer as discussed under "--Events of Default" above.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, a written report will be provided to each
holder of Certificates setting forth certain information with respect to the
composition of the payment being made, the Certificate Principal Balance or
Notional Amount of an individual Certificate following the payment and certain
other information relating to the Certificates and the Mortgage Loans.
TERMINATION
The obligations of the Master Servicer and the Trustee created by the
Pooling and Servicing Agreement will terminate upon (i) the later of the making
of the final payment or other liquidation, or any advance with respect thereto,
of the last Mortgage Loan subject thereto or the disposition of all property
acquired upon foreclosure or acceptance of a deed in lieu of foreclosure of any
such Mortgage Loans and (ii) the payment to Certificateholders of all amounts
required to be paid to them pursuant to such Pooling and Servicing Agreement.
On any Distribution Date on which the aggregate Stated Principal
Balances of the Mortgage Loans is less than 10% of the aggregate Stated
Principal Balances as of the Cut-off Date of the Mortgage Loans, SAMI, or its
designee may repurchase from the Trust all Mortgage Loans remaining outstanding
and any REO Property remaining in the Trust at a purchase price equal to (a) the
unpaid principal balance of such Mortgage Loans (other than Mortgage Loans
related to REO Property), net of the principal portion of any unreimbursed
Monthly Advances made by the Servicer or the Master Servicer, as applicable,
plus accrued but unpaid interest thereon at the applicable Net Mortgage Rate to
the next Due Date, plus (b) the appraised value of any REO Property, less the
good faith estimate of the Master Servicer of liquidation expenses to be
incurred in connection with its disposal thereof (but not more than the unpaid
principal balance of the related Mortgage Loan, together with accrued but unpaid
interest on that balance at the applicable Net Mortgage Rate to the next Due
Date). If SAMI or its designee has not exercised such option and the Stated
Principal Balance of the Mortgage Loans is less than 5% of their Stated
Principal Balance on the Cut-off Date, the Master Servicer shall also have such
option. Any such repurchase will result in the retirement of the Certificates.
THE TRUSTEE
The Trustee may resign at any time, in which event the Master Servicer
will be obligated to appoint a successor Trustee. The Master Servicer may also
remove the Trustee if the Trustee ceases to be eligible to continue as such
under the Pooling and Servicing Agreement or if the Trustee becomes incapable of
acting, bankrupt, insolvent or if a receiver or public officer takes charge of
the Trustee or its property. Upon becoming aware of such circumstances, the
Master Servicer will be entitled to appoint a successor Trustee. The Trustee may
also be removed at any time by the holders of Certificates evidencing ownership
of not less than 51% of the Trust. In the event that the Certificateholders
remove the Trustee, the compensation of any successor Trustee shall be paid by
the Certificateholders to the extent that such compensation exceeds the amount
agreed to by the Master Servicer and the original Trustee. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
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<PAGE>
YEAR 2000 ISSUE
The "Year 2000 Issue" relates to the fact that many existing computer
programs and applications use only two digits to identify a year in the date
field. A failure to modify such programs and applications to be Year 2000
compliant may adversely impact the operations at the turn of the century of the
Servicer, Master Servicer and the Trustee. SAMI will seek to obtain
representations and warranties from the Servicer, Master Servicer and the
Trustee with respect to their plans to modify or replace computer programs and
applications in order to deal with the Year 2000 Issue. There can be no
assurance that any planned modification or replacement will be timely completed.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Mortgage Loans, the Certificate
Account and certain assets owned by the Trust as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. The REMIC will
issue "regular interests" and one "residual interest." The Certificates (other
than the Residual Certificates) will be designated as regular interests in the
REMIC and are herein referred to as "Regular Certificates" or "REMIC Regular
Certificates". The Class R Certificates will be designated as the residual
interest in the REMIC (the "Residual Certificates" or the "REMIC Residual
Certificates"). Upon the issuance of the Offered Certificates, Thacher Proffitt
& Wood, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the Agreement, for
federal income tax purposes, the REMIC will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986 (the "Code"). All
Certificateholders are advised to see "Certain Federal Income Tax Consequences"
in the Prospectus for a discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the REMIC Regular
Certificates and the REMIC Residual Certificates.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Code,
and interest paid or accrued on the Regular Certificates, including original
issue discount with respect to any Regular Certificates issued with original
issue discount, will be taxable to Certificateholders in accordance with the
accrual method of accounting. For federal income tax purposes, the Class A-12
Certificates, Class PO Certificates and Class X Certificates will, the Offered
Subordinate Certificates may, and all other Classes of Offered Certificates will
not, be issued with original issue discount. See "Certain Federal Income Tax
Consequences--REMIC Regular Certificates--Current Income on REMIC Regular
Certificates--Original Issue Discount" in the Prospectus. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount or premium with respect to the Certificates is 275% SPA. The
prepayment assumption represents a rate of payment of unscheduled principal on a
pool of mortgage loans, expressed as an annualized percentage of the outstanding
principal balance of such mortgage loans at the beginning of each period.
However, no representation is made as to the rate at which prepayments actually
will occur.
Certain other Classes of Regular Certificates may be treated as having
been issued at a premium. Holders of REMIC Regular Certificates issued with a
premium may elect to amortize such premium under a constant yield method in
which case such amortizable premium will generally be allocated among the
interest payments on such Certificates and will be applied as an offset against
such interest payments. All purchasers of REMIC Regular certificates are urged
to consult their tax advisors for advice regarding the effect, if any, of the
rules relating to original issue discount and premium on the purchase of the
Regular Certificates. See "Certain Federal Income Tax Consequences--REMIC
Regular Certificates--Premium" in the Prospectus.
The Residual Certificates generally will not be treated as evidences of
indebtedness for federal income tax purposes. Instead, the Residual Certificates
will be considered as residual interests in the REMIC, representing rights to
the taxable income or net loss of the REMIC. Holders of the Residual
Certificates will be required to report and will be taxed on their PRO RATA
share of such income or loss, and such reporting requirements will continue
until there are no Certificates of any Class outstanding, even though holders of
Residual Certificates previously may have received full payment of any stated
interest and principal. The taxable income of holders of the Residual
Certificates attributable to the Residual Certificates may exceed any principal
and interest payments received by such Certificateholders during the
corresponding period, which would result in a negligible (or even negative)
after-tax return, in certain circumstances.
The Offered Certificates (including the Residual Certificates) will
generally be treated as "qualifying real property loans" for domestic building
and loan associations, and "real estate assets" for real estate investment
trusts ("REITs"), subject to the limitations described in "Certain Federal
Income Tax Consequences--REMIC Certificates--Status of REMIC Certificates" in
the Prospectus. Similarly, interest on such Certificates will be
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<PAGE>
considered "interest on obligations secured by mortgages on real property" for
REITs, subject to the limitations described in "Certain Federal Income Tax
Consequences --REMIC Certificates--Status of REMIC Certificates" in the
Prospectus.
RESTRICTIONS ON PURCHASE AND TRANSFER
OF THE RESIDUAL CERTIFICATES
The Residual Certificates are not offered for sale to any investor that
is a "disqualified organization" as described in "Federal Income Tax
Consequences--Transfers of REMIC Residual Certificates--Tax on Disposition of
REMIC Residual Certificates" and "--Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus.
A Residual Certificate (or interests therein) may not be transferred
without the prior express written consent of the holder of the Residual
Certificate who is a "Tax Matters Person" as defined in the Code and by SAMI.
SAMI will not give its consent to any proposed transfer to a disqualified
organization. As a prerequisite to such consent to any other transfer, the
proposed transferee must provide the Tax Matters Person, the Trustee and SAMI
with an affidavit that the proposed transferee is not a disqualified
organization (and, unless the Tax Matters Person and SAMI consent to the
transfer to a person who is not a U.S. Person (as defined below), an affidavit
that it is a U.S. Person). Notwithstanding the fulfillment of the prerequisites
described above, the Tax Matters Person or SAMI may withhold its consent to a
transfer, but only to the extent necessary to avoid a risk of REMIC
disqualification or REMIC-level tax. In the event that legislation is enacted
which would subject the Trust to tax (or disqualify the REMIC as a REMIC) on the
transfer of an interest in the Residual Certificate to any other person or
persons, the Tax Matters Person and SAMI may, without action on the part of
Certificateholders, amend the Pooling and Servicing Agreement to restrict or
prohibit prospectively such transfer. A transfer in violation of the
restrictions set forth herein may subject a Residual Certificateholder to
taxation. See "Federal Income Tax Consequences--REMIC Residual
Certificates--Transfers of REMIC Residual Certificates--Tax on Disposition of
REMIC Residual Certificates" and "--Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus. Moreover, certain transfers of a
Residual Certificate that are effective to transfer legal ownership may
nevertheless be ineffective to transfer ownership for federal income tax
purposes, if at the time of the transfer the Residual Certificate represents a
"non-economic residual interest" as defined in the REMIC Regulations and if
avoiding or impeding the assessment or collection of tax is a significant
purpose of the transfer. See "Federal Income Tax Consequences --REMIC Residual
Certificates--Transfers of REMIC Residual Certificates" and "--Restrictions on
Transfer; Holding by Pass-Through Entities" in the Prospectus. Further, unless
the Tax Matters Person and SAMI consent in writing (which consent may be
withheld in the Tax Matters Person's or SAMI's sole discretion), a Residual
Certificate (including a beneficial interest therein) may not be purchased by or
transferred to any person who is not a "United States person," as such term is
defined in Section 7701(a)(30) of the Code (a "U.S. Person").
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. ss. 2510.3-101 (the "Plan Asset Regulations"), thereby
subjecting the Plan to the prohibited transaction rules with respect to the
Trust Assets and the Trustee or the Master Servicer to the fiduciary investments
standards of ERISA, or cause the excise tax provisions of Section 4975 of the
Code to apply to the Trust Assets, unless an exemption granted by the Department
of Labor applies to the purchase, sale, transfer or holding of the Certificates.
Prohibited Transaction Exemption 90-30 (the "Exemption") may be met
with respect to the Underwritten Certificates that are also Senior Certificates
(other than the Residual Certificates), but no representation is made with
respect to those conditions which are dependent on facts unknown to SAMI or
which it cannot control, such as those relating to the circumstances of the Plan
purchaser or the Plan fiduciary making the decision to purchase such Class of
Senior Certificates. Before purchasing a Senior Certificate, a fiduciary of a
Plan should make its own determination as to the availability of exemptive
relief provided by the Exemption or the availability of any other prohibited
transaction
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exemptions, and whether the conditions of any such exemption will be applicable
to such Senior Certificates. See "ERISA Considerations" in the Prospectus.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not likely apply to the purchase, sale
or holding of the Offered Subordinate Certificates (due to the subordinate
nature thereof), the Class X Certificates, the Class PO Certificates or the
Residual Certificates, transfers of such Certificates to a Plan, to a trustee or
other person acting on behalf of any Plan, or to any other person using "Plan
Assets" to effect such acquisition will not be registered by the Trustee unless
the transferee provides SAMI, the Trustee and the Master Servicer with an
opinion of counsel satisfactory to SAMI, the Trustee and the Master Servicer,
which opinion will not be at the expense of SAMI, the Trustee or the Master
Servicer, that the purchase of such Certificates by or on behalf of such Plan is
permissible under applicable law, will not constitute or result in a non-exempt
prohibited transaction under ERISA or Section 4975 of the Code and will not
subject SAMI, the Trustee or the Master Servicer to any obligation in addition
to those undertaken in the Pooling and Servicing Agreement.
In lieu of such opinion of counsel, the transferee may provide (or, in
the case of Book-Entry Certificates, shall be deemed to provide) a certification
substantially to the effect that the purchase of the Offered Subordinate
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject SAMI, the Trustee or the Master
Servicer to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement and one of the following conditions are satisfied: (a) the
transferee is an insurance company and (i) the source of funds used to purchase
such Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60), (ii) the conditions set forth in PTCE 95-60 have been
satisfied and (iii) there is no Plan with respect to which the amount of such
general account's reserves and liabilities for contracts held by or on behalf of
such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization, exceeds 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Certificates; (b) the transferee is an insurance company and
(i) the source of funds used to purchase such Certificates is an insurance
company general account, (ii) the requirements of Sections 401(c) of ERISA and
the regulations to be promulgated thereunder have been satisfied and will
continue to be satisfied and (iii) the insurance company represents that it
understands that the operation of the general account after December 31, 1998
may affect its ability to continue to hold such Certificates after the date
which is 18 months after the 401(c) Regulations become final and that unless a
Class Exemption or an exception under Section 401(c) of ERISA is then available
for the continued holding of such Certificates, it will dispose of such
Certificates prior to the date which is 18 months after the 401(c) Regulations
become final; (c) the transferee is an insurance company and (i) the source of
funds used to purchase such Certificates is an "insurance company pooled
separate account" (as such term is defined in PTCE 90-1), (ii) the conditions
set forth in PTCE 90-1 have been satisfied and (iii) there is no Plan, together
with all other Plans maintained by the same employer (or any "affiliate"
thereof, as defined in PTCE 90-1) or by the same employee organization, with
assets which exceed 10% of the total of all assets in such pooled separate
account (as determined under PTCE 90-1) as of the date of the acquisition of
such Certificates; (d) the transferee is a bank and (i) the source of funds used
to purchase such Certificates is a "collective investment fund" (as defined in
PTCE 91-38), (ii) the conditions set forth in PTCE 91- 38 have been satisfied
and (iii) there is no Plan, the interests of which, together with the interests
of any other Plans maintained by the same employer or employee organization, in
the collective investment fund exceed 10% of the total of all assets in the
collective investment fund (as determined under PTCE 91-38) as of the date of
acquisition of such Certificates; (e) the transferee is a "qualified
professional asset manager" described in PTCE 84-14 and the conditions set forth
in PTCE 84-14 have been satisfied and will continue to be satisfied; or (f) the
transferee is an "in-house asset manager" described in PTCE 96-23 and the
conditions set forth in PTCE 96-23 have been satisfied and will continue to be
satisfied. The Residual Certificates, Class X Certificates, Class PO
Certificates and the Offered Subordinate Certificates will contain a legend
describing such restrictions on transfer.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the Offered Certificates. Assets of a Plan should not be invested in the Offered
Certificates unless it is clear that the Exemption or any other prohibited
transaction exemption will apply and exempt all potential prohibited
transactions.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such governmental plan may be subject
to Federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for and the availability of any exemptive relief under any Similar Law.
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<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated November 24, 1998 (the "Underwriting Agreement"), the
Underwriter has agreed to purchase and SAMI has agreed to sell to the
Underwriter the Underwritten Certificates. It is expected that delivery of the
Underwritten Certificates (other than the Residual Certificates) will be made
only in book-entry form through the Same Day Funds Settlement System of DTC, and
the delivery of the Residual Certificates offered hereby in definitive,
fully-registered form will be made at the offices of the Underwriter, New York,
New York 10167 on or about November 30, 1998, against payment therefor in
immediately available funds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Underwritten Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of
SAMI's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Underwritten Certificates by the Underwriter
may be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
SAMI
from the sale of the Underwritten Certificates, before deducting expenses
payable by SAMI, will be approximately 98.90% of the aggregate Certificate
Principal Balance of the Underwritten Certificates, plus accrued interest
thereon from the Cut-off Date. The Underwriter may effect such transactions by
selling their respective Certificates to or through dealers, and such dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter for whom they act as agent. In connection with
the sale of its Underwritten Certificates, the Underwriter may be deemed to have
received compensation from SAMI in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of its Underwritten Certificates may be deemed to be Underwriter
and any profit on the resale of the Underwritten Certificates positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
The Underwriting Agreement provides that SAMI will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
SAMI, against certain civil liabilities under the Securities Act of 1933, or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Reports to Securityholders," which will include information as to the
outstanding principal balance of the Offered Certificates. There can be no
assurance that any additional information regarding the Offered Certificates
will be available through any other source. In addition, SAMI is not aware of
any source through which price information about the Offered Certificates will
be generally available on an ongoing basis. The limited nature of such
information regarding the Offered Certificates may adversely affect the
liquidity of the Offered Certificates, even if a secondary market for the
Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for SAMI and for the Underwriter by Thacher Proffitt & Wood, New York, New York.
RATINGS
It is a condition of the issuance of the Senior Certificates (other
than the Variable Strip Certificates and Principal Only Certificates), that they
be rated not lower than "AAA" by each of S&P and Fitch IBCA. It is a condition
of the issuance of the Principal Only Certificates and Variable Strip
Certificates that they be rated "AAAr" by S&P and "AAA" by Fitch IBCA. It is a
condition of the issuance of the Class B-1, Class B-2 and Class B-3 Certificates
that they be rated not lower than "AA," "A" and "BBB," respectively, by Fitch
IBCA.
S&P's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. S&P's ratings take into consideration the
credit
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quality of the mortgage pool, structural and legal aspects associated with the
Certificates, and the extent to which the payment stream in the mortgage pool is
adequate to make payments required under the Certificates. S&P's rating on the
Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. See "Certain Yield and Prepayment Considerations"
herein. The "r" of the "AAAr" rating of the Variable Strip Certificates and
Principal Only Certificates by S&P is attached to highlight derivative, hybrid,
and certain other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The ratings assigned by S&P to mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. The rating process addresses the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans. The ratings assigned to mortgage
pass-through certificates do not represent any assessment of the likelihood or
rate of Mortgagor prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield. The ratings do
not address the possibility that Certificateholders might suffer a lower than
anticipated yield or that the holders of the Variable Strip Certificates may
fail to recoup their initial investments.
The Depositor has not requested a rating on the Offered Certificates by
any rating agency other than S&P and Fitch IBCA. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by S&P and Fitch IBCA.
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. The ratings of the Variable Strip
Certificates do not address the possibility that the holders of such
Certificates may fail to fully receive their initial investments. In the event
that the ratings initially assigned to the Offered Certificates are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Offered
Certificates.
LEGAL INVESTMENT
The Senior Certificates and Class B-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA so long as they are rated in
at least the second highest rating category by one of the Rating Agencies, and,
as such, are legal investments for certain entities to the extent provided in
SMMEA. SMMEA provides, however, that states could override its provisions on
legal investment and restrict or condition investment in mortgage related
securities by taking statutory action on or prior to October 3, 1991. Certain
states have enacted legislation which overrides the preemption provisions of
SMMEA. The Class B-2 Certificates and Class B-3 Certificates will not constitute
"mortgage related securities" for purposes of SMMEA.
The Depositor makes no representation as to the proper characterization
of any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of the Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment" in the Prospectus.
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<TABLE>
<CAPTION>
INDEX OF PRINCIPAL DEFINITIONS
<S> <C>
1933 Act ................................................................................................2
Accrued Certificate Interest.....................................................................................22
Agreement ................................................................................................4
Alternative Documentation Program................................................................................18
Available Distribution Amount....................................................................................22
Bankruptcy Amount ...............................................................................................35
Business Day ...............................................................................................21
Cede ...............................................................................................21
Cedel ...............................................................................................21
Certificate Account..............................................................................................52
Certificate Principal Balance....................................................................................24
Certificate Register.............................................................................................22
Certificateholder ...............................................................................................22
Certificates ................................................................................................4
Class PO Collection Shortfall....................................................................................25
Class PO Distribution Amount.....................................................................................25
Closing Date ................................................................................................4
Code ...............................................................................................56
Compensating Interest Payments...................................................................................23
Credit Support Depletion Date....................................................................................28
Custodial Account ...............................................................................................52
Custodian ...............................................................................................47
Cutoff Date ................................................................................................4
Debt Service Reduction...........................................................................................33
Deceased Holder ...............................................................................................30
Definitive Certificates..........................................................................................21
Depositor ................................................................................................1
Determination Date...............................................................................................22
Discount Fraction ...............................................................................................21
Discount Mortgage Loan...........................................................................................21
Distribution Date ................................................................................................5
DTC ...............................................................................................21
Due Date ...............................................................................................22
Eligible Funds ...............................................................................................25
Euroclear ...............................................................................................21
Events of Default ...............................................................................................53
Excess Bankruptcy Losses.........................................................................................23
Excess Fraud Losses..............................................................................................23
Excess Special Hazard Losses.....................................................................................23
Exemption ...............................................................................................57
Expanded Underwriting Guidelines.................................................................................18
Extraordinary Losses.............................................................................................23
FDIC ...............................................................................................49
Final Disposition ...............................................................................................25
Fitch IBCA ...............................................................................................12
Fraud Loss Amount ...............................................................................................35
Full Documentation Program.......................................................................................18
Individual Retail Lottery Certificate............................................................................28
Interest Shortfall...............................................................................................23
Living Holders ...............................................................................................28
Lockout Certificates.............................................................................................21
Lockout Distribution Percentage..................................................................................27
Master Servicer ................................................................................................4
Master Servicing Fee.............................................................................................51
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<PAGE>
Master Servicing Fee Rate........................................................................................24
Material Defect ...............................................................................................47
Monthly Advance ...............................................................................................11
Mortgage File ...............................................................................................47
Mortgagor ...............................................................................................23
Net Interest Shortfalls..........................................................................................23
Net Mortgage Rate ...............................................................................................24
No Income/No Asset Documentation Program.........................................................................18
No Ratio Documentation Program...................................................................................18
Non-Discount Mortgage Loans......................................................................................21
Norwest ................................................................................................4
Offered Certificates.............................................................................................21
Offered Subordinate Certificates.................................................................................21
Offered Subordinate Percentage...................................................................................32
Other Certificates................................................................................................4
Outstanding Principal Balance....................................................................................48
Permitted Investments............................................................................................50
Plan Asset Regulations...........................................................................................57
Plans ...............................................................................................57
Pool Strip Rate ...............................................................................................24
Pooling and Servicing Agreement...................................................................................4
Principal Only Certificates......................................................................................21
Protected Account ...........................................................................................21, 52
Provident ................................................................................................4
Rating Agencies ...............................................................................................13
Realized Losses ...............................................................................................34
Record Date ................................................................................................6
Reduced Documentation Program....................................................................................18
Regular Certificates.............................................................................................56
REITs ...............................................................................................56
Relief Act ...............................................................................................23
REMIC ...........................................................................................12, 56
REMIC Regular Certificates.......................................................................................56
REMIC Residual Certificates......................................................................................57
Repurchase Price ...............................................................................................47
Residual Certificates............................................................................................21
Retail Lottery Certificates......................................................................................21
Rounding Account ...............................................................................................29
S&P ...............................................................................................12
SAMI ................................................................................................4
Senior Accelerated Distribution Percentage.......................................................................26
Senior Certificates..............................................................................................20
Senior Interest Distribution Amount..............................................................................24
Senior Percentage ...............................................................................................26
Senior Principal Distribution Amount.............................................................................25
Servicer ...............................................................................................16
Servicer Events of Default.......................................................................................54
Servicing Account ...............................................................................................49
Servicing Fee ...............................................................................................51
Servicing Fee Rate...............................................................................................24
Similar Law ...............................................................................................58
SMMEA ...............................................................................................13
SPA ...............................................................................................38
Special Hazard Amount............................................................................................34
Special Hazard Loss..............................................................................................34
Standard Underwriting Guidelines.................................................................................18
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<PAGE>
Stated Principal Balance.........................................................................................26
Structuring Assumptions..........................................................................................39
Subordinate Certificates.........................................................................................21
Subordinate Percentage...........................................................................................26
Subordination ...............................................................................................33
Tax Matters Person...............................................................................................57
Trust Assets ...............................................................................................57
Trust Fund ................................................................................................1
Trustee ................................................................................................4
U.S. Person ...............................................................................................57
Underwriter ................................................................................................1
Underwriting Agreement...........................................................................................59
Underwritten Certificates.........................................................................................1
Variable Strip Certificates......................................................................................21
Year 2000 Issue ...............................................................................................56
</TABLE>
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SCHEDULE A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The description herein of the Mortgage Loans is based upon estimates of the
composition of the Mortgage Loans as of the Cut-off Date, assuming that all
scheduled principal payments due on or before the Cut-off Date have been
received. Prior to the issuance of the Certificates, Mortgage Loans may be
removed as a result of (i) Principal Prepayments thereof in full prior to
November 30, 1998, (ii) requirements of S&P or Fitch IBCA or (iii) delinquencies
or otherwise. In any such event, other mortgage loans may be included in the
Trust. All weighted average information reflecting weighting of the applicable
Mortgage Loans by their respective Scheduled Principal Balances as of the
Cut-off Date. The characteristics as of the Cut-off Date of the Mortgage Pool at
the time the Certificates are issued will not, however, differ by more than 5%
from the estimated information set forth herein with respect to the Mortgage
Pool as presently constituted, although certain characteristics of the Mortgage
Pool may vary.
Original Principal Balances of Mortgage Loans
Average: $316,324
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Original Principal Balance Loans Cut-Off Date Pool
- ---------------------------- ----------- ------------------- -----------
Less than $100,000 5 $ 383,546 0.15%
$100,000 - $149,999 13 1,783,805 0.72
$150,000 - $199,999 49 8,519,937 3.44
$200,000 - $249,999 108 25,341,492 10.24
$250,000 - $299,999 234 63,841,283 25.79
$300,000 - $349,999 160 51,182,844 20.67
$350,000 - $399,999 77 28,822,711 11.64
$400,000 - $449,999 46 19,438,616 7.85
$450,000 - $499,999 42 19,924,315 8.05
$500,000 - $599,999 31 16,568,510 6.69
$600,000 - $699,999 15 9,417,970 3.80
$700,000 or greater 3 2,354,000 0.95
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
Unpaid Principal Balances of Mortgage Loans
Average: $316,193
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Unpaid Principal Balance Loans Cut-Off Date Pool
- -------------------------- ----------- ------------------- -----------
Less than $100,000 5 $ 383,546 0.15%
$100,000 - $149,999 15 2,083,583 0.84
$150,000 - $199,999 50 8,819,535 3.56
$200,000 - $249,999 108 25,491,387 10.30
$250,000 - $299,999 240 65,788,919 26.57
$300,000 - $349,999 152 48,835,926 19.73
$350,000 - $399,999 79 29,671,532 11.98
$400,000 - $449,999 47 20,037,839 8.09
$450,000 - $499,999 40 19,125,100 7.72
$500,000 - $599,999 29 15,569,693 6.29
$600,000 - $699,999 15 9,417,970 3.80
$700,000 or greater 3 2,354,000 0.95
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
A-1
<PAGE>
Mortgage Interest Rates as of the Cut-Off Date of Mortgage Loans
Weighted Average: 7.290%
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Mortgage Interest Rate Loans Cut-Off Date Pool
- ------------------------ ----------- ------------------- -----------
6.750% or less 11 $ 3,348,720 1.35%
6.751% - 7.000% 183 62,048,349 25.06
7.001% - 7.250% 255 81,416,177 32.88
7.251% - 7.500% 201 62,582,107 25.28
7.501% - 7.750% 91 27,060,084 10.93
7.751% - 8.000% 28 7,173,733 2.90
8.001% - 8.250% 10 2,683,936 1.08
8.251% - 8.500% 3 706,200 0.29
8.501% or greater 1 559,725 0.23
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
Loan-to-Value Ratios at Origination of Mortgage Loans
Weighted Average: 72.94%
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE POOL
- ------------------------------- ----------- ------------------- -----------
50.00% or less 46 $ 16,034,188 6.48%
50.01% - 55.00% 23 7,856,574 3.17
55.01% - 60.00% 24 8,297,108 3.35
60.01% - 65.00% 51 16,125,946 6.51
65.01% - 70.00% 85 28,164,043 11.38
70.01% - 75.00% 146 49,359,065 19.94
75.01% - 80.00% 320 98,264,720 39.69
80.01% - 85.00% 4 949,136 0.38
85.01% - 90.00% 30 8,528,388 3.44
90.01% - 95.00% 54 13,999,862 5.65
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
Property Types of Mortgaged Properties
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Property Type Loans Cut-Off Date Pool
- --------------------------- ----------- ------------------- -----------
Single Family 731 $232,752,819 94.01%
Two-Family to Four-Family 23 7,319,648 2.96
Condominium 29 7,506,563 3.03
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
A-2
<PAGE>
Loan Purposes of Mortgage Loans
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Loan Purpose Loans Cut-Off Date Pool
- ----------------------- ----------- ------------------- -----------
Purchase 194 $ 57,633,548 23.28%
Rate / Term Refinance 282 92,307,288 37.28
Cash Out Refinance 307 97,638,195 39.44
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
Occupancy Status of Mortgaged Properties
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Occupancy Status Loans Cut-Off Date Pool
- ------------------- ----------- ------------------- -----------
Primary Residence 751 $241,411,067 97.51%
Investor Property 32 6,167,963 2.49
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
Original Terms of Mortgage Loans
Weighted Average: 358 months
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Original Terms Loans Cut-Off Date Pool
- ---------------- ----------- ------------------- -----------
180 Months 15 $ 2,453,778 0.99%
360 Months 768 245,125,253 99.01
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
Stated Remaining Terms to Maturity of Mortgage Loans
Weighted Average: 358 months
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATED REMAINING TERM TO MATURITY LOANS CUT-OFF DATE POOL
- --------------------------------- ----- ------------ ----
121 - 180 Months 15 $ 2,453,778 0.99%
301 - 360 Months 768 245,125,253 99.01
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
A-3
<PAGE>
Geographic Distribution of Mortgaged Properties*
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
State Loans Cut-Off Date Pool
- ---------------- ----------- ------------------- -----------
California 696 $222,632,340 89.92%
Arizona 19 5,935,707 2.40
Washington 12 3,703,387 1.50
Utah 13 3,391,129 1.37
Oregon 9 2,812,623 1.14
Michigan 10 2,757,921 1.11
Nevada 4 951,944 0.38
Connecticut 3 930,000 0.38
Colorado 3 789,239 0.32
New Jersey 2 681,500 0.28
Texas 3 602,812 0.24
North Carolina 2 589,562 0.24
Indiana 2 551,442 0.22
New Mexico 2 479,449 0.19
Idaho 1 299,542 0.12
Ohio 1 236,000 0.10
Alabama 1 234,433 0.09
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
- ------------
* No more than 1.71% (San Jose, CA) of the Mortgage Loans by Unpaid Principal
Balance will be secured by Properties located in any one zip code area in
California and no more than 0.34% (Redmond, WA) of the Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code area outside of
California.
Documentation Types of Mortgage Loans
Aggregate
Number of Principal Balance % of
Mortgage Outstanding as of Mortgage
Documentation Type Loans Cut-Off Date Pool
- ------------------------ ----------- ------------------- -----------
Full Documentation 599 $193,967,688 78.35%
No Income Verification 143 42,385,163 17.12
No Ratio 23 7,205,731 2.91
No Documentation 18 4,020,448 1.62
--- ------------ ------
Total 783 $247,579,030 100.00%
=== ============ ======
Zip Code Concentration (over 1%) of Mortgage Loans
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ZIP CODE CONCENTRATION LOANS CUT-OFF DATE POOL
- ---------------------------------- ----------- ------------------- ---------
95120 -- San Jose, CA 9 $4,223,271 1.71%
94583 -- San Ramon, CA 12 4,019,928 1.62
94539 -- Fremont, CA 9 3,539,717 1.43
95035 -- Milpitas, CA 13 3,489,495 1.41
90275 -- Rancho Palos Verdes, CA 8 3,054,352 1.23
94506 -- Danville, CA 6 2,693,913 1.09
A-4
<PAGE>
PROSPECTUS
Mortgage-Backed Certificates
Mortgage-Backed Notes
(Issuable in Series)
STRUCTURED ASSET MORTGAGE INVESTMENTS INC.
Seller
------------------
This Prospectus relates to Mortgage-Backed Certificates (the
"Certificates") and Mortgage-Backed Notes (the "Notes" and, collectively with
the Certificates, the "Securities") which may be sold from time to time in one
or more series (each, a "Series") on terms determined at the time of sale and
described in the related Prospectus Supplement for the Series. The Securities of
a Series will evidence either beneficial ownership of one or more trusts (each a
"Trust Fund") or the debt obligations of a Trust Fund. As specified in the
related Prospectus Supplement, a Trust Fund for a Series of Securities will
include certain mortgage-related assets (the "Mortgage Assets") consisting of
(i) mortgage loans or participations therein secured by one- to four-family
residential properties ("Single Family Loans"), (ii) mortgage loans or
participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by security
interests or similar liens on shares in cooperative housing corporations and the
related proprietary leases or occupancy agreements ("Cooperative Loans"), (iv)
conditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing ("Contracts"), (v)
mortgage pass-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("Fannie Mae"), Freddie Mac (formerly, the Federal Home
Loan Mortgage Corporation) ("Freddie Mac") 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 Securities will evidence the entire beneficial
ownership interest in, or the debt obligations of, a Trust Fund that will
contain a beneficial ownership interest in another Trust Fund which will contain
the Mortgage Assets. The Mortgage Assets will be acquired by Structured Asset
Mortgage Investments Inc. (formerly, 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. In
addition to Mortgage Assets, a Trust Fund may include United States Treasury
securities and other securities issued by the U.S. Government, any of its
agencies or other issuers established by federal statute (collectively, "U.S.
Government Securities"), 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 (collectively, the
"Trust Assets").
Each Series of Securities will include either one or more classes of
Certificates or, if Notes are issued as part of a Series, one or more classes of
Notes and one or more classes of Certificates, as set forth in the related
Prospectus Supplement. Each class of Securities 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 Trust Assets in the related Trust Fund or
will evidence the obligations of the related Trust Fund to make payments from
amounts received on the Trust Assets in the related Trust Fund. A Series of
Securities may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Securities
of such Series. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof prior to
one or more other classes of Securities 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 Securities, in each case as specified in
the related Prospectus Supplement. Certain Series will provide for the issuance
of one or more classes of "Exchangeable Securities," or "Callable Securities"
and "Call Securities," as provided in this Prospectus. See "Summary of
Terms--Description of the Securities."
(Continued on next page)
------------------
For a discussion of significant factors affecting investments in the
Securities, see "Risk Factors" on page 19 herein.
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 OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
Prior to issuance there will have been no market for the Securities of any
Series and there can be no assurance that a secondary market for any Securities
will develop. This Prospectus may not be used to consummate sales of a Series of
Securities unless accompanied by a Prospectus Supplement.
Offers of the Securities 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. To the extent
Securities are underwritten, Securities will be distributed by, or sold by
underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is November 24, 1998.
<PAGE>
Distributions to holders of Securities ("Securityholders") 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 Securities
of a Series will be made only from the assets of the related Trust Fund and any
other assets specified in the related Prospectus Supplement.
The Securities 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 and will be insured or guaranteed by
another person only if specified in the related Prospectus Supplement. In
general, with respect to a Series of Securities, the Seller will obtain certain
representations and warranties from the Lender or Lenders from which it acquired
the Mortgage Assets or other third parties and will assign its rights with
respect to such representations and warranties to the Trust Fund for the related
Series of Securities. The Seller will have obligations with respect to a Series
only to the extent specified in the related Prospectus Supplement. 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 Securities 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 Securities 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. Certain classes of Securities
may be subject to call and a Trust Fund may be subject to early termination
under the circumstances described herein and in the related Prospectus
Supplement. See "Administration--Termination; Optional Termination."
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") or a "financial asset securitization
investment trust" ("FASIT") for federal income tax purposes. See "Federal
Income Tax Consequences."
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 Securities of each Series to be
offered hereunder will, among other things, set forth with respect to such
Securities, as appropriate: (i) a description of the class or classes of
Securities; (ii) the rate of interest or method of determining the amount of
interest, if any, to be paid 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 distributions 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 Securities; (vi) information as to
the nature and extent of subordination with respect to any class of Securities
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 Securities; (x) whether one or more REMIC or FASIT
elections will be made and designation of the regular interests and residual
interests; (xi) information as to the Trustee; and (xii) information as to any
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 Securities. This Prospectus and the Prospectus
Supplement relating to each Series of Securities 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
2
<PAGE>
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: 500 West Madison Street, Chicago,
Illinois 60661; and Seven World Trade Center, New York, New York 10048. The
Commission maintains an Internet Web site that contains reports, proxy and
information statements and other information regarding the registrants that file
electronically with the Commission, including the Seller. The address of such
Internet Web site is (http://www.sec.gov).
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 Securities offered
hereby and thereby nor an offer of the Securities 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 Structured Asset Mortgage Investments Inc.
(formerly, Bear Stearns Mortgage Securities Inc.) (the "Seller") 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 Securities subsequent to the date of this
Prospectus and the related Prospectus Supplement and prior to the termination of
the offering of such Series of Securities shall be deemed to be incorporated by
reference in this Prospectus as supplemented by the related Prospectus
Supplement from the date of filing of such documents. 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 in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
) or in the accompanying Prospectus Supplement) or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus and the related Prospectus Supplement.
The Seller 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, Structured Asset Mortgage Investments 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 SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Securityholders. See "Description of the Securities--Reports to
Securityholders."
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement which will be prepared in connection with each Series of Securities.
Title of Securities...... Mortgage-Backed Certificates (the "Certificates")
and Mortgage- Backed Notes (the "Notes" and,
together with the Certificates, the "Securities"),
issuable from time to time in Series.
Seller................... Structured Asset Mortgage Investments Inc., a
Delaware corporation and a wholly-owned subsidiary
of Bear Stearns Mortgage Capital Corporation. See
"The Seller."
Issuer................... The trust created pursuant to the Pooling and
Servicing Agreement (each, a "Pooling and Servicing
Agreement") among the Seller, the Master
Servicer(s), if applicable, and the Trustee for the
related Series or the owner trust created pursuant
to the Deposit Trust Agreement (each, a "Trust
Agreement") among the Seller, the Master
Servicer(s), if applicable, and the Trustee for the
related Series, as applicable.
Trustee.................. The trustee under the applicable Pooling and
Servicing Agreement, Trust Agreement or Indenture
(as herein defined) and named as such 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
"Administration--Certain Matters Regarding the
Master Servicer and the Seller."
Trust Fund Assets........ A Trust Fund for a Series of Securities 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, such as United States
Treasury securities and other securities issued by
the U.S. Government, any of its agencies or other
issuers established by federal statute
(collectively, "U.S. Government Securities"), in
each case as specified in the related Prospectus
Supplement. The assets of a Trust Fund will be
purchased by such Trust Fund under the terms of the
related Pooling and Servicing Agreement or the
related Trust Agreement, as applicable.
A. Single Family,
Cooperative and
Multifamily Loans.... Single Family Loans will be secured by mortgage
liens on one- to four-family residential properties
or by other liens specified in the related
Prospectus Supplement. Cooperative Loans generally
will be secured by security interests in shares
issued by private, nonprofit, cooperative housing
corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings. Single Family Loans
and Cooperative Loans may be conventional loans
(i.e., loans that are not insured or guaranteed by
any governmental agency), insured by the Federal
Housing Authority
4
<PAGE>
("FHA") or partially guaranteed by the Veterans
Administration ("VA") as 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, or such other
individual principal balances at origination and/or
original terms to stated maturity as are specified
in the related Prospectus Supplement.
Multifamily Loans will be secured by 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.
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, or such other individual principal
balances at origination and/or original terms to
stated maturity as are specified in the related
Prospectus Supplement.
The payment terms of the Mortgage Loans to be
included in a Trust Fund will be described in the
related Prospectus Supplement and may include any of
the following features or combinations thereof or
other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an
index, a rate that is fixed for a period of time
or under certain circumstances and is followed
by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed
rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be deferred
and added to the principal of a Mortgage Loan
for such periods and under such circumstances as
may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the
payment of interest at a rate lower than the
specified interest rate on the Mortgage Loan
(the "Mortgage Rate") for a period of time or
for the life of the Mortgage Loan, and the
amount of any difference may be contributed from
funds supplied by the seller of the Mortgaged
Property or another source ("Buydown Loans") or
may be treated as accrued interest and added to
the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service
basis to fully amortize the Mortgage Loan over
its term, may be calculated on the basis of an
assumed amortization schedule that is
significantly longer than the original term to
maturity or on an interest rate that is
different from the interest rate on the Mortgage
Loan or may not be amortized during all or a
portion of the original term. Payment of all or
a substantial portion of the principal may be
due on maturity ("balloon payments"). Principal
may include interest that has been deferred and
added to the principal balance of the Mortgage
Loan.
5
<PAGE>
(c) Payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase
over a specified period of time or may change
from period to period. Mortgage Loans may
include limits on periodic increases or
decreases in the amount of monthly payments and
may include maximum or minimum amounts of
monthly payments.
(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, the District of Columbia, Guam, Puerto
Rico or any other territory of the United States.
The Mortgage Loans generally 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. Each Contract
will be fully amortizing and will bear interest at a
fixed accrual percentage rate ("APR") or will
amortize on another basis, and bear interest at
another APR, as 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, or such
other individual principal balances at origination
and/or original terms to stated maturity as are
specified in the related Prospectus Supplement.
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
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Pass-Through Certificates issued and guaranteed as
to timely payment of principal and interest by the
Federal National Mortgage Association ("Fannie Mae
Certificates"), (iii) Mortgage Participation
Certificates issued and guaranteed as to timely
payment of interest and ultimate (but generally not
timely) payment of principal by Freddie Mac
(formerly, the Federal Home Loan Mortgage
Corporation) ("Freddie Mac 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, Fannie Mae, Freddie Mac or other
government agency or government-sponsored agency
certificates and generally guaranteed to the same
extent as the underlying securities, (v) another
type of guaranteed pass-through certificate issued
or guaranteed by GNMA, Fannie Mae, Freddie Mac 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
Fannie Mae or Freddie Mac Certificates will be
backed, directly or indirectly, by the full faith
and credit of the United States. However, to the
extent any Fannie Mae or Freddie Mac Certificates
are backed by GNMA Certificates, such Fannie Mae or
Freddie Mac Certificates benefit from the backing of
the underlying GNMA Certificates 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, Freddie Mac's Cash or Guarantor Program or
another program specified in the related Prospectus
Supplement. The payment characteristics of the
Mortgage Loans underlying the Agency Secur-ities
will be described in the related Prospectus
Supplement.
D. Private Mortgage-Backed
Securities............. Private Mortgage-Backed Securities may include (i)
mortgage participation or pass-through certificates
representing beneficial interests in certain
Mortgage Loans or (ii) Collateralized Mortgage
Obligations ("CMOs") secured by such Mortgage Loans.
Private Mortgage-Backed Securities may include
stripped mortgage-backed securities representing an
undivided interest in all or a part of any of the
principal distributions (but not the interest
distributions) or the interest distributions (but
not the principal distributions) or in some
specified portion of the principal and interest
distributions (but not all of such distributions) on
certain mortgage loans. Although individual Mortgage
Loans underlying a Private Mortgage-Backed Security
may be insured or guaranteed by the United States or
an agency or instrumentality thereof, they need not
be, and the Private Mortgage-Backed Securities
themselves will not be so insured or guaranteed. See
"The Trust Fund-Private Mortgage-Backed Securities."
Payments on the Private Mortgage-Backed Securities
will be distributed directly to the Trustee as
registered owner of such Private Mortgage-Backed
Securities or as otherwise specified in the
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related Prospectus Supplement. See "The Trust
Fund--Private Mortgage-Backed Securities."
The Prospectus Supplement for a Series will specify
(i) the aggregate approximate principal amount, if
any, 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, (D) the minimum and maximum stated maturities
of the Mortgage Loans at origination and (E)
delinquency experience with respect to the Mortgage
Loans; (iii) the pass-through or certificate rate or
ranges thereof for the Private Mortgage-Backed
Securities and the method of determination thereof;
(iv) 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"); (v)
certain characteristics of credit support, if any,
such as subordination, 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; (vi)
the terms on which underlying Mortgage Loans for
such Private Mortgage-Backed Securities, or such
Private Mortgage-Backed Securities themselves, may,
or are required to, be repurchased prior to stated
maturity; and (vii) the terms on which substitute
Mortgage Loans or substitute Private Mortgage-Backed
Securities may be delivered to replace those
initially deposited with the PMBS Trustee or the
Trustee. See "The Trust Fund." Such securities will
(i) either (a) have been previously registered under
the Securities Act of 1933, as amended or (b) will
at the time be eligible for sale under Rule 144(k)
under such act; and (ii) will be acquired in bona
fide secondary market transactions not from an
issuer or seller that is an affiliate of the Seller.
E. U.S. Government
Securities............... If specified in the related Prospectus Supplement,
United States Treasury securities and other
securities issued by the U.S. Government, any of its
agencies or other issuers established by federal
statute (collectively, "U.S. Government Securities")
may be included in the Trust Assets. Such securities
will be backed by the full faith and credit of the
United States or will represent the obligations of
the U.S. Government or such agency or such other
issuer or obligations payable from the proceeds of
U.S. Government Securities, as specified in the
related Prospectus Supplement.
F. 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
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portion of the proceeds of the sale of the
Securities of such Series (such amount to be equal
to the excess of (x) the principal amounts of
Securities being sold over (y) the principal balance
(as of the related Cut-off Date) of the Trust Assets
on the Closing Date, the "Pre-Funded Amount") will
be deposited in the Pre-Funding Account and may be
used to purchase additional Mortgage Loans during
the period of time, not to exceed six months,
specified in the related Prospectus Supplement (the
"Pre-Funding Period"). The Mortgage Loans to be so
purchased will be required to have certain
characteristics specified in the related Prospectus
Supplement. Each additional Mortgage Loan so
purchased must conform to the representations and
warranties set forth in the applicable Agreement.
Therefore, the characteristics of the Trust Assets
at the end of the Pre-Funding Period will conform in
all material respects to the characteristics of the
Trust Assets on the Closing Date. 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
Securities of the applicable Series. Pending the
acquisition of additional assets during the
Pre-Funding Period, all amounts in the Pre-Funding
Account will be invested in Permitted Investments,
as defined under "Credit Enhancement--Reserve and
other Accounts" herein. It is expected that
substantially all of the funds deposited in the
Pre-Funding Account will be used during the related
Pre-Funding Period to purchase additional assets as
described above. If, however, amounts remain in the
Pre-Funding Account at the end of the Pre-Funding
Period, such amounts will be distributed to the
Securityholders, as described in the related
Prospectus Supplement.
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 Securities 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
Securities 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
Mortgage Assets or other 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
Securities.............. A Series will include either one or more classes
of Certificates or, if Notes are issued as part of a
Series, one or more classes of Notes and one or more
classes of Certificates. Each Certificate will
represent a beneficial ownership interest in a trust
(a "Trust Fund") created by the Seller pursuant to a
Pooling and Servicing Agreement or a Trust Agreement
for the related Series. Each Note will represent a
debt obligation of a Trust Fund created pursuant to
an Indenture for
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<PAGE>
such Notes. The Securities of any Series may be
issued in one or more classes as specified in the
related Prospectus Supplement. A Series of
Securities may include one or more classes of senior
Securities (collectively, the "Senior Securities")
which receive certain preferential treatment
specified in the related Prospectus Supplement with
respect to one or more classes of subordinate
Securities (collectively, the "Subordinated
Securities"). Certain Series or classes of
Securities may be covered by U.S. Government
Securities, 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 Securities 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 Securities 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 Securities of such Series throughout the lives of
the Securities 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 related 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
Securities 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 Securities entitled to
distributions allocable to interest, may be entitled
to such distributions only after the occurrence of
events specified in the related Prospectus
Supplement and may accrue interest until such events
occur, in each case as specified in the related
Prospectus Supplement. The timing and amounts of
such distributions may vary among classes, over
time, or otherwise as specified in the related
Prospectus Supplement.
In addition, certain Series may provide for the
issuance of one or more classes of of exchangeable
certificates (each an "ES Class" or "Exchangeable
Security") as provided in the related Prospectus
Supplement. The holders of such ES Classes will be
entitled to exchange all or a portion of such ES
Classes for proportionate interests in other related
classes of Exchangeable Securities. See
"Exchangeable Securities--General." Further, if so
provided in the related Prospectus Supplement, one
or more classes of Securities (each, a "Callable
Class") may be callable at the option of one or more
other classes of securities (each, a "Call Class").
A Call Class and its related Callable Class or
Classes will be issued pursuant to a separate trust
agreement. A Callable Class generally will not be
called unless the market value of the assets in the
trust fund for such Callable Class exceeds the
outstanding principal balance of such assets. If so
provided in the related Prospectus Supplement,
after the
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<PAGE>
issuance of the Callable Class, there may be a
specified "lock-out period" during which such
Securities could not be called. It is anticipated
that Call Classes generally will be offered only on
a private basis. See "Description of the
Securities--General."
The related Prospectus Supplement will specify
whether application will be made to list any
Securities on a securities exchange or to quote the
Securities in the automated quotation system of a
registered securities association.
Distributions on the
Securities.............. Distributions on the Securities entitled thereto
will be made monthly, quarterly, semi-annually or at
such other intervals and on such other Distribution
Dates specified in the related 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 Securities as
specified in the related Prospectus Supplement. The
amount allocable to distributions of principal and
interest on any Distribution Date will be determined
as specified in the related Prospectus Supplement.
All distributions will be made pro rata to
Securityholders of the class entitled thereto or as
otherwise specified in the related Prospectus
Supplement, and the aggregate original principal
balance of the Securities will equal the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If specified
in the related Prospectus Supplement, the Securities
will have an aggregate original principal balance
equal to or less than the aggregate unpaid principal
balance of the Trust Assets (plus amounts held in a
Pre-Funding Account) as of a date specified in the
Prospectus Supplement related to the creation of the
Trust Fund (the "Cut-off Date") and will bear
interest in the aggregate at a rate (the "Interest
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 related Prospectus Supplement. If
specified in the related Prospectus Supplement, the
aggregate original principal balance of the
Securities and interest rates on the classes of
Securities will be determined based on the cash flow
on the Trust Assets. The Interest Rate at which
interest will be paid to holders of Securities
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 related 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
related Prospectus Supplement.
Credit Enhancement....... The assets in a Trust Fund or the Securities 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
Securities of a Series to receive distributions with
respect to the assets in the related Trust
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Fund will be subordinated to such rights of the
holders of the Senior Securities 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 Securities 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
Securities 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 Securities, 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 Securities Account and, to the extent
described in the related Prospectus Supplement, by
the right of such holders to receive future
distributions from the assets in the related Trust
Fund that would otherwise have been payable to the
Subordinated Securityholders; (ii) reducing the
ownership interest of the related Subordinated
Securities; (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 Securities of a
Series by means of the subordination feature also
may be accomplished by allocating certain types of
losses or delinquencies to the Subordinated
Securities to the extent described in the related
Prospectus Supplement.
If so specified in the related Prospectus
Supplement, the same class of Securities may be
Senior Securities with respect to certain types of
payments or certain types of losses or delinquencies
and Subordinated Securities 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 related Prospectus
Supplement, a reserve fund may be established and
maintained by the deposit therein of distributions
allocable to the holders of Subordinated Securities
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 Securities 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 Securities 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
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under which the amounts in any such Reserve Account
will be used to make distributions to holders of
Securities 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"). Each Special Hazard
Insurance Policy generally will be limited in scope
and will cover losses in an initial amount equal to
the greatest of (i) a specified percentage of the
aggregate principal balance of the Single Family
Loans, Cooperative Loans or Contracts as of the
related Cut-off Date, (ii) twice the unpaid
principal balance as of the related Cut-off Date of
the largest Single Family Loan, Cooperative Loan or
Contract in the related Mortgage Pool, or (iii) the
aggregate principal balance of Single Family Loans,
Cooperative Loans or Contracts as of the Cut-off
Date secured by property in any single zip code
concentration.
E. Bankruptcy Bond....... A bankruptcy bond or bonds (the "Bankruptcy Bond")
may be obtained covering certain losses resulting
from action which may be taken by a bankruptcy court
in connection with a Single Family Loan, Cooperative
Loan or Contract. The level of coverage of each
Bankruptcy Bond will be specified in the related
Prospectus Supplement.
F. FHA Insurance and VA
Guarantee.............. All or a portion of the Mortgage Loans in a
Mortgage Pool may be insured by FHA insurance and
all or a portion of the Single Family Loans or
Contracts in a Mortgage Pool may be partially
guaranteed by the VA.
G. Other Arrangements.... Other arrangements as described in the related
Prospectus Supplement including, but not limited to,
one or more U.S. Government Securities, letters of
credit, financial guaranty insurance policies or
third party guarantees, interest rate or other swap
agreements, caps, collars or floors, may be used to
provide coverage for certain risks of defaults or
losses. These arrangements may be in addition to or
in substitution for any forms of credit support
described in the Prospectus. Any such arrangement
must be acceptable to each nationally recognized
rating agency that rates the related Series of
Securities (the "Rating Agency").
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<PAGE>
H. Cross Support......... If specified in the related Prospectus Supplement,
separate groups of assets or separate Trust Funds
may be beneficially owned by separate classes of the
related Series of Securities or separate groups of
assets or separate Trust Funds may be available for
the payment of principal and interest on certain
classes of Securities. In any such case, credit
support may be provided by a cross-support feature
which requires that distributions be made with
respect to certain Securities relating to one or
more asset groups or Trust Funds out of funds
received with respect to other asset groups or Trust
Funds prior to distributions to other Securities
relating to such other asset groups or Trust Funds
or that losses be allocated in such manner as to
provide such cross-support. If specified in the
related Prospectus Supplement, the coverage provided
by one or more forms of credit support may apply
concurrently to two or more separate Trust Funds,
without priority among such Trust Funds, until the
credit support is exhausted. If specified in the
related Prospectus Supplement, one or more asset
groups or Trust Funds relating to certain securities
could be initially free of cross-support but later
might become subject to cross-support. If
applicable, the related Prospectus Supplement will
identify the asset groups or Trust Funds to which
such credit support relates and the manner of
determining the amount of the coverage provided
thereby and of the application of such coverage to
the identified asset groups or Trust Funds.
Advances................. Each Master Servicer and, if applicable, each
mortgage servicing institution that services a
Mortgage Loan in a Mortgage Pool on behalf of a
Master Servicer (a "Sub-Servicer") generally will be
obligated to advance amounts corresponding to
delinquent principal and interest payments on such
Mortgage Loan until the date on which the related
Mortgaged Property is sold at a foreclosure sale or
the related Mortgage Loan is otherwise liquidated.
Any such obligation to make advances may be limited
to amounts due holders of Senior Securities of the
related Series, to amounts deemed to be recoverable
from late payments or liquidation proceeds, for
specified periods or any combination thereof, or as
otherwise specified in the related Prospectus
Supplement. See "Description of the
Securities--Advances." Advances will be reimbursable
to the extent described herein and in the related
Prospectus Supplement.
Optional Termination..... The Seller, a Master Servicer, the holders of the
residual interests in a REMIC, a FASIT or any other
entity specified in the related Prospectus
Supplement may have the option to effect early
retirement of a Series of Securities through the
purchase of the Mortgage Assets and other assets in
the related Trust Fund under the circumstances and
in the manner described in "Administration--
Termination; Optional Termination."
Legal Investment......... The related Prospectus Supplement for each Series
of Securities will specify which, if any, of the
classes of Securities offered will constitute
"mortgage-related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") and, as such, will be legal investments
for certain types of institutional investors to the
extent provided in SMMEA, subject, in any case, to
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<PAGE>
any other regulations which may govern investments
by such institutional investors. See "Legal
Investment."
Institutions whose investment activities are subject
to legal investment laws and regulations or to
review by certain regulatory authorities may be
subject to restrictions on investment in the
Securities. Any such institution should consult its
own legal advisors in determining whether and to
what extent there may be restrictions on its ability
to invest in the Securities. See "Legal Investment"
herein.
Federal Income Tax
Consequences............ The income tax consequences of the purchase,
ownership and disposition of the Securities 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 either a REMIC or a
FASIT under the Internal Revenue Code of 1986, as
amended (the "Code"), or whether the Trust Fund will
be treated as either a grantor trust or a
partnership for federal income tax purposes.
REMIC. If an election is to be made to treat the
Trust Fund for a Series of Securities 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 Securities") 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
Securities generally will be treated as debt
obligations of the Trust Fund with payment terms
equivalent to the terms of such Securities. Holders
of REMIC Regular Securities will be required to
report income with respect to such Securities under
an accrual method, regardless of their normal tax
accounting method. Original issue discount, if any,
on REMIC Regular Securities will be includible in
the income of the holders thereof as it accrues, in
advance of receipt of the cash attributable thereto,
which rate of accrual will be determined based on a
reasonable assumed prepayment rate. The REMIC
Residual Certificates generally will not be treated
as evidences of indebtedness for federal income tax
purposes, but instead, as representing rights to the
taxable income or net loss of the REMIC.
Each holder of a REMIC Residual Certificate will be
required to take into account separately its pro
rata portion of the REMIC's taxable income or loss.
Certain income of a REMIC (referred to as "excess
inclusions") generally may not be offset by such a
holder's net operating loss carryovers or other
deductions, and in the case of a tax-exempt holder
of a REMIC Residual Certificate will be treated as
"unrelated business taxable income". In certain
situations, particularly in the early years of a
REMIC, holders of a REMIC Residual Certificate may
have taxable income, and possibly tax liabilities
with respect to such income, in excess of cash
distributed to them. Certain disqualified
organizations (as defined under "Federal Income Tax
Consequences--Transfers of REMIC Residual
Certificates--Restrictions on Transfer; Holding by
Pass-Through Entities") are prohibited from
acquiring or holding any beneficial
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<PAGE>
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.
FASIT. If an election is to be made to treat the
Trust Fund for a Series of Securities as a FASIT for
federal income tax purposes, the related Prospectus
Supplement will specify which class or classes
thereof will be designated as regular interests in
the FASIT ("FASIT Regular Securities"), which class
or classes of FASIT Regular Securrities constitute
"High-Yield Interests" and which class of
Certificates will be designated as the ownership
interest in the FASIT ("FASIT Ownership
Certificate").
For federal income tax purposes, FASIT Regular
Securities generally will be treated as debt
obligations of the Trust Fund with payment terms
equivalent to the terms of such Securities. Holders
of FASIT Regular Securities will be required to
report income with respect to such Securities under
an accrual method, regardless of their normal tax
accounting method. Original issue discount, if any,
on FASIT Regular Securities 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. Holders of
High-Yield Interests may not use net operating
losses to offset any non-FASIT income derived from
the High-Yield Interest, and in certain cases, a
transfer of a High-Yield Interest will not be
recognized for federal income tax purposes.
The FASIT Ownership Certificate generally will not
be treated as an evidence of indebtedness for
federal income tax purposes, but instead, as
representing rights to the taxable income or net
loss of the FASIT. The holder of the FASIT Ownership
Certificate will be required to take into account
all of the income or loss of the FASIT under an
accrual method regardless of its normal accounting
method. In certain situations, particularly in the
early years of a FASIT, the holder of the FASIT
Ownership Certificate may have taxable income, and
possibly tax liabilities with respect to such
income, in excess of cash distributed to it. Certain
"disqualified holders" are prohibited from acquiring
or holding the FASIT Ownership Certificate.
Grantor Trust. If a determination is to be made to
treat the Trust Fund for a Series of Certificates as
a grantor trust, the Trust Fund will be classified
as a grantor trust for federal income tax purposes
and not as an association or taxable mortgage pool
taxable as a corporation. Holders of Certificates
issued by a grantor trust ("Non- Electing
Securities") will be treated for such purposes,
subject to the possible application of the stripped
bond rules, as owners of undivided interests in the
related Trust Assets 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 Trust
Assets and will be entitled, subject to certain
limitations, to deduct their pro rata share of
expenses of the Trust Fund.
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Partnerships. If a Prospectus Supplement for a
Series indicates that a Trust Fund is to be treated
as a partnership, assuming that all the provisions
of the applicable Agreement are complied with, the
Trust Fund will not be treated as an association,
taxable mortgage pool, or a publicly traded
partnership taxable as a corporation. If a
Prospectus Supplement indicates that one or more
classes of Securities of the related Series are to
be treated as indebtedness for federal income tax
purposes, assuming that all of the provisions of the
applicable Agreement are complied with, the
Securities so designated will be considered
indebtedness for federal income tax purposes. Each
holder of a Note, by the acceptance of a Note of a
given Series, will agree to treat such Note as
indebtedness, and each holder of a Certificate, by
the acceptance of a Certificate of a given Series,
will agree to treat the related Trust Fund for
federal tax purposes as a partnership in which such
holder is a partner if there is more than one holder
of Certificates for federal income tax purposes, or
to disregard the Trust Fund as an entity separate
from the holder of Certificates if there is only one
such holder for federal income tax purposes.
Alternative characterizations of such Trust Fund and
such Securities are possible, but would not result
in materially adverse tax consequences to holders of
Securities. See "Federal Income Tax Consequences."
Generally, gain or loss will be recognized on a sale
of Securities in the amount equal to the difference
between the amount realized and the seller's tax
basis in the Securities sold. The material federal
income tax consequences for investors associated
with the purchase, ownership and disposition of the
Securities are set forth herein under "Federal
Income Tax Consequences." The material federal
income tax consequences for investors associated
with the purchase, ownership and disposition of
Securities of any particular Series will be set
forth under the heading "Federal Income Tax
Consequences" in the related Prospectus Supplement.
See "Federal Income Tax Consequences."
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"), and/or Section 4975 of the Code
should carefully review with its legal advisors
whether the purchase, holding or disposition of
Securities 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."
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RISK FACTORS
Limited Liquidity. There will be no market for the Securities of any Series
prior to the issuance thereof, and there can be no assurance that a secondary
market will develop or, if it does develop, that it will provide liquidity of
investment or will continue for the life of the Securities of such Series. The
market value of the Securities will fluctuate with changes in prevailing rates
of interest. Consequently, the sale of Securities in any market that may develop
may be at a discount from the Securities' par value or purchase price. Owners of
Secur-ities generally have no right to request redemption of Securities, and the
Securities are subject to redemption only under the limited circumstances, if
any, described in the related Prospectus Supplement. It is not intended to list
any class of Securities on any securities exchange or to quote the Securities in
the automated quotation system of a regulated securities association. However,
if such listing or such quotation is intended with respect to some or all of the
Securities in a Series, relevant information will be included in the related
Prospectus Supplement. If the Securities are not so listed or quoted, investors
may experience more limited liquidity. The Prospectus Supplement for a Series
may indicate that an underwriter specified therein intends to establish a
secondary market in some or all of the Securities of such Series. However, no
underwriter will be obligated to do so.
Book-Entry Securities. If Securities are issued in a book-entry form,
investors may experience delay in receipt of their payments and/or reports since
payments and reports will initially be made to the book-entry depository or its
nominee. In addition, the issuance of Securities in book-entry form may reduce
the liquidity of such Securities in the secondary trading market since some
investors may be unwilling to purchase Securities for which they cannot receive
physical certificates. See "The Securities--Book-Entry Registration".
Yield, Maturity and Prepayment Considerations. The yield to maturity and
weighted average life of the Securities of each series will depend on the rate
and timing of principal payments (including prepayments, liquidations due to
defaults, and repurchases due to conversion of adjustable rate loans to fixed
interest rate loans or breaches of representations and warranties) on the
Mortgage Loans and the price paid by Securityholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments or
level of losses on the related Mortgage Loans. The yield to maturity on
Securities purchased at a discount to their principal amounts (including any
principal only Securities) will be lower than anticipated if prepayments occur
at a slower than anticipated rate and the yield to maturity on Securities
purchased at a premium to their principal amounts or on interest only
Securities, will be lower than anticipated if prepayments occur at a faster than
anticipated rate. In the case of certain interest only Securities, a faster rate
of prepayments may result in a loss of investment. In addition, the yield to
maturity on certain other types of classes of Securities, including accrual
Securities, Securities with a pass-through rate which fluctuates inversely with
an index or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities. Prepayments are
influenced by a number of factors, including prevailing mortgage market interest
rates, local and regional economic conditions and homeowner mobility. Any losses
allocated to the Securities will have a negative effect on the yield to maturity
of such Secur-ities. See "Yield and Prepayment Considerations" herein.
Optional Termination May Adversely Affect Yield. As described under
"Administration-Termination; Optional Termination", a Trust Fund may be subject
to optional termination. Any such optional termination may adversely affect the
yield to maturity on the related Series of Securities. In addition, if the
Mortgage Assets include properties which have been acquired by the related Trust
Fund through foreclosure or deed-in-lieu of foreclosure, the purchase price paid
to exercise the optional termination may be less than the outstanding principal
balances of the related Series of Securities. In such event, the Holders of one
or more classes of Securities may incur a loss.
Subordination of the Subordinated Securities; Effect of Losses on the
Mortgage Assets. The rights of Holders of Subordinated Securities to receive
distributions to which they would otherwise be entitled with respect to the
Mortgage Assets will be subordinated to the rights of the Holders of the Senior
Securities to the extent described in the related Prospectus Supplement. As a
result of the foregoing, investors must be prepared to bear the risk that they
may be subject to delays in payment and may not recover their initial
investments in the Subordinated Securities.
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The yields on the Subordinated Securities may be extremely sensitive to the
loss experience of the Mortgage Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Mortgage Assets exceed the
rate and amount of such losses assumed by an investor, the yields to maturity on
the Subordinated Securities may be lower than anticipated.
Limited Obligations. The Securities will not represent an interest in or
obligation of the Seller, a Master Servicer or any of their affiliates. The only
obligations of the foregoing entities with respect to the Securities or any
Mortgage Assets will be the obligations (if any) of the Seller and a Master
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Assets, a Master Servicer's servicing obligations under
the related Pooling and Servicing Agreement (including its limited obligation to
make certain advances) and pursuant to the terms of any Mortgage Assets, and, if
and to the extent expressly described in the related Prospectus Supplement,
certain limited obligations of a Master Servicer in connection with a swap,
yield supplement agreement or purchase obligation. If an affiliate of the Seller
has originated any Mortgage Loan, such affiliate will only have an obligation
with respect to the representations and warranties of the Seller, as described
herein. Neither the Securities nor the underlying Mortgage Assets will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Seller, a Master Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund (including the Mortgage Assets and any form
of credit enhancement) will be the sole source of payments on the Securities,
and there will be no recourse to the Seller, a Master Servicer or any other
entity in the event that such proceeds are insufficient or otherwise unavailable
to make all payments provided for under the Securities.
Declining Real Estate Market; Geographical Concentration. If the
residential real estate market in general or a regional or local area where real
property securing Mortgage Loans constituting or underlying the Mortgage Assets
for a Trust Fund are concentrated should experience an overall decline in
property values, or a significant downturn in economic conditions, rates of
delinquencies, foreclosures and losses could be higher than those then generally
experienced in the mortgage lending industry. See "The Trust Fund--The Mortgage
Loans--General".
Limitations, Reduction and Substitution of Credit Enhancement. Credit
enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of the related Series, a Pool Insurance Policy,
a Special Hazard Insurance Policy, Bankruptcy Bond, FHA Insurance, VA
Guarantees, Reserve Accounts, other insurance, guaranties and similar
instruments and agreements, or any combination thereof. See "Credit
Enchancement". Regardless of the credit enhancement provided, the coverage
provided may be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. Furthermore, such credit
enhancement may provide only very limited coverage as to certain types of losses
and may provide no coverage as to certain other types of losses. The Trustee may
be permitted to reduce, terminate or substitute all or a portion of the credit
enhancement for any Series of Securities, if the applicable rating agencies
indicate that the then-current rating thereof will not be adversely affected.
Risks related to Financial Instruments. A Trust Fund may include one or
more financial instruments such as interest rate or other swap agreements and
interest rate cap or floor agreements. See "Credit Enchancement". These
financial instruments provide protection against certain types of risks or
provide certain cashflow characteristics for one or more classes of a Series.
The protection or benefit to be provided by any such financial instrument will
be dependent on, among other things, the performance of the provider of such
financial instrument. If such provider were to be unable or unwilling to perform
its obligations under the related financial instrument, the Securityholders of
the applicable class or classes would bear the effects of such non-performance,
including the possibility of a material adverse effect on the yield to maturity,
the market price and liquidity for such class or Series. Even if the provider of
a financial instrument performs its obligations thereunder, a withdrawal or
reduction in a credit rating assigned to such provider may adversely affect the
market price and liquidity of the applicable class or classes of Securities. To
the extent that a financial instrument is intended to provide an approximate or
partial hedge for certain risks or cashflow characteristics, the Securityholders
of the applicable class or classes will bear the risk that such an imperfect
hedge may result in a material adverse effect on the yield to maturity, the
market price and liquidity for such class or classes.
Environmental Considerations. Real property pledged as security for a
mortgage loan may be subject to certain environmental risks. There are many
federal and state environmental laws concerning hazardous waste
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and other substances that may affect the property securing Mortgage Assets.
Under certain federal and state laws, a person who takes a deed in lieu of
foreclosure or purchases a mortgaged property in foreclosure may become liable
for remedial action to remove hazardous waste and other substances from such
property. It is possible that such costs could become a liability of the Trust
Fund and reduce the amounts otherwise distributable to the Securityholders if a
Mortgaged Property securing a Mortgage Loan constituting part of or underlying
the Mortgage Assets became the property of the Trust Fund in certain
circumstances and if the costs of such remediation were incurred. Moreover,
certain states by statute impose a priority lien for any such remediation costs
incurred by such state on such property. In such states, even prior recorded
liens are subordinated to such state liens. In these states, the security
interest of the Trustee in a property that is subject to such a state lien could
be adversely affected. See "Legal Aspects of the Mortgage Loans--Environmental
Considerations".
Security Interests in Manufactured Homes May Be Lost. The method of
perfecting a security interest in a Manufactured Home depends on the laws of the
state in which the Manufactured Home is located and, in some cases, the facts
and circumstances surrounding the location of the Manufactured Home (for
example, whether the Manufactured Home has become permanently affixed to its
site). If a Manufactured Home is moved from one state to another, steps must be
taken to re-perfect the security interest under the laws of the new state.
Generally the Sub-Servicer would become aware of the need to take such steps
following notice due to the notation of the Lender's lien on the applicable
certificate of title. However, if through fraud or administrative error such
steps were not taken in a timely manner, the perfected status of the lien on the
related Manufactured Home could be lost.
Similarly, if a Manufactured Home were to become or be deemed to be
permanently affixed to its site, additional steps may have to be taken to
maintain the priority and/or perfection of the security interest granted by the
related Contract. Although the borrower will have agreed not to permit the
Manufactured Homes to become or to be deemed to be permanently affixed to the
site, there can be no assurance that the borrower will comply with this
agreement. In such cases, the Sub-Servicer would be unlikely to obtain knowledge
thereof which would permit the Sub-Servicer to take additional steps, if any,
required under applicable law to maintain the priority and/or perfection of the
lien on the Manufactured Home.
THE TRUST FUND
A Trust Fund for a Series of Securities 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, such as U.S. Government Securities, in each case as specified in the
related Prospectus Supplement.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and any other assets specified in the related Prospectus
Supplement, but 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 Secur-ities in a Series will evidence the entire
beneficial ownership interest in, or the debt obligations of, a trust fund, and,
in turn the assets of such trust fund will consist of a beneficial ownership
interest in another trust fund which will contain the underlying trust assets,
as would be the case, for example, in a Series that includes Exchangeable
Secuirites. For a further discussion of such a structure, see "Exchangeable
Securities--General".
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from 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 "The Mortgage
Loans--Underwriting Standards."
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* Whenever the terms "Mortgage Pool" and "Securities" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Securities representing
certain undivided interests in, or the debt obligations of, a single Trust
Fund consisting primarily of the Mortgage Loans in such Mortgage Pool.
Similarly, the term "Interest Rate" will refer to the Interest Rate borne by
the Securities of one specific Series and the term "Trust Fund" will refer to
one specific Trust Fund.
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As used herein, "Agreement" means, (i) with respect to the Certificates of
a Series, the Pooling and Servicing Agreement or the Trust Agreement and (ii)
with respect to the Notes of a Series, the Indenture or the Master Servicing
Agreement, as the context requires.
The following is a brief description of the Trust Assets expected to be
included in a Trust Fund. If specific information respecting the Trust Assets is
not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related 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 Securities (the "Detailed Description"). A copy of the
Pooling and Servicing Agreement or the Trust Agreement and/or the Indenture, as
applicable, with respect to each Series of Securities 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 Securities.
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 related Prospectus Supplement and described below. Mortgage
Loans with certain Loan-to-Value Ratios (as defined herein) 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 related Prospectus
Supplement.
Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly or as 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 or such other day as is specified in the related
Prospectus Supplement. 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
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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, generally (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 Securities are initially offered, more general information
of the nature described above will be provided in the related 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. 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"), generally 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. In
the case of Refinance Loans, the Collateral Value of the related Mortgaged
Property generally is the appraised value thereof determined in an appraisal
obtained at the time of refinancing. For purposes of calculating the
Loan-to-Value Ratio of a Contract relating to a new Manufactured Home, the
Collateral Value generally 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. The Collateral
Value of a used Manufactured Home generally 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
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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 Securities 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 Securities 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
Pooling and Servicing Agreement or, if the Series includes Notes, pursuant to a
Master Servicing Agreement among the Seller, the Master Servicer and the related
Trust Fund (the "Master Servicing Agreement") and will receive a fee for such
services. See "The Mortgage Loans" and "Administration". 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 applicable
Agreement, as if the Master Servicer alone were servicing such Mortgage Loans.
In general, the Seller with respect to a Series of Securities will obtain
certain representations and warranties from the Lenders or other third parties
and will assign its rights with respect to such representations and warranties
to the Trustee for such Series of Securities. The Seller will have obligations
with respect to a Series only to the extent specified in the related Prospectus
Supplement. See "Administration--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 "The
Mortgage Loans--Representations by Lenders; Repurchases" and
"Administration--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 Securities--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
Single Family Loans generally will consist of mortgage loans, deeds of
trust or participation or other beneficial interests therein, secured by liens
on one- to four-family residential properties. The Single Family Loans also 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.
Cooperative Loans generally 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. 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 or such
other individual principal balances at origination and/or original terms to
stated maturity as are specified in the related Prospectus Supplement.
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 lease--
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hold interests, the term of the leasehold generally will exceed the scheduled
maturity of the Mortgage Loan by at least five years. Certain Mortgage Loans may
be originated or acquired in connection with employee relocation programs.
Multifamily Loans
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by 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. Multifamily Loans generally will have original
terms to stated maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by Cooperatives. The Cooperative owns all the
apartment units in the building and all common areas. The Cooperative is owned
by tenant-stockholders who, through ownership of stock, shares or membership
certificates in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific apartments or units.
Generally, a tenant-stockholder of a Cooperative must make a monthly payment to
the Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its mortgage loan, real property taxes, maintenance
expenses and other capital or ordinary expenses. Those payments are in addition
to any payments of principal and interest the tenant-stockholder must make on
any loans to the tenant-stockholder secured by its shares in the Cooperative.
The Cooperative will be directly responsible for building management and, in
most cases, payment of real estate taxes and hazard and liability insurance. A
Cooperative's ability to meet debt service obligations on a Multifamily Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
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. Each Contract generally will be fully amortizing and will bear
interest at its APR. Contracts will 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, or such other individual principal
balances at origination and/or original terms to stated maturity as are
specified in the related Prospectus Supplement.
The "Manufactured Homes" securing the Contracts generally 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.
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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 Fannie Mae 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.
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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 related Prospectus Supplement, GNMA Certificates may be
backed by multifamily mortgage loans having the characteristics specified in
such Prospectus Supplement.
The GNMA Certificates included 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. Fannie Mae is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (the "Charter Act"). Fannie Mae was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae 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, Fannie
Mae helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
Fannie Mae Certificates. Fannie Mae Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae 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
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mortgage loans underlying a Fannie Mae 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 Fannie Mae 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 Fannie Mae 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 Fannie Mae'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 Fannie Mae 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 Fannie Mae assumes
the entire risk for foreclosure losses), the annual interest rates on the
mortgage loans underlying a Fannie Mae Certificate will generally be between 55
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related Prospectus Supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae 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 Fannie Mae 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 Fannie Mae under its guarantees are obligations solely of Fannie
Mae 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 Fannie Mae up to $2.25 billion outstanding at
any time, neither the United States nor any agency thereof is obligated to
finance Fannie Mae's operations or to assist Fannie Mae in any other manner. If
Fannie Mae were unable to satisfy its obligations, distributions to holders of
Fannie Mae Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and, accordingly, monthly distributions to holders
of Fannie Mae Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae 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 Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae Certificate register in the case of fully registered Fannie
Mae Certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
Fannie Mae Certificates, distributions thereon will be made by check.
The Fannie Mae 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.
Freddie Mac. Freddie Mac 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"). Freddie Mac 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 Freddie
Mac 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 Freddie Mac Certificates. Freddie Mac 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.
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Freddie Mac Certificates. Each Freddie Mac 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 "Freddie Mac Certificate Group").
Freddie Mac Certificates are sold under the terms of a Mortgage Participation
Certificate Agreement. A Freddie Mac Certificate may be issued under either
Freddie Mac's Cash Program or Guarantor Program.
Mortgage loans underlying the Freddie Mac Certificates held by a Trust Fund
will consist of mortgage loans with original terms to maturity of between 10 and
30 years or such other period as provided in the related Prospectus Supplement.
Each such mortgage loan must meet the applicable standards set forth in the
FHLMC Act. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate group. Under
the Guarantor Program, any such Freddie Mac Certificate group may include only
whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
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 Freddie Mac Certificate group represented by such Freddie
Mac Certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac 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 Freddie
Mac's Gold PC Program, Freddie Mac 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, Freddie Mac indemnifies holders of
Freddie Mac Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac 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 Freddie Mac Certificates, including the timing
of demand for acceleration, Freddie Mac 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
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each mortgagor, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac 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 Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac 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 Freddie Mac.
Under Freddie Mac's cash program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the pass-through rate on the Freddie Mac Certificate. Under such
program, Freddie Mac purchases groups of whole mortgage loans from sellers at
specified
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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 Freddie Mac. 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 Freddie Mac Certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac Certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans. Under Freddie Mac's Guarantor Program, the
pass-through rate on a Freddie Mac Certificate is established based upon the
lowest interest rate on the underlying mortgage loans, minus a minimum servicing
fee and the amount of Freddie Mac's management and guaranty income as agreed
upon between the seller and Freddie Mac.
Freddie Mac 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 Freddie Mac
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 Freddie Mac 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 Freddie Mac Certificates sold by Freddie Mac
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 Secur-ity 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 Freddie Mac, Fannie
Mae, GNMA or other government agency or government-sponsored agency
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, GNMA or another government agency or
government-sponsored agency, each as trustee, or by another trustee named in the
related Prospectus Supplement. Freddie Mac, Fannie Mae, GNMA or another
government agency or government-sponsored agency generally will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security.
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, Fannie Mae, Freddie Mac or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage
pass-through certificates will be described in such related 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 a direct or indirect 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 pooling and servicing agreement (a "PMBS Agreement"). The Private
Mortgage-Backed Securities in a Trust Fund may include a class or classes of
securities that are callable at the option of another class or classes of
securities. 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. The PMBS Servicer will be a Fannie Mae or Freddie Mac 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, or such other servicer as specified in the related Prospectus
Supplement.
Such securities will (i) either (a) have been previously registered under
the Securities Act of 1933, as amended, or (b) will at the time be eligible for
sale under Rule 144(k) under such act; and (ii) will be acquired
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in bona fide secondary market transactions not from the issuer or its
affiliates. The PMBS Issuer generally 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 related 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 or the assignment by it of the
representations and warranties of another entity from which it acquired the
assets. The PMBS Issuer generally will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Mortgage-Backed Securities
issued under the PMBS Agreement. Additionally, although the Mortgage Loans
underlying the Private Mortgage-Backed Securities may be guaranteed by an agency
or instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such Mortgage Loans
may be secured by single family property, multifamily property, Manufactured
Homes or by an assignment of the proprietary lease or occupancy agreement
relating to a specific dwelling within a Cooperative and the related shares
issued by such Cooperative. In general, (i) no Mortgage Loan will have had a
Loan-to-Value Ratio at origination in excess of 95%, (ii) each Single Family
Loan secured by a Mortgaged Property having a Loan-to-Value Ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy until
the principal balance is reduced to 80%, (iii) each Mortgage Loan will have had
an original term to stated maturity of not less than 5 years and not more than
40 years, (iv) no Mortgage Loan that was more than 30 days delinquent more than
once in the past 12 months and will not be delinquent as of the Cut-off Date as
to the payment of principal or interest will have been eligible for inclusion in
the assets under the related PMBS Agreement, (v) each Mortgage Loan (other than
a Cooperative Loan) will be required to be covered by a standard hazard
insurance policy (which may be a blanket policy), and (vi) each Mortgage Loan
(other than a Cooperative Loan or a Contract secured by a Manufactured Home)
will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
Additional Information. The related 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, (D) the minimum and maximum stated maturities of
the underlying Mortgage Loans at origination and (E) delinquency experience with
respect to the Mortgage Loans, (iii) the pass-through or certificate rate of the
Private Mortgage-Backed Securities and the method of determination thereof, (iv)
the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS
Trustee for such Private Mortgage-Backed Securities, (v) certain characteristics
of credit support, if any, such as
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subordination, 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, (vi) the
terms on which the underlying Mortgage Loans for such Private Mortgage-Backed
Securities, or such Private Mortgage-Backed Securities themselves, may, or are
required to, be purchased prior to their stated maturity or the stated maturity
of the Private Mortgage-Backed Securities and (vii) the terms on which Mortgage
Loans or Private Mortgage-Backed Securities may be substituted for those
originally deposited with the PMBS Trustee or the Trustee.
U.S. Government Securities
If specified in the related Prospectus Supplement, United States Treasury
securities and other securities issued by the U.S. Government, any of its
agencies or other issuers established by federal statute (collectively, "U.S.
Government Securities") may be included in the Trust Assets. Such securities
will be backed by the full faith and credit of the United States or will
represent the obligations of the U.S. Government or such agency or such other
issuer or obligations payable from the proceeds of U.S. Government Securities,
as specified in the related Prospectus Supplement.
FASITs
Assets may be added to the Trust Fund if it has elected to be treated as a
FASIT for federal income tax purposes under the Code, subject to the provisions
of the Code restricting such additional assets to "permitted assets", as defined
in the Code, and so long as the FASIT does not engage in a "prohibited
transaction" under the Code. See "Federal Income Tax Consequences--Qualification
as a FASIT" and "--FASIT Ownership Certificate--Income from Prohibited
Transactions". Subject to the foregoing, it is intended that, in connection with
a particular Trust Fund, assets will be chosen for a FASIT on the basis of
similarity of certain characteristics such as coupon and market price, as
provided in the related Prospectus Supplement. Assets would be added to a FASIT
upon the occurrence of certain events such as prepayment of existing assets or
removal of assets for credit or other reasons, as provided in the related
Prospectus Supplement. Any such addition or removal would be subject to
confirmation from the applicable rating agency or agencies that such actions
would not affect the ratings then assigned to the related 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 or
other party identified in the related Prospectus Supplement 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 Securities of each Series to repay short-term loans incurred to finance the
purchase of the Trust Assets related to such Securities, to acquire certain of
the Trust Assets to be deposited in the related Trust Fund, and/or to pay other
expenses connected with pooling Trust Assets and issuing Securities. Any amounts
remaining after such payments may be used for general corporate purposes. The
Seller expects to sell Securities in Series from time to time.
THE SELLER
Structured Asset Mortgage Investments Inc. (formerly, Bear Stearns Mortgage
Securities Inc.), the Seller, is a Delaware corporation organized on October 17,
1991. The Seller is engaged in the business 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.
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THE MORTGAGE LOANS
The Mortgage Loans will have been purchased by the Seller, either directly
or through affiliates, from Lenders. The Mortgage Loans so acquired by the
Seller will have been originated in accordance with the underwriting criteria
specified below under "Underwriting Standards" or such other underwriting
criteria as is specified in the related Prospectus Supplement.
Underwriting Standards
In general, 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.
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A Lender may originate Mortgage Loans under a reduced documentation program
with balances that exceed in size or other respects general agency criteria. 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 more 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.
Re-Underwriting. The Seller will acquire Mortgage Loans utilizing
re-underwriting criteria it believes are appropriate depending to some extent on
the Seller's or its affiliates' prior experience with the Lender and the
servicer, as well as the Seller's prior experience with a particular type of
loan or with loans relating to mortgaged properties in a particular geographical
region. A standard approach to re-underwriting will be to compare loan file
information and information that is represented to the Seller on a tape with
respect to a percentage of the Mortgage Loans deemed appropriate by the Seller
in the circumstances. No independent investigation of the creditworthiness of
particular obligors will be undertaken by the Seller.
Qualifications of Lenders
Each Lender will be required to satisfy the qualifications set forth herein
or as otherwise set forth in the related Prospectus Supplement. 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. In general, each Lender must be a
seller/servicer approved by either Fannie Mae or Freddie Mac, 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
Each Lender generally will have made representations and warranties in
respect of the Mortgage Loans sold by such Lender and included in the assets of
the Trust Fund. 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 or other applicable 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 a specified number of 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.
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 or as of such
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other date as is specified in the related Prospectus Supplement. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the Series of Securities evidencing an interest in, or secured by,
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.
In general, the Master Servicer or the Trustee, if the Master Servicer is
the Lender, will be required to 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 Securityholders
with respect to such Mortgage Loan. If such Lender cannot cure such breach
generally within 60 days after notice from the Master Servicer or the Trustee,
as the case may be, then such Lender generally 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. This repurchase obligation will
constitute the sole remedy available to holders of Securities 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 Seller or
the Master Servicer, the Master Servicer may have a repurchase obligation as
described below under "Administration--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 Securityholders. 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
Securities.
Optional Purchase of Defaulted Loans
If specified in the related Prospectus Supplement, the Master Servicer or
another entity identified in such Prospectus Supplement 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.
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DESCRIPTION OF THE SECURITIES
The Notes of a Series will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Notes. The
Certificates will also be issued in Series pursuant to separate agreements (each
a "Pooling and Servicing Agreement" or a "Trust Agreement") among the Seller,
one or more Master Servicers, if applicable, and the Trustee. The provisions of
each such Agreement will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. A form of Pooling
and Servicing Agreement, a form of a Trust Agreement and a form of Indenture are
exhibits to the Registration Statement of which this Prospectus is a part. The
following summaries describe certain provisions which may appear in each such
Agreement. The Prospectus Supplement for a Series of Securities will provide
additional information regarding each such Agreement relating to such Series.
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
applicable Agreement or Agreements for each Series of Securities and the
applicable Prospectus Supplement. The Seller will provide a copy of the
applicable Agreement or Agreements (without exhibits) relating to any Series
without charge upon written request of a Securityholder of such Series addressed
to Structured Asset Mortgage Investments Inc., 245 Park Avenue, New York, New
York 10167; Attention: Mortgage Department.
General
The Securities of each Series will be issued in fully registered form, in
the denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in, or debt secured by the assets of,
the related Trust Fund and will not be entitled to distributions in respect of
the Trust Assets included in any other Trust Fund established by the Seller. The
Securities will not represent obligations of the Seller or any affiliate of the
Seller. The Mortgage Loans generally will not be insured or guaranteed by any
governmental entity or other person unless the Prospectus Supplement provides
that loans are included that have the benefit of FHA insurance ("FHA
Insurance"), VA guarantees ("VA Guarantees"), primary mortgage insurance, pool
insurance or another form of insurance or guarantees. 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 related Prospectus Supplement ("Retained Interest")), (ii) such
assets as from time to time are required to be deposited in the related
Protected Account, Securities 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 Securityholders by
foreclosure or deed in lieu of foreclosure, (iv) U.S. Government Securities; and
(v) any Primary Insurance Policies, FHA Insurance, 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 Trust 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, U.S. Government Securities designed to assure
payment of the Securities or other agreements. If provided in the related
Agreement, a securities administrator may be obligated to perform certain duties
in connection with the administration of the Securities. It is not intended to
list any class of Securities on any securities exchange or to quote the
Securities in the automated quotation system of a regulated securities
association. However, if such listing or such quotation is intended in a Series,
relevant information will be included in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each class
of Securities 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 assets in the related Trust Fund or will evidence the obligations of the
related Trust Fund to make payments from amounts received on the such assets in
the related Trust Fund. A Series of Securities may include one or more classes
that receive certain preferential treatment with respect to one or more other
classes of Securities of such Series. Certain Series or classes of Securities
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 Securities 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
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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. If so provided in the related Prospectus Supplement, the
Securityholder of a class (a "Call Class") of securities of a Series may have
the right to direct the Trustee to redeem a related Callable Class or Classes
(as defined herein). A "Callable Class" is a class of Securities of a Series
that is redeemable, directly or indirectly, at the direction of the holder of
the related Call Class, as provided in the related Prospectus Supplement. A Call
Class and its related Callable Class or Classes will be issued pursuant to a
separate trust agreement. A Callable Class generally will not be called unless
the market value of the assets in the trust fund for such Callable Class exceeds
the outstanding principal balance of such assets. If so provided in the related
Prospectus Supplement, after the issuance of the Callable Class, there may be a
specified "lock-out period" during which such Securities could not be called. It
is anticipated that Call Classes generally will be offered only on a private
basis. It is anticipated that Call Classes generally will be offered only on a
private basis.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities 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 specified in the related Prospectus Supplement) in
the proportions specified in the related Prospectus Supplement. Distributions
will be made to the persons in whose names the Securities are registered at the
close of business on the dates specified in the related 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 Securities (the "Securities Register") or, if
specified in the related Prospectus Supplement, in the case of Securities that
are of a certain minimum denomination, upon written request by the
Securityholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the office or agency of the Trustee or other person specified in the notice
to Securityholders of such final distribution.
Except with respect to REMIC Residual Securities and FASIT Ownership
Securities, the Securities 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 Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge. Certain
representations will be required in connection with the transfer of REMIC
Residual Securities and FASIT Ownership Securities, as provided in the related
Prospectus Supplement.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular Series of Securities 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 Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Securities Account, including any funds transferred from any Reserve Account and
funds received as a result of credit enhancement or from other specified
sources. As between Securities 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 related Prospectus
Supplement. Distributions to any class of Securities will be made pro rata to
all Securityholders of that class or as specified in the related Prospectus
Supplement.
Available Funds. All distributions on the Securities of each Series on each
Distribution Date will be made from the Available Funds in accordance with the
terms described in the related Prospectus Supplement and as specified in the
Agreement. "Available Funds" for each Distribution Date will generally equal the
amounts on deposit in the related Securities Account on a date specified in the
related Prospectus Supplement, net of related fees and expenses payable by the
related Trust Fund and other amounts to be held therein for distribution on
future Distribution Dates.
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Distributions of Interest. Interest generally will accrue on the aggregate
Current Principal Amount (defined herein) (or, in the case of Securities
entitled only to distributions allocable to interest, the aggregate notional
principal balance) of each class of Securities entitled to interest from the
date, at the interest rate (the "Interest Rate") and for the periods specified
in the related Prospectus Supplement. To the extent funds are available
therefor, interest accrued during each such specified period on each class of
Securities entitled to interest (other than a class of Securities that provides
for interest that accrues, but is not currently payable, referred to hereinafter
as "Accrual Securities") will be distributable on the Distribution Dates
specified in the related Prospectus Supplement until the aggregate Current
Principal Amount of the Securities of such class has been distributed in full
or, in the case of Securities entitled only to distributions allocable to
interest, until the aggregate notional principal balance of such Securities is
reduced to zero or for the period of time designated in the related Prospectus
Supplement. The original Current Principal Amount of each Security will equal
the aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional principal balance of such Security or on such other basis as is
specified in the related Prospectus Supplement. The notional principal balance
of a Security 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 Securities, if specified in the
related 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 Securities on that Distribution Date. Distributions of
interest on each class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Current Principal
Amount of such class of Accrual Securities, generally will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Securities 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 Securities will thereafter accrue interest on its outstanding
Current Principal Amount as so adjusted.
Distributions of Principal. The aggregate "Current Principal Amount" of any
class of Securities entitled to distributions of principal generally will be the
aggregate original Current Principal Amount of such class of Securities
specified in the related Prospectus Supplement, reduced by all distributions and
losses reported to the holders of such Securities as allocable to principal,
and, in the case of Accrual Securities, generally will be increased by all
interest accrued but not then distributable on such Accrual Securities. The
related Prospectus Supplement will specify the method by which the amount of
principal to be distributed on the Securities on each Distribution Date will be
calculated and the manner in which such amount will be allocated among the
classes of Securities entitled to distributions of principal.
If so provided in the related Prospectus Supplement, one or more classes of
Senior Securities 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 related Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Securities will have the effect of
accelerating the amortization of such Senior Securities while increasing the
interests evidenced by the Subordinated Securities in the Trust Fund. Increasing
the interests of the Subordinated Securities relative to that of the Senior
Securities is intended to preserve the availability of the subordination
provided by the Subordinated Securities. See "Credit Enhancement-
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities 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 related Prospectus Supplement. If applicable, the
Trustee will be required to make such unscheduled distributions on the day and
in the amount specified in the related 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,
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based on the assumptions specified in the Agreement, that the amount anticipated
to be on deposit in the Securities 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
Securities on such Distribution Date. The amount of any such unscheduled
distribution that is allocable to principal generally will not exceed the amount
that would otherwise have been required to be distributed as principal on the
Securities on the next Distribution Date. All unscheduled distributions
generally will include interest at the applicable Interest Rate (if any) on the
amount of the unscheduled distribution allocable to principal for the period and
to the date specified in the related Prospectus Supplement.
All distributions allocable to principal in any unscheduled distribution
generally will be made in the same priority and manner as distributions of
principal on the Securities would have been made on the next Distribution Date,
and with respect to Securities of the same class, unscheduled distributions of
principal generally 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
The Master Servicer or other person designated in the Prospectus Supplement
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 Securities), 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 Securities,
rather than to guarantee or insure against losses. If advances are made by the
Master Servicer from cash being held for future distribution to Securityholders,
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
Securityholders 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 herein). 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 Securityholders (including the holders of
Senior Securities) 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 Securityholders
Prior to or concurrently with each distribution on a Distribution Date or
at such other time as is specified in the related Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Securityholder of record of the related Series a statement setting forth, to the
extent applicable or material to such Series of Securities, 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;
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<PAGE>
(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
Securityholders on such Distribution Date, and (b) withdrawn from the Reserve
Fund, if any, that is included in the amounts distributed to the Senior
Securityholders;
(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) 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) the percentage of Principal Prepayments on the Mortgage Loans, if
any, which such class will be entitled to receive on the following
Distribution Date;
(viii) unless the Interest Rate is a fixed rate, the Interest Rate
applicable to the distribution on the Distribution Date;
(ix) the number and aggregate principal balances of Mortgage Loans in the
related Mortgage Pool delinquent (a) one month, (b) two months or (c) three
or more months, and the number and aggregate principal balances of Mortgage
Loans in foreclosure;
(x) 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
(xi) 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 Security of the relevant class having a denomination or
interest specified in the related Prospectus Supplement or in the report to
Securityholders. The report to Securityholders for any Series of Securities 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
Securityholder 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 Securityholders to prepare their tax returns.
Book-Entry Registration
If specified in the related Prospectus Supplement, one or more classes of
Securities of any Series may be issued in book-entry form. Persons acquiring
beneficial ownership interests in the book-entry Securities ("Owners") will hold
their Securities through the Depository Trust Company ("DTC") in the United
States, or Cedel Bank, soci[0082]t[0082] anonyme, ("Cedel") or the Euroclear
System ("Euroclear") (in Europe) if they are participants of any of such systems
("Participants"), or indirectly through organizations which are Participants.
The book-entry Securities will be issued in one or more certificates or notes,
as the case may be, that equal the aggregate principal balance of the applicable
class or classes of Securities and will initially be registered in the name of
Cede & Co., the nominee of DTC. Cedel and Euroclear will hold omnibus positions
on behalf of their Participants through customers' securities accounts in
Cedel's and Euroclear's names on the books of their respective depositaries that
in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. will act as depositary
for Cedel and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no person acquiring a
book-entry Security will be entitled to receive a physical certificate or note
representing such Security (a "Definitive Security"). Unless and until
Definitive Securities are issued, it is anticipated that the only
"Securityholder" will be Cede & Co., as nominee of DTC. Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
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<PAGE>
The Owner's ownership of a book-entry Security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such book-entry Security will be recorded on the records of DTC (or
of a DTC Participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Cedel or Euroclear, as appropriate).
Owners will receive all distributions allocable to principal and interest
with respect to the book-entry Securities from the Trustee through DTC and DTC
Participants. While the book-entry Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating, governing and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it acts
with respect to the Securities and is required to receive and transmit
distributions allocable to principal and interest with respect to the
Securities. Participants and Financial Intermediaries with whom Owners have
accounts with respect to Securities are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Owners. Accordingly, although Owners will not possess physical
certificates or notes, the Rules provide a mechanism by which Owners will
receive distributions and will be able to transfer their beneficial ownership
interests in the Securities.
Owners will not receive or be entitled to receive Definitive Securities,
except under the limited circumstances described below. Unless and until
Definitive Securities are issued, Owners who are not Participants may transfer
ownership of Securities only through Participants and Financial Intermediaries
by instructing such Participants and Financial Intermediaries to transfer
beneficial ownership interests in the Securities by book-entry transfer through
DTC for the account of the purchasers of such Securities, which account is
maintained with their respective Participants or Financial Intermediaries. Under
the Rules and in accordance with DTC's normal procedures, transfers of ownership
of Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and Financial Intermediaries will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel or Euroclear cash
account only as of the business day following settlement in DTC.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC is a New York-chartered limited purpose trust company that performs
services for its Participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC Participant in the book-entry Securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry Securities will be subject to the Rules as in
effect from time to time.
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<PAGE>
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for movement of physical securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars. Cedel
provides to its Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets in
several countries. As a professional depository, Cedel is subject to regulation
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Cedel is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for movement of physical securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear provides
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the book-entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the Owners that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Owners that it
represents.
Under a book-entry format, Owners may experience some delay in their
receipt of payments, since such payments will be forwarded by the Trustee to
Cede & Co. Distributions with respect to Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
DTC Participants that in turn can only act on behalf of Financial
Intermediaries, the ability of an Owner to pledge book-entry Securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such book-entry Securities, may be limited due to the
41
<PAGE>
lack of physical certificates or notes for such book-entry Securities. In
addition, issuance of the book-entry Securities in book-entry form may reduce
the liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot obtain
physical certificates or notes.
Monthly and annual reports on the applicable Trust Fund will be provided to
Cede & Co., as nominee of DTC, and may be made available by Cede & Co. to Owners
upon request, in accordance with the Rules, and to the DTC Participants to whose
DTC accounts the book-entry Securities of such Owners are credited directly or
are credited indirectly through Financial Intermediares.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
book-entry Securities under the Agreement only at the direction of one or more
DTC Participants to whose DTC accounts the book-entry Securities are credited,
to the extent that such actions are taken on behalf of such Participants whose
holdings include such book-entry Securities. Cedel or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a holder
under the Agreement on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Definitive Securities will be issued to Owners only upon 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
Securities, 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), Securityholders representing not less than 50% of the
aggregate Current Principal Amount of the applicable Securities 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 Securityholders. 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 Securities. Upon
surrender by DTC of the certificates or notes representing the Securities and
instruction for re-registration, the Trustee will issue the Securities in the
form of Definitive Securities, and thereafter the Trustee will recognize the
holders of such Definitive Securities as Securityholders. Thereafter, payments
of principal of and interest on the Certificates will be made by the Trustee
directly to Securityholders in accordance with the procedures set forth herein
and in the Agreement. The final distribution of any Security (whether Definitive
Securities or Securities registered in the name of Cede & Co.), however, will be
made only upon presentation and surrender of such Securities on the final
Distribution Date at such office or agency as is specified in the notice of
final payment to Securityholders.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
None of the Seller, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
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<PAGE>
EXCHANGEABLE SECURITIES
General
Certain Series will provide for the issuance of one or more classes of
Exchangeable Securities, as set forth in the relevant Prospectus Supplement. In
any such Series, the holders of one or more of the specified classes of
Exchangeable Securities will be entitled, upon notice and payment to the Trustee
of an administrative fee, to exchange all or a portion of such classes for
proportionate interests in one or more of the other specified classes of
Exchangeable Securities. The classes of Exchangeable Securities that are
exchangeable for one another will be referred to as being "related" to one
another, and related classes of Exchangeable Securities will be referred to as
"Combinations". The Combinations for the Exchangeable Securities in a Series, if
any, will be set forth in the Prospectus Supplement for the Series.
In each Series that includes Exchangeable Securities, all of the classes of
Securities that are shown on the cover page of the related Prospectus Supplement
will be issued, and those classes that are to be the basis for the exchange
arrangements will be deposited in a separate trust fund (an "Exchangeable
Security Trust Fund") established pursuant to a trust agreement between the
Seller and a trustee. The Trustee may serve as such trustee. The Exchangeable
Security Trust Fund initially will issue classes of Exchangeable Securities that
are identical in all respects to the classes of Securities deposited in such
trust fund. At any time after their issuance, including immediately after such
issuance, these classes of Exchangeable Securities may be exchanged, in whole or
in part, for other related classes of Exchangeable Securities that are part of
the same Combination, as specified in the related Prospectus Supplement. When an
exchange is effected, the Exchangeable Security Trust Fund will cancel the
relevant portion or portions of the class or classes of Exchangeable Securities
that are being exchanged and will issue the corresponding portion or portions of
the class or classes of other related Exchangeable Securities into which such
class or classes of securities are exchangeable. Exchangeable Securities
received in an exchange may subsequently be exchanged for other Exchangeable
Securities that are part of the same Combination. This process may be repeated
again and again. Each Exchangeable Security issued by an Exchangeable Security
Trust Fund will represent a beneficial ownership interest in the class or
classes of Securities deposited in such trust fund.
In general, the descriptions in this Prospectus of classes of Securities of
a Series also apply to the ES Classes of that Series, except where the context
requires otherwise. For example, the ES Classes of a Series are entitled to
receive payments of principal and/or interest, are issued in book-entry form or
as Definitive Securities to Securityholders in prescribed denominations, may be
provided with credit enhancements, and are subject to yield and prepayment
considerations, in the same manner and to the same extent as are the classes of
Securities of such Series. Similarly, the discussions under "ERISA
Considerations" and "Legal Investment" apply to Exchangeable Securities as well
as Securities.
Exchanges
The ability of a holder of a class or classes of Exchangeable Securities to
exchange such class or classes for another related class or classes of
Exchangeable Securities within the same Combination will be subject to three
basic constraints, as follows:
oThe aggregate principal amount (rounded to whole dollars) of the
Exchangeable Securities received in the exchange, immediately after the
exchange, must equal that of the Exchangeable Securities surrendered for
exchange immediately before the exchange (for this purpose, the principal
amount of any interest only class will always equal $0).
oThe aggregate amount of annual interest (rounded to whole dollars) (the
"Annual Interest Amount") payable with respect to the Exchangeable
Securities received in the exchange must equal that of the Exchangeable
Securities surrendered for exchange.
oSuch classes must be exchanged in the applicable exchange proportions, if
any, shown in the related Prospectus Supplement, which, as described below,
are based at all times on the original principal amounts (or original
notional principal amounts, if applicable) of such classes.
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<PAGE>
Within any particular Series, one or more types of Combinations may exist.
For example, a class of Exchangeable Securities with an Interest Rate that
varies directly with changes in an index (a "Floating Rate Class") and a class
of Exchangeable Securities with an Interest Rate that varies inversely with
changes in an index (an "Inverse Floating Rate Class") may be exchangeable for a
class of Exchangeable Securities with a fixed Interest Rate. Under another
Combination, a class of Exchangeable Securities that is a principal only class
and a class of Exchangeable Securities that is an interest only class may be
exchangeable for a class of Exchangeable Securities that pays both principal and
interest. Further, a class of Exchangeable Securities that accretes all of its
interest for a period (such accreted interest being added to the principal of
such class) (an "Accrual Class") and a class of Exchangeable Securities that
receives principal payments from such accretions on the Accrual Class may be
exchangeable for a class of Exchangeable Securities that receives payments of
principal continuously from the first Distribution Date on which it receives
principal until it is retired. Under another Combination, a class of
Exchangeable Securities that is designed to receive principal payments in
accordance with a predetermined schedule derived by assuming two constant
prepayment rates for the underlying Mortgage Loans ( a "Planned Amortization
Class") and a class of Exchangeable Securities that receives principal payments
on any Distribution Date only if scheduled payments have been made on the
Planned Amortization Class may be exchangeable for a class of Exchangeable
Securities that receives payments of principal continuously from the first
Distribution Date on which it receives principal until it is retired and that
also receives a coupon. The foregoing examples describe only some of the types
of Combinations that are possible.
Set forth below are additional examples that illustrate in simple
mathematical terms how certain possible Combinations might operate. The first
example shows a Combination in which Exchangeable Securities of a principal only
class and Exchangeable Securities of an interest bearing class are exchangeable
for Exchangeable Securities of a class that has the aggregate characteristics of
the two original classes of Exchangeable Securities:
Maximum
Original Original
Principal Interest Principal Interest
Class Amount Rates Class Amount Rate
----- ------ ----- ----- ------ ----
ES-1 $20,000,000 10% ES-2 $40,000,000 5%
ES-P* 20,000,000 0%
- ------------
* Class ES-P is a principal only class and will receive no interest.
The following example illustrates a Combination of a Floating Rate
Exchangeable Security and an Inverse Floating Rate Exchangeable Security which
are exchangeable for a single class of Exchangeable Securities with a fixed
interest rate:
Maximum
Original Original
Principal Interest Principal Interest
Class Amount Rates Class Amount Rate
----- ------ ----- ----- ------ ----
ES-3 $9,333,330 LIBOR+ 0.75% ES-5 $11,333,330 7%
ES-4 2,000,000 36.16666 -
(LIBOR x
4.666667)
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<PAGE>
In the following Combination, a Exchangeable Security that pays both
principal and interest is exchangeable for two Exchangeable Securities, one of
which pays only interest and the other pays only principal:
<TABLE>
<CAPTION>
Maximum Original
Original Principal or
Principal Interest Notional Principal Interest
Class Amount Rate Class Amount Rates
----- ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
ES-5 $20,000,000 10% ES-P* $ 20,000,000 0%
ES-X** 20,000,000 10%
(notional)***
</TABLE>
- ------------
* Class ES-P is a principal only class and will receive no interest.
** Class ES-X is an interest only class and will receive no principal.
*** Notional principal amount of ES-X Class being exchanged equals principal
amount of ES-P Class being exchanged.
In some Series, a Combination may include a number of classes of
Exchangeable Securities that are exchangeable for one another and that will
enable a holder of one of the classes of Exchangeable Securities to exchange it
for another class of Exchangeable Securities with a higher or lower coupon. As
discussed below, any such exchange also will require the issuance of a third
class of Exchangeable Securities that will pay only principal or interest,
respectively. The following table illustrates such a Combination:
<TABLE>
<CAPTION>
Original Maximum Original
Principal Interest Principal or Notional Interest
Class Amount Rate Class Principal Amount Rates
----- ------ ---- ----- ---------------- -----
<S> <C> <C> <C> <C> <C>
ES-6 $20,000,000 7.00% ES-X* $20,000,000 7.00%
(notional)
ES-7 20,000,000 6.00
ES-8 20,000,000 6.25
ES-9 20,000,000 6.50
ES-10 20,000,000 6.75
ES-11 19,310,344 7.25
ES-12 18,666,666 7.50
ES-13 18,064,516 7.75
ES-14 17,500,000 8.00
ES-P** 20,000,000 0.00
</TABLE>
- ------------
* Class ES-X is an interest only class and will receive no principal.
** Class ES-P is a principal only class and will receive no interest.
The foregoing table shows the maximum amount of each other ES Class that
can be created from the related Class ES-6 Exchangeable Security. Such amounts
could not exist concurrently, as any combination is limited to the amount of
principal and interest distributable on the related Exchangeable Security to be
exchanged. One method of calculating the maximum amount that can be created in a
specific combination is to determine the Annual Interest Amount applicable to
the Exchangeable Security to be exchanged, and divide such interest amount by
the coupon of the desired Exchangeable Security. The resulting principal amount
can in no case be greater than the principal amount of Exchangeable Securities
to be exchanged. For example, using the foregoing table, if Class ES-12 is
desired, the maximum original principal amount of the Class ES-12 Exchangeable
Securities that could be created would be $18,666,666, an amount arrived at by
dividing the Annual Interest Amount of the Class ES-6 Securities ($1,400,000) by
the Interest Rate of the Class ES-12 Exchangeable Securities (7.50%). Since all
of the available Annual Interest Amount with respect to the Class ES-6
Exchangeable Securities would be used to create the Class ES-12 Exchangeable
Securities, principal only Class ES-P Exchangeable Securities would be created
to receive the remainder of the Class ES-6 principal in the amount of $1,333,334
(calculated by subtracting the Class ES-12 Exchangeable Securities original
principal amount from the Class ES-6 Exchangeable Securities original principal
amount).
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<PAGE>
Similarly, if Class ES-9 Exchangeable Securities are desired, dividing the
Annual Interest Amount of the Class ES-6 Exchangeable Securities ($1,400,000) by
the Interest Rate of the Class ES-9 Exchangeable Securities (6.50%) would
indicate an original principal amount of $21,538,461. However, since the Class
ES-6 Exchangeable Securities have a principal balance of $20,000,000, only
$20,000,000 of the Class ES-9 Exchangeable Securities could be created. The
Annual Interest Amount applicable to the Class ES-9 Exchangeable Securities
would be $20,000,000 multiplied by 6.50% or $1,300,000. Since the Annual
Interest Amount of the Class ES-6 Exchangeable Securities is $1,400,000, the
interest only Class ES-X Exchangeable Securities would be created to receive the
remaining $100,000 of interest. The notional amount of such securities would be
calculated by dividing the Annual Interest Amount ($100,000) by the Interest
Rate applicable to Class ES-X Exchangeable Securities (7.00%) to determine the
notional amount ($1,428,571).
Under the terms of this Combination, the Class ES-9 Exchangeable Securities
described in the preceding paragraph might also be exchangeable for the Class
ES-14 Exchangeable Securities. If the Annual Interest Amount of the Class ES-9
Exchangeable Securities ($1,300,000) is divided by the Interest Rate on the
Class ES-14 Exchangeable Securities (8.00%), the maximum original principal
amount of the Class ES-14 Exchangeable Securities that can be created is
$16,250,000. Since all of the available Annual Interest Amount with respect to
the Class ES-9 Exchangeable Securities would be used to create the Class ES-14
Exchangeable Securities, principal only Class ES-P Exchangeable Securities would
be created to receive the remainder of the Class ES-9 principal in the amount of
$3,750,000 (calculated by subtracting the Class ES-14 Exchangeable Securities
original principal amount from the Class ES-9 Exchangeable Securities original
principal amount).
The foregoing examples set forth various combinations of Exchangeable
Securities which differ in interest characteristics (i.e., interest only
classes, principal only classes and classes which have principal amounts and
bear interest). In certain Series, a Securityholder may also be able to exchange
its Exchangeable Securities for other Exchangeable Securities that have
different principal payment characteristics. For example, an exchange of two or
more classes of Exchangeable Securities for a single class of Exchangeable
Securities may result in an Exchangeable Security with the aggregate principal
payment characteristics of the multiple classes of Exchangeable Securities for
which it was exchanged. In addition, in certain Series, Exchangeable Securities
may be exchangeable for other Exchangeable Securities with different credit
characteristics. For example, a class that is senior in priority of payment may
be combined with a subordinated class, to create a new class with the aggregate
credit characteristics of the two classes that were combined.
At any given time, a Securityholder's ability to exchange Exchangeable
Securities for other Exchangeable Securities will be limited by a number of
factors. A Securityholder must, at the time of the proposed exchange, own the
class or classes which are permitted to be exchanged in the proportions
necessary in order to effect the desired exchange. A Securityholder that does
not own such class or classes or the necessary amounts of such class or classes
may not be able to obtain the desired class or classes of Exchangeable
Securities. The Securityholder of a needed class may refuse or be unable to sell
at a reasonable price or at any price, or certain classes may have been
purchased and placed into other financial structures. ERISA or other transfer
restrictions may apply to certain of the Exchangeable Securities in a
combination, but not to others. In addition, principal payments and prepayments
will, over time, diminish the amounts available for exchange.
Procedures and Exchange Proportions
A Securityholder proposing to effectuate an exchange must notify the
Trustee or follow other procedures as described in the related Prospectus
Supplement. Such notice must be given in writing or by telefax not later than
five business days before the proposed exchange date (which date, subject to the
Trustee's approval, can be any business day other than the first or last
business day of the month) or as otherwise specified in the related Prospectus
Supplement. The notice must include the outstanding principal (or notional
principal) amount of both the securities to be exchanged and the securities to
be received, and the proposed exchange date. Promptly after the Securityholder
has given the required notice, the Trustee will provide instructions for
delivering the securities and the payment of the administrative fee to the
Trustee by wire transfer. A Securityholder's notice becomes irrevocable on the
second business day before the proposed exchange date or as otherwise specified
in the related Prospectus Supplement.
An administrative fee will be payable to the Trustee in connection with
each exchange as specified in the related Prospectus Supplement. Any exchanges
will be subject to the rules, regulations and procedures applicable to DTC's
book-entry securities, in the case of ES Classes issued in book-entry form.
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Where exchange proportions are shown in the related Prospectus Supplement
for classes of Exchangeable Securities, the Issuer will follow the convention of
basing such proportions on the original, rather than on the outstanding,
principal or notional principal amounts of such classes. If such classes receive
principal payments pro rata with each other, the exchange proportions also will
apply to their outstanding principal amounts. If such classes do not receive
principal payments pro rata with each other, an investor can calculate current
exchange proportions for such classes, based on their outstanding principal
amounts, by (i) multiplying the exchange proportion shown in the related
Prospectus Supplement for each such class by its current Class Factor (as
defined below) and (ii) dividing each resulting percentage by the sum of such
percentages. The Trustee will include the Class Factor for each class of
outstanding Exchangeable Securities having a principal amount in the statements
it furnishes to Securityholders in connection with each Distribution Date. The
current Class Factor also will be available to Securityholders upon request from
the Trustee or the Seller as specified in the related Prospectus Supplement. The
"Class Factor" for any month will be a truncated seven-digit decimal which, when
multiplied by the original principal amount of that class, will equal its
remaining principal amount, after giving effect to any payment of (or addition
to) principal to be made on the Distribution Date in the following month. A
Class Factor for each interest only class having a notional principal amount
will be included in the statements the Trustee furnishes to Securityholders in
connection with each Distribution Date and also will be available to
Securityholders upon request from the Trustee or the Seller as specified in the
related Prospectus Supplement. Such a Class Factor will reflect the remaining
notional principal amount of the interest only class in an analogous manner.
The first payment on an Exchangeable Security received in an exchange
transaction will be made on the Distribution Date in the month following the
month of the exchange or as specified in the related Prospectus Supplement. Such
payment will be made to the Securityholder of record as of the applicable record
date.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of a
Series of Securities or with respect to the assets in the related Trust Fund.
Credit enhancement may be in the form of (i) the subordination of one or more
classes of the Securities 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. In general, any credit
enhancement will not provide protection against all risks of loss and generally
will not guarantee repayment of the entire principal balance of the Securities
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 Securities will bear their allocable share of deficiencies.
If a form of credit enhancement applies to several classes of Securities, 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. Coverage under any
credit enhancement generally 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 Securities.
Subordination
If so specified in the related 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 Securities of a Series will instead be payable to
holders of one or more classes of Senior Securities under the circumstances and
to the extent specified in the related Prospectus Supplement. If specified in
the related 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 Securities and thereafter by the various
classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the related Prospectus Supplement. The aggregate
distributions in respect of delinquent
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payments on the Mortgage Loans over the lives of the Securities or at any time,
the aggregate losses in respect of defaulted Mortgage Loans which must be borne
by the Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Securityholders that
will be distributable to Senior Securityholders on any Distribution Date may be
limited as specified in the related 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
Securities or, if applicable, were to exceed the specified maximum amount,
holders of Senior Securities would experience losses on such Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee. If so
specified in the related 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 Securities 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 related Prospectus
Supplement. If so specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Account may be released to the holders of the class of
Securities specified in the related Prospectus Supplement at the times and under
the circumstances specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the same class of
Securities may be Senior Securities with respect to certain types of payments or
certain types of losses or delinquencies and Subordinated Securities with
respect to other types of payment or types of losses or delinquencies. If
specified in the related Prospectus Supplement, various classes of Senior
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, 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 related 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 related 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 Securities. 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. A Pool
Insurance Policy generally will not cover losses due to a failure to pay or
denial of a claim under a Primary Insurance Policy.
In general, 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
Securityholders, 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
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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
Securityholders 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 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.
The original amount of coverage under each Pool Insurance Policy generally
will be reduced over the life of the related Securities 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
Securityholders.
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 Securities 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 "Administration-Hazard
Insurance." Special Hazard Insurance Policies 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,
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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 Securityholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy.
Collection of insurance proceeds under a Pool Insurance Policy is generally
not possible if the underlying property has been damaged and not restored. A
Special Hazard Insurance Policy permits full recovery under a Pool Insurance
Policy relating to the Mortgage Loans backing the Series of Securities by
providing insurance to restore damaged property. 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 related 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
Securities 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 Securities
may be reduced so long as any such reduction will not result in a downgrading of
the rating of such Securities 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 Securities 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 "Legal Aspects of the Mortgage Loans--Anti-
Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the related 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
Securities 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 Securities may be reduced so long as any such
reduction will not result in a downgrading of the rating of such Securities 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
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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. Mortgage 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 Mortgage 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 Mortgage Loans insured by the FHA are collected
by lenders approved by HUD or by the Master Servicer or any Sub-Servicers and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Mortgage Loan to HUD. With
respect to a defaulted FHA-insured Mortgage Loan, the Master Servicer or any
Sub-Servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined, either by the Master Servicer or any Sub-Servicer or HUD, that
default was caused by circumstances beyond the mortgagor's control, the Master
Servicer or any Sub-Servicer is expected to make an effort to avoid foreclosure
by entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. Such plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be made
up on or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or beyond the maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other criteria,
HUD may provide relief by making payments to the Master Servicer or any
Sub-Servicer in partial or full satisfaction of amounts due under the Mortgage
Loan (which payments are to be repaid by the mortgagor to HUD) or by accepting
assignment of the loan from the Master Servicer or any Sub- Servicer. With
certain exceptions, at least three full monthly installments must be due and
unpaid under the Mortgage Loan, and HUD must have rejected any request for
relief from the mortgagor before the Master Servicer or any Sub-Servicer may
initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When 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.
Mortgage 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 Mortgage Loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
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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
April, 1998, 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 $50,750. 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 and other Accounts
If specified in the related Prospectus Supplement, cash, U.S. Treasury or
comparable 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 related Prospectus Supplement will be
deposited by the Master Servicer or Seller on the date specified in the related
Prospectus Supplement with the Trustee or 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 pay, or to enhance the likelihood of
timely payment of, principal of, and interest on, or, if so specified in the
related Prospectus Supplement, to provide additional protection against losses
in respect of, the assets of the related Trust Fund, to pay the expenses of the
Trust Fund or for such other purposes specified in the related Prospectus
Supplement. Whether or not the Master Servicer or Seller has any obligation to
make such a deposit, certain amounts to which the Subordinated Securityholders,
if any, will otherwise be entitled may instead be deposited into a Reserve
Account from time to time and in the amounts as
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specified in the related 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"). Instruments held by the
Trustee and/or deposited in the Reserve Account generally will name the Trustee,
in its capacity as trustee for the holders of the Securities, as beneficiary and
generally will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for distribution to the holders of Securities for the purposes, in the
manner and at the times specified in the related 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, U.S.
Government Securities and other arrangements for providing for or 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 related 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 Securities 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 related 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 Securities. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to Securities 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 related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
separate Trust Fund. If applicable, the related Prospectus Supplement will
identify the Trust Fund 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 Fund.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Securities 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
Securities, the Interest Rate for various Classes of Securities and the purchase
price paid for the Securities.
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. Single Family
Loans, Cooperative Loans and Contracts generally 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.
Conventional Single Family Loans, Cooperative Loans and Contracts generally
will contain due-on-sale provisions permitting the mortgagee or holder of the
Contract to accelerate the maturity of the Mortgage Loan
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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. 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
"Administration--Collection Procedures" and "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. The effect of prepayments in full and
liquidations generally will be to reduce the amount of interest passed through
in the following month to holders of Securities because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment or liquidation. In connection with certain Series, as described in
the related Prospectus Supplement, the Master Servicer or a Lender will be
required to use some or all of its servicing compensation to pay compensating
interest to cover such shortfalls. Interest shortfalls also could result from
the application of the Solders' and Sailors' Civil Relief Act of 1940, as
amended, as described under "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 Securities, 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 a FASIT 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
Securities. See "Administration--Termination; Optional Termination." The yield
to investors in a Callable Class will depend on whether and, if so, when a
redemption of such Securities occurs.
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.,
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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
Securities will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
The effective yield to Securityholders generally 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 Securities 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 Securities 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 Security will yield its
Interest Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Securities. 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 Securities.
The Prospectus Supplement relating to a Series of Securities 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 Securities (including, but not limited to, any Exchangeable Securities in
such Series).
ADMINISTRATION
Set forth below is a summary of the material provisions of each Agreement
which are not described elsewhere in this Prospectus. Where particular
provisions or terms used in the Agreements are referred to, such provisions or
terms are as specified in the Agreements. Concurrently with the assignment of
the Trust Assets to the related Trust Fund, the Trustee will execute and deliver
the Securities.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the Securities
of a Series, the Seller will cause the Mortgage Loans comprising the 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 related
Prospectus Supplement. If Notes are issued in a Series, such assets will be
pledged to the Trustee pursuant to the terms of the Indenture. 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, the Seller generally 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
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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. In
the case of Single Family Loans or Multifamily Loans, the Seller or Master
Servicer generally 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.
In the case of Contracts, the Seller or Master Servicer generally 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 Securityholders. In general, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) will be required to notify the Master Servicer and
the Seller or in certain circumstances the related Lender, or the Master
Servicer will notify the related Lender. 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 (or such other period as is specified in the
related Prospectus Supplement), the Lender or such entity generally 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 "The Mortgage
Loans--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. This purchase obligation generally will
constitute the sole remedy available to the Securityholders 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. 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
on behalf of the Trust Fund. The Trustee (or the custodian) will have possession
of any certificated Private Mortgage-Backed Securities. The Trustee generally
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
In general, each Master Servicer and Sub-Servicer servicing the Mortgage
Loans will be required to establish and maintain for one or more Series of
Securities a separate account or accounts for the collection of payments on the
related Mortgage Loans (the "Protected Account"), which must be either (i)
maintained with a
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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 Securities, (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. The related Master Servicer or Sub-Servicer or its designee or
another person specified in the Prospectus supplement 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 or deliver
for 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 generally will be required to deposit
or cause to be deposited in the Protected Account for each Trust Fund on a daily
basis 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 Securityholders by foreclosure or
deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "The Mortgage Loans-Representations by Lenders;
Repurchases" or "--Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described under
"--Hazard Insurance" below; (vi) any amount required to be deposited by the
Master Servicer or Sub-Servicer in connection with losses realized on
investments for the benefit of the Master Servicer or Sub-Servicer of funds held
in any Accounts; and
(vii) all other amounts required to be deposited in the Protected Account
pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Securities, 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 Securities a trust account or another account acceptable to each
Rating Agency (the "Securities Account"). The Securities 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
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of Securities, there may be a separate Securities Account or a separate
subaccount in a single Securities Account for funds received from each Master
Servicer. The related Master Servicer or its designee or another person
specified in the related Prospectus Supplement may be entitled to receive any
interest or other income earned on funds in the Securities Account or subaccount
of the Securities Account as additional compensation and, if so entitled, will
be obligated to deposit or deliver for deposit in the Securities Account or
subaccount the amount of any loss immediately as realized. The Trustee will be
required to deposit into the Securities Account on the business day received all
funds received from the Master Servicer for deposit into the Securities Account
and any other amounts required to be deposited into the Securities Account
pursuant to the Agreement. In addition to other purposes specified in the
Agreement, the Trustee will be required to make withdrawals from the Securities
Account to make distributions to Securityholders. If the Series includes one
Trust Fund which contains a beneficial ownership interest in another Trust Fund,
funds from the Trust Assets may be withdrawn from the Securities Account
included in the latter Trust Fund and deposited into another Account included in
the former Trust Fund prior to transmittal to Securityholders with a beneficial
ownership interest in the former Trust Fund. If specified in the related
Prospectus Supplement, the Protected Account and the Securities Account may be
combined into a single Securities Account. With respect to a Series backed by
Agency Securities and/or Private Mortgage-Backed Securities there would only be
one or more Securities Accounts.
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 in general 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 Securities is
issued will provide that, if for any reason the Master Servicer for such Series
of Securities 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. Such Sub-Servicer will remain
obligated, or will be released from its obligations, under the related Sub-
Servicing Agreement, as provided in the related Prospectus Supplement. 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 the 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 impound 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 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 will generally be 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."
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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. The Master
Servicer generally 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.
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 generally 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, the Master Servicer
generally 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 "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.
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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 "Legal Aspects of the Mortgage
Loans." This approval is usually based on the purchaser's income and net worth
and numerous other factors. 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.
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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 Securities 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 Securities 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
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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 Securityholders, 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
Securityholders, 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 Securityholders 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 Securityholders, 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
Securityholders, 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."
Recoveries Under FHA Insurance and VA Guarantees. The Master Servicer, on
behalf of itself, the Trustee and the Securityholders, will present claims under
any FHA Insurance or VA Guarantees with respect to the Mortgage Loans. See
"Credit Enhancement--FHA Insurance; VA Guarantees."
Servicing and Other Compensation and Payment of Expenses
A Master Servicer's primary servicing compensation with respect to a Series
of Securities 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 related Prospectus Supplement of the outstanding principal
balance thereof or from such other source as is specified in the related
Prospectus Supplement. If the Master Servicer's primary
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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
generally will be entitled to retain all assumption fees and late payment
charges, to the extent collected from Mortgagors, and any prepayment penalties
and, to the extent provided in the related Prospectus Supplement, any interest
or other income which may be earned on funds held in any Accounts. Sub-Servicers
generally 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 may 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 Securityholders, 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 Lenders 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, the Audit Program for Mortgages serviced for Freddie Mac or a
program certified by such firm to be comparable, 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, the Audit Program for Mortgages serviced for Freddie Mac
or such comparable program requires it to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of mortgage
loans, agency securities or private mortgage-backed securities by Sub-Servicers,
upon comparable statements for examinations conducted substantially in
compliance with the Uniform Single Audit Program for Mortgage Bankers, the Audit
Program for Mortgages serviced for Freddie Mac or such comparable program
(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 Securityholders 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.
The 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 or as otherwise
specified in the related Prospectus Supplement. 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.
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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 Securityholders 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 Securities, 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 Securityholders 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 Securityholders.
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, Fannie Mae or Freddie Mac 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 Securities of such Series
that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Trust Agreement; Master Servicing
Agreement, "Events of Default" under a Pooling and Servicing Agreement, a Trust
Agreement or a Master Servicing Agreement generally will include (i) any failure
by the Master Servicer to cause to be deposited in the Securities 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 60 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 Securities of any class evidencing not less
than 25% of the aggregate principal amount or interests ("Percentage Interests")
evidenced by such class; and (iii) certain events of insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings 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 related Prospectus Supplement, the Pooling and
Servicing Agreement, the Trust Agreement or Master Servicing Agreement will
permit the Trustee to sell the 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 related Prospectus Supplement.
In general, so long as an Event of Default under an Agreement remains
unremedied, the Trustee may, and at the direction of holders of Securities
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
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Trustee shall, terminate all of the rights and obligations of the Master
Servicer under the Agreement relating to such Trust Fund and in and to the
Mortgage Loans, whereupon the Trustee generally will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related 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.
In general, no Securityholder, solely by virtue of such holder's status as
a Securityholder, 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
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interest 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.
Indenture. "Events of Default" under the Indenture for each Series of Notes
will include: In general, (i) a default for 30 days or more in the payment of
any principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Trust Fund in the Indenture which continues for a
period of 60 days or such other time period as is specified in the Indenture
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made, and such
breach is not cured within 60 days after notice thereof is given in accordance
with the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Seller or
the Trust Fund; or (v) any other Event of Default provided with respect to Notes
of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Securityholders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series are
entitled to payment of principal only, such portion of the principal amount as
may be specified in the related Prospectus Supplement) of all the Notes of such
Series to be due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the Securityholders of a majority in
aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for 30 days or more, unless
(a) the Securityholders of 100% of the then aggregate outstanding amount of the
Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of Securityholders of 66 2/3% of the then aggregate
outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for 30 days or more in the payment of
principal of or interest on the Notes of a Series, the Indenture
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provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Securityholders of Notes may be less than would otherwise be the case. However,
the Trustee may not institute a proceeding for the enforcement of its lien
except in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Securityholders of Notes after the occurrence
of such an Event of Default.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the Securityholder of any such Notes issued at a
discount from par may be entitled to receive no more than an amount equal to the
unpaid principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Securityholders of Notes of such Series, unless such Securityholders have
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
The Trustee
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Seller and its affiliates. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the applicable Agreement will be conferred or
imposed upon the Trustee and each such separate trustee or co-trustee jointly,
or, in any jurisdiction in which the Trustee shall be incompetent or unqualified
to perform certain acts, singly upon such separate trustee or co-trustee who
will exercise and perform such rights, powers, duties and obligations solely at
the direction of the Trustee. The Trustee may also appoint agents to perform any
of the responsibilities of the Trustee, which agents will have any or all of the
rights, powers, duties and obligations of the Trustee conferred on them by such
appointment; provided that the Trustee will continue to be responsible for its
duties and obligations under the Agreement. In the event a Series includes both
Notes and Certificates, a separate Trustee identified in the related Prospectus
Supplement will serve as Trustee for the Certificates and for the Notes.
Duties of the Trustee
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any assets or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the
Securityholders or the Master Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the
Securityholders following an Event
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of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Resignation of Trustee
The Trustee may, upon written notice to the Seller, resign at any time, in
which event the Seller will be obligated to use its best efforts to appoint a
successor Trustee. If no successor Trustee has been appointed and has accepted
the appointment within the period specified in the Agreement after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for appointment of a successor Trustee. The Trustee may
also be removed at any time (i) if the Trustee ceases to be eligible to continue
as such under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by
the Securityholders evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Seller. Any resignation or removal of the Trustee and appointment of a successor
Trustee will not become effective until acceptance of the appointment by the
successor Trustee.
Amendment
In general, each Agreement may be amended by the parties thereto, without
the consent of any of the Securityholders, (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
Securityholder. In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the Securityholders, to
change the manner in which the Securities 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 Securities 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. In general, each Agreement
may also be amended by the parties thereto with consent of holders of Securities
of such Series evidencing not less than 51% 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 Securities; provided, however, that no such amendment may (i) reduce in
any manner the amount of or delay the timing of, payments received on Trust
Assets which are required to be distributed on any Security without the consent
of the holder of such Security, or (ii) reduce the aforesaid percentage of
Securities of any class of holders which are required to consent to any such
amendment without the consent of the holders of all Securities 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
The obligations created by each Agreement for a Series of Securities
generally will terminate upon the payment to the related Securityholders 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 Trust Assets subject thereto or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any Mortgage Assets remaining in the Trust Fund and (ii) the
purchase by the Seller, the Master Servicer or other entity specified in the
related Prospectus Supplement including, if REMIC or FASIT treatment has been
elected, by the holder of the residual interest in the REMIC or FASIT (see
"Federal Income Tax Consequences" below), from the related Trust Fund of all of
the remaining Trust Assets and all property acquired in respect of Mortgage
Assets remaining in the Trust Fund.
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Any such purchase of Trust Assets and property acquired in respect of
Mortgage Assets evidenced by a Series of Securities will be made at the option
of the Seller or other entity identified in the related Prospectus Supplement,
at a price, and in accordance with the procedures, specified in the related
Prospectus Supplement. Such purchase price may not in all cases equal the entire
unpaid principal and accrued unpaid interest on the Securities that are
outstanding at the time of the optional termination due to the fact that any
component of the purchase price based on existing REO property (i.e. real
property acquired following foreclosure and as to which a realized loss has not
yet been taken) will be equal to the fair market value of such property and not
necessarily the previously outstanding principal balance of the related loan.
There may not be sufficient proceeds to pay off the then current balance of and
accrued unpaid interest on Securities of such Series outstanding. The exercise
of such right will effect early retirement of the Securities, but the right of
the Seller or such other entity to so purchase will generally be subject to the
principal balance of the related Trust Assets being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Trust Assets at the Cut-off Date for the Series. The foregoing is
subject to the provision that if a REMIC or FASIT 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 or the FASIT within
the meaning of Section 860F(g)(4) of the Code.
LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of material 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.
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. Deeds of trust are used
almost exclusively in California instead of mortgages. 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. The priority of the lien of the mortgage in a Single Family Loan or
Multifamily Loan will be specified in the related Prospectus Supplement.
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 other 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.
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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 property 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 typically 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. Under the Agreement, the
Seller generally 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
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documents and payment of a fee to such office, depending on state law. The
Master Servicer generally 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 Securityholders. In general,
neither the Seller, the Master Servicer nor the Trustee will amend the
certificates of title to identify the Trustee, on behalf of the Securityholders,
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 Securityholders
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
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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 Securityholders 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, such as California, the trustee must record a notice of
default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of any notice of default and notice of sale. In
addition the trustee must provide notice in some states to any other person
having an interest of record in the real property, including any junior
lienholders. Before such non- judicial sale takes place, typically a notice of
sale must be posted in a public place and, in most states, including California,
published during a specific period of time in one or more newspapers. In
addition, these notice provisions require that a copy of the notice of sale be
posted on the property and sent to parties having an interest of record in the
property. In California, the entire process from recording a notice of default
to recording a non-judicial sale usually takes four to five months.
In some states, including California, the borrower-trustor has the right to
reinstate the loan at any time following default until shortly before the
trustee's sale. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
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
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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.
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.
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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 and existing shareholders and
tenants are entitled to remain in the building pursuant to such laws.
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 certain 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 certain other states, including
California, this right of redemption applies only to sales following judicial
foreclosure, and not to sales pursuant to a non-judicial power of 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, including California, 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.
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Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states the lender, following judgment on such personal
action, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the security. Consequently, the practical
effect of the election requirement, when applicable, is that lenders will
usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
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 Securities 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.
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Due-on-Sale Clauses
Each conventional Mortgage Loan generally will contain a due-on-sale clause
which will generally provide that if the mortgagor or obligor sells, transfers
or conveys the Mortgaged Property, the loan or contract may be accelerated by
the mortgagor or secured party. The Garn-St Germain Depository Institutions Act
of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on- sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default or may result in a
Mortgage bearing an interest rate below the current market rate being assumed by
a new home buyer, which may affect the average life of the Mortgage Loan.
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
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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. In general, any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Securities. 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. In general, the successful assertion of such claim
constitutes a breach of a representation or warranty of the Lender, and the
Securityholders 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 Securityholders 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 related 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, petroleum
substances (including heating oil and 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 Securityholders
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 priority lien for any Cleanup Costs
incurred by such state on the property that is the subject of such Cleanup Costs
(a "Superlien"). In such states, even prior recorded liens are subordinated to
such Superliens. In these states, the security interest of the Trustee in a
property that is subject to such a Superlien could be adversely affected.
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FEDERAL INCOME TAX CONSEQUENCES
General
This section sets forth (i) the federal income tax opinions of Stroock &
Stroock & Lavan LLP, special counsel to the Seller ("Federal Tax Counsel"),
described below regarding the federal income tax status of the entity issuing
the Secuirites and the federal income tax characterization of such Securities,
and (ii) a summary, based on the advice of Federal Tax Counsel, of the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"), but much of the discussion is applicable to other investors as
well. Because tax consequences may vary based on the status or tax attributes
and the individual circumstances or special treatment under the income tax laws
of the owner of a Security, prospective investors are urged to consult their own
tax advisers concerning the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of Securities. For purposes
of this tax discussion (except with respect to information reporting, or where
the context indicates otherwise), any reference to the "holder" means the
beneficial owner of a Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences with respect to a Series of Securities
to holders will vary depending on whether: (i) an election is made to treat the
Trust Fund (or certain assets of the Trust Fund) relating to a particular Series
of Securities as a real estate mortgage investment conduit ("REMIC") under the
Code; (ii) an election is made to treat the Trust Fund (or certain assets of the
Trust Fund) as a financial asset securitization investment trust ("FASIT") under
the Code; (iii) for federal income tax purposes the Trust Fund is classified as
a grantor trust; (iv) for federal income tax purposes the Trust Fund is
classified as a partnership or is disregarded as an entity separate from its
owner; (v) the Securities represent an ownership interest for federal income tax
purposes in some or all of the assets included in the Trust Fund for a Series
and/or (vi) the Securities of a Series are classified as indebtedness for
federal income tax purposes. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC or FASIT election, if any, will be
made with respect to such Series.
REMIC and FASIT Elections
Under the Code, an election may be made with respect to each Trust Fund
related to a Series of Securities to treat such Trust Fund or certain assets of
such Trust Fund as a REMIC or a FASIT. The Prospectus Supplement for each Series
of Securities will indicate whether a REMIC or a FASIT election will be made
with respect to the related Trust Fund. To the extent provided in the Prospectus
Supplement for a Series, holders 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 or under the Yield Supplement
Agreement in the event that interest accrued on the Mortgage Loans at their
Mortgage Rates is insufficient to pay interest on the Securities of such Series
(a "Basis Risk Shortfall").
REMIC Securities
General. The term "REMIC Securities" denotes Securities (or the interests
composing Securities) of a Series with respect to which a REMIC election will be
made. If a REMIC election with respect to a Trust Fund is to be made, the
Prospectus Supplement will designate the Securities of such Series or the
interests composing such Securities as "regular interests" ("REMIC Regular
Securities"), which where the context so requires includes a reference to each
interest composing a Security where such interest has been designated as a
regular interest, in lieu of such Securities, in the REMIC (within the meaning
of Section 860G(a)(l) of the Code) or as the REMIC Residual Certificates in the
REMIC (within the meaning of Section 860G(a)(2) of the Code). With
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respect to each Series of REMIC Securities, 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 Securities,
Federal Tax Counsel will deliver its opinion that, with respect to each Series
of REMIC Securities 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 Securities will be
considered to evidence ownership of "regular interests" or "residual interests"
within the meaning of the REMIC provisions of the Code.
Allocation of Purchase Price. To the extent provided in the Prospectus
Supplement for a Series, holders of REMIC Regular Securities 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 Security. However, a portion of the
purchase price of a REMIC Regular Security 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 Securities or at any time thereafter. Holders of REMIC
Regular Securities are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the applicable Agreement,
holders of applicable REMIC Regular Securities 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 Securities. REMIC Securities will be "real estate assets"
for purposes of Section 856(c)(4)(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 Securities will be qualifying assets. Similarly, income on the REMIC
Securities 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 the Mortgage
Assets, the REMIC's assets will include payments on the Mortgage Assets held
pending distribution to holders of REMIC Securities, amounts in Reserve Accounts
(if any), other credit enhancements (if any), and possibly buydown funds
("Buydown Funds"). The Prospectus Supplement will indicate whether the Mortgage
Assets will be qualifying assets under the foregoing sections of the Code. The
regulations under Sections 860A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgages 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 the Mortgage Assets and held pending
distribution to holders of REMIC Securities ("cash flow investments") will be
treated as qualifying assets. Treasury regulations do not address 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 Securities 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 Securities, 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 Securities, Federal Tax Counsel will deliver its opinion 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
Securities 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.
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Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Securities is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC Regular Securities
Current Income on REMIC Regular Securities--General. Except as otherwise
indicated herein, the REMIC Regular Securities 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 Securities and not as beneficial interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Securities who would otherwise report
income under a cash method of accounting will be required to report income with
respect to REMIC Regular Securities under an accrual method.
Payments of interest on REMIC Regular Securities 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 Security 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 "--Current Income on
REMIC Regular Securities--Original Issue Discount" and "--Variable Rate REMIC
Regular Securities" 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
"--Current Income on REMIC Regular Securities--Original Issue Discount" and
"--Variable Rate REMIC Regular Securities" below for 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 Security 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 Security 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 Security, 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 Security 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 Securities of certain Series may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Holders of REMIC Regular Securities 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 Security be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Securities.
Each Trust Fund will report original issue discount, if any, to the holders
of REMIC Regular Securities based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Securities.
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The OID Regulations provide that, in the case of debt instruments such as
REMIC Regular Securities, (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 Securities
will be the rate used in pricing the initial offering of the securities. The
Prospectus Supplement for each Series of REMIC Regular Securities will specify
the Prepayment Assumption, but no representation is made that the REMIC Regular
Securities will, in fact, prepay at a rate based on the Prepayment Assumption or
at any other rate.
In general, a REMIC Regular Security 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
Securities; Initial Period Considerations," and "--Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Securities (as defined
below) and accrual Securities, the stated redemption price at maturity of a
REMIC Regular Security is its principal amount. The issue price of a REMIC
Regular Security is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Securities is 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 Security 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 Security 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 Security, 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
Security'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 Securities.
The holder of a REMIC Regular Security 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 Security. In the case of an original holder of a REMIC Regular Security,
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 Security, if any, in future periods and (B) the distributions
made on the REMIC Regular Security during the accrual period that are included
in such REMIC Regular Security's stated redemption price at maturity, over (ii)
the adjusted issue price of such REMIC Regular Security 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
Securities 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 Securities. For these purposes,
the original yield to maturity of the REMIC Regular Securities will be
calculated based on their issue price and assuming that the REMIC Regular
Securities will be prepaid in accordance with the Prepayment Assumption. The
adjusted issue price of a REMIC Regular Security at the beginning of any accrual
period will equal the issue price of such REMIC Regular Security, 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 Security in prior accrual periods that were included in such REMIC
Regular Security's stated redemption price at maturity.
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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 Security in future accrual
periods. 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. However, Treasury regulations do not address this issue.
A subsequent holder that purchases a REMIC Regular Security 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 Security, the daily
portions of original issue discount with respect to the REMIC Regular Security,
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 Security, then such daily portions
will be reduced proportionately in determining the income of such holder.
Qualified Stated Interest. Interest payable on a REMIC Regular Security
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 Security. Accordingly, if the interest on a REMIC Regular
Security does not constitute "qualified stated interest," the REMIC Regular
Security 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.
Treasury regulations do not address whether the terms and conditions of the
Mortgage Assets underlying the REMIC Regular Securities or the terms and
conditions of the REMIC Regular Securities 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 Security that purchases such REMIC
Regular Security at a cost greater than its remaining stated redemption price at
maturity will be considered to have purchased such REMIC Regular Security 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 Security. The
Prepayment Assumption is probably taken into account in determining the life of
the REMIC Regular Security for this purpose. Except as provided in regulations,
amortizable premium will be treated as an offset to interest income on the REMIC
Regular Security.
Payment Lag REMIC Regular Securities; Initial Period Considerations.
Certain REMIC Regular Securities 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 Securities 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 Securities. Under the OID Regulations, REMIC
Regular Securities paying interest at a variable rate (a "Variable Rate REMIC
Regular Security") are subject to special rules. A Variable Rate REMIC Regular
Security 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 Security 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,
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(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 Securities 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 Security 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 Security
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 Security'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 Security or the
restriction is not reasonably expected as of the issue date to significantly
affect the yield of the Variable Rate REMIC Regular Security.
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
Security 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 Security 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 Security'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 Security'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 Security 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 Security'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 Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate REMIC Regular Securities 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 Security"), original issue discount is
computed as described above in "--Current Income on REMIC Regular
Securities--Original Issue Discount" based on the following: (i) stated interest
on the Single Variable Rate REMIC Regular Security 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 Security is a fixed rate equal
to: (a) in the case of a Single Variable Rate REMIC Regular Security with a
qualified floating rate or a qualified inverse floating rate, the value,
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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
Security 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 Security; 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 Security other than a Single
Variable Rate REMIC Regular Security(a "Multiple Variable Rate REMIC Regular
Security") 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 Security. The OID Regulations generally
require that such a Multiple Variable Rate REMIC Regular Security 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 Security 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 Security'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 Security is
converted into a fixed rate that reflects the yield that is reasonably expected
for the Multiple Variable Rate REMIC Regular Security. (A Multiple Variable Rate
REMIC Regular Security may not bear more than one objective rate.) In the case
of a Multiple Variable Rate REMIC Regular Security 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 Security 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 Security as of the Multiple Variable Rate
REMIC Regular Security'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 Security is then converted into an "equivalent" fixed rate debt
instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Security 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 above in "--Current Income on REMIC Regular
Securities--Original Issue Discount." A holder of the Multiple Variable Rate
REMIC Regular Security 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 Security during the accrual
period.
If a Variable Rate REMIC Regular Security does not qualify as a "variable
rate debt instrument" under the OID Regulations, then the Variable Rate REMIC
Regular Security would be treated as a contingent payment debt obligation. The
manner in which a Variable Rate REMIC Regular Security would be taxed if such
REMIC Regular Security were treated as a contingent payment debt obligation is
not governed by the OID Regulations relating to contingent payment debt
obligations which do not apply to REMIC regular interests and Treasury
regulations do not otherwise address this point.
Interest-Only REMIC Regular Securities. The Trust Fund intends to report
income from interest-only REMIC Regular Securities to the Internal Revenue
Service and to holders of interest-only REMIC Regular Securities 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 Securities will be treated as having original issue
discount.
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Market Discount. A holder that acquires a REMIC Regular Security 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 holder of a REMIC Regular Security will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Security 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 Security may be treated, at the election of the holder of the
REMIC Regular Security, 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 Interest 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 Security purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Security 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 Security. 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 Securities.
Notwithstanding the above rules, market discount on a REMIC Regular
Security 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 Security
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 Securities--Original
Issue Discount"), taking into account distributions (including prepayments)
prior to the date of acquisition of such REMIC Regular Security by the
subsequent purchaser. If market discount on a REMIC Regular Security is treated
as zero under this rule, the actual amount of such discount must be allocated to
the remaining principal distributions on such REMIC Regular Security 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 Securities
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 Securities.
The deductibility of such expenses may be subject to certain limitations. See
"--Deductibility of Trust Fund Expenses" below.
Sales of REMIC Regular Securities. If a REMIC Regular Security 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 Security. A
holder's adjusted basis in a REMIC Regular Security generally equals the cost of
the REMIC Regular Security to the holder, increased by income reported by the
holder with respect to the REMIC Regular Security and reduced (but not below
zero) by distributions on the REMIC Regular Security 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
Security is held as a capital asset.
Gain from the sale of a REMIC Regular Security 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 Security 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 Security, over (ii) the amount
actually includable in the seller's income. In addition, gain recognized on the
sale of a REMIC Regular Security
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by a seller who purchased the REMIC Regular Security 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 Security was held by
such seller, reduced by any market discount includable in income under the rules
described above under "--Current Income on REMIC Regular Securities--Market
Discount."
REMIC Regular Securities 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 Security 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 Security should be treated
as a payment in full retirement of a debt instrument.
Tax Treatment of Yield Supplement Agreements
Whether a holder of a REMIC Regular Security 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 holder of a REMIC Residual Certificate 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 Security will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Assets 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 Assets or as principal on the Mortgage Assets 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 Security is uncertain. As a result,
the timing of recognition of the related REMIC taxable income is also uncertain.
The related REMIC taxable income may be recognized when the adjusted issue price
of such REMIC Regular Security would exceed the maximum amount of future
payments with respect to such REMIC Regular Security. However, Treasury
regulations do not address this issue.
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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 its share of the
REMIC's taxable income.
Mismatching of Income and Deductions. 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
Securities, on the other. In the case of multiple classes of REMIC Regular
Secur-ities 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 Securities, will increase over time as the shorter term, lower yielding
classes of REMIC Regular Secur-ities are paid, whereas interest income from the
Mortgage Assets may not increase over time as a percentage of the outstanding
principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Assets (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.
Excess Inclusions. 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 Section 1274(d)(1) and (B) of the Code 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 Securities plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Securities 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
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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 Section 511 of the Code, the
excess inclusions will be treated as unrelated business taxable income of such
holder for purposes of Section 511 of the Code. 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.
Prohibited Transactions. A 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 Securities. In addition, a tax is imposed on a
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 Assets or to sell defective Mortgage Assets.
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).
The related Prospectus Supplement will indicate whether any tax described
in the two preceding paragraphs that may be imposed on a Trust Fund initially
would be borne by the REMIC Residual Certificates in the related REMIC rather
than by the REMIC Regular Securities.
Dealers' Ability to Mark to Market REMIC Residual Certificates. Treasury
regulations 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.
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 Section 582(c) of the Code, 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 not addressed in Treasury regulations, under general tax
principles, the holder would be entitled to claim a loss in the amount of the
unrecovered basis.
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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 preamble to the REMIC Regulations indicates that
the Internal Revenue Service is considering the appropriate federal income tax
consequences of any considertaion paid to a transferee on a transfer of an
interest in a REMIC Residual Certificate and has requested comments on this
issue from tax practitioners. 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.
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For taxable years beginning after December 31, 1997, all partners of
certain "electing large partnerships" having 100 or more 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.
In addition, 70 percent of an electing large partnership's miscellaneous
itemized deductions will be disallowed, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
will not be subject to the 2 percent floor applicable to individual partners.
See "--Deductibility of Trust Fund Expenses" below.
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 in REMIC Securities" below.
Deductibility of Trust Fund Expenses
A holder of REMIC Securities that is an individual, estate or trust will be
subject to the limitation with respect to certain itemized deductions described
in Section 67 of the Code, 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 Assets. 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 Securities 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 Securities and the REMIC
Residual Certificates on a daily basis in proportion to the relative amounts of
income accruing to each holder on that day. In the case of a holder of a REMIC
Regular Security 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 Securities to
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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 tax 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 in REMIC Securities
REMIC Regular Securities. Except as discussed below, a holder of a REMIC
Regular Security 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 Security, 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 Security under penalties of perjury, certifying that the
holder of the REMIC Regular Security 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 Section 871(h)(3)(B) of the Code, which could
be interpreted to apply to a holder of a REMIC Regular Security 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 Security. 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. Recently issued Treasury regulations (the
"Final Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
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 in REMIC Securities--REMIC
Regular Securities") 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 the Mortgage Assets 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
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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 Assets 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 on REMIC Securities
Distributions made on the REMIC Securities and proceeds from the sale of
REMIC Securities 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 Securities complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Securities
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.
The Prospectus Supplement will indicate whether the Trustee, its designee
or some other party 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 Trustee 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.
FASIT Securities
If a FASIT election with respect to a Trust Fund is to be made, the
Prospectus Supplement will designate the Securities of such Series or the
interests composing such Securities as "regular interests" ("FASIT Regular
Securities") which, where the context so requires, includes a reference to each
interest composing a Security where such interest has been designated as a
regular interest, in lieu of such Securities, in the FASIT (within the meaning
of Section 860L(b)(1)(A) of the Code) or an "ownership interest" ("FASIT
Ownership Certificate") in the FASIT (within the meaning of Section 860L(b)(2)
of the Code). Each class of FASIT Regular Securities which are "high-yield
interests" within the meaning of Section 860L(b)(1)(B) of the Code ("High-Yield
Interests") will be identified as such in the Prospectus Supplement. The term
"FASIT Securities" denotes Securities (or the interests composing Securities) of
a Series with respect to which a FASIT election will be made.
With respect to each Series of FASIT Securities, the Trustee will agree in
the Agreement to elect to treat the related Trust Fund or certain assets of such
Trust Fund as a FASIT. Qualification as a FASIT requires ongoing compliance with
certain conditions which are generally described below. Upon the issuance of
each Series
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of FASIT Securities, Federal Tax Counsel will deliver its opinion that, with
respect to each Series of FASIT Securities for which a FASIT election is to be
made, under then existing law, and assuming a proper and timely FASIT election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations, if any, the related
Trust Fund or certain assets of such Trust Fund will be a FASIT and the FASIT
Securities will be considered to evidence ownership of "regular interests" or an
"ownership interest" within the meaning of the FASIT provisions of the Code.
Qualification as a FASIT
The following is a general description of the requirements under the
applicable provisions of Sections 860H through 860L of the Code for the Trust
Fund or certain assets of each Trust Fund to qualify as a FASIT. Treasury
regulations have not yet been proposed or issued with respect to FASITs. A FASIT
must fulfill an assets test, which requires that substantially all the assets of
the FASIT, as of the close of the third calendar month beginning after the
Startup Day and at all times thereafter, must consist of cash or cash
equivalents, certain permitted debt instruments (other than debt instruments
issued by the holder of the FASIT Ownership Certificate or a related party) and
hedges (including contracts to acquire hedges), foreclosure property and regular
interests in another FASIT or in a REMIC. By analogy to the REMIC provisions, it
appears that the "substantially all" requirements should be met if at all times
the aggregate adjusted basis of the nonqualified assets is less than one percent
of the aggregate adjusted basis of all the FASIT's assets. The FASIT Ownership
Certificate and "High-Yield Interests" (described below) may be held only by
certain fully taxable, domestic corporations ("eligible corporations" described
below). The Agreement for each Trust Fund will provide that no legal or
beneficial interests in the FASIT Ownership Certificate or in any Class of FASIT
Regular Securities which the Seller determines to be a High-Yield Interest may
be transferred or registered unless certain conditions, designed to prevent
violation of this requirement, are met.
For purposes of the assets test, permitted debt instruments must bear
interest, if any, at a fixed or qualified variable rate. Permitted hedges
include interest rate or foreign currency notional principal contracts, letters
of credit, insurance, guarantees of payment default and similar instruments as
provided in regulations, and which are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on interests issued
by the FASIT. Foreclosure property is real property acquired by the FASIT in
connection with the default or imminent default of a qualified mortgage,
provided the Seller had no knowledge or reason to know as of the date such asset
was acquired by the FASIT that such a default had occurred or would occur.
Foreclosure property may generally not be held beyond the close of the third
taxable year after the taxable year in which the FASIT acquired such property,
with one extension available from the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a FASIT
also must meet the following requirements. All of the interests in a FASIT must
be: (i) one or more classes of FASIT regular interests or (ii) a single FASIT
ownership interest. A FASIT regular interest is an interest that is issued on or
after the Startup Day with fixed terms, is designated as a FASIT regular
interest, and (i) unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), (ii) provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or on a qualified variable rate that would be permitted
under the REMIC Regulations, (iii) has a stated maturity of generally not longer
than 30 years, (iv) has an issue price not greater than 125% of its stated
principal amount, and (v) has a yield to maturity not greater than 5 percentage
points higher that the related applicable federal rate (as defined in Section
1274(d) of the Code). A FASIT regular interest that is described in the
preceding sentence except that it fails to meet one or more of requirements (i),
(ii) (iv) or (v) is a "High-Yield Interest." In order for a FASIT to issue a
High-Yield Interest that fails requirement (ii), such High-Yield Interest must
consist of a specified, nonvarying portion of the interest payments on the
permitted assets (as provided in the REMIC rules). A FASIT ownership interest is
an interest in a FASIT other than a regular interest that is issued on the
Startup Day, is designated a FASIT ownership interest and is held by an
"eligible corporation". An "eligible corporation" is a taxable C corporation
which is not a RIC, REIT, REMIC or cooperative and, therefore, would not include
tax-exempt entities (including pension funds).
If an entity fails to comply with one or more of the ongoing requirements
of the Code for status as a FASIT during any taxable year, the entity or
applicable portion thereof will not be treated as a FASIT thereafter. In this
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event, any entity that holds Mortgage Assets and is the obligor with respect to
debt obligations with two or more maturities may be treated as a separate
taxable mortgage pool (i.e, as an association taxable as a corporation; see
"--Tax Characterization of the Trust as a Partnership--Taxable Mortgage
Pools."), and the FASIT Regular Securities may be treated as equity interests
therein. The legislative history of the FASIT provisions indicates, however,
that an entity can continue to be a FASIT if loss of its status was inadvertent,
it takes prompt steps to requalify and other requirements that may be provided
in Treasury regulations are met. Loss of FASIT status results in retirement of
all FASIT regular interests and their reissuance. If the resulting interests
would be treated as equity under general tax principles, cancellation of debt
income may result.
Tiered FASIT Structures
For certain Series of Securities, two or more separate elections may be
made to treat designated portions of the related Trust Fund as FASITs ("Tiered
FASITs") for federal income tax purposes. Upon the issuance of any such Series
of Securities, Federal Tax Counsel will deliver its opinion that, assuming
compliance with all provisions of the related Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
Tiered FASITs will each qualify under then existing law as a FASIT and the FASIT
Securities issued by the Tiered FASITs, respectively, will be considered to
evidence ownership of "regular interests" or "ownership interests" in the
related FASIT within the meaning of the FASIT provisions of the Code.
Solely for purposes of determining whether the FASIT Regular Securities
will be "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, and assets described in Section 7701(a)(19)(C) of the Code, and whether
the income on such Securities is interest described in Section 856(c)(3)(B) of
the Code, the Tiered FASITs will be treated as one FASIT.
FASIT Regular Securities
Current Income on FASIT Regular Securities-General. Except as otherwise
indicated herein, the FASIT Regular Securities will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the FASIT on the date of issuance of the
FASIT Regular Securities and not as beneficial interests in the FASIT or the
FASIT's assets. Holders of FASIT Regular Securities who would otherwise report
income under a cash method of accounting will be required to report income with
respect to FASIT Regular Securities under an accrual method.
As FASIT Regular Securities will be treated as debt instruments, they are
subject to the same original issue discount, premium and market discount
provisions that apply to REMIC regular interests and which are described above
in "--REMIC Regular Securities--Current Income on REMIC Regular
Securities--Original Issue Discount," "--Premium" and "--Market Discount,"
except that those FASIT Regular Securities which are High- Yield Interests are
subject to additional provisions set forth below.
High-Yield Interests. The taxable income of the holder of any High-Yield
Interest for any tax year will in no event be less than the sum of that holder's
taxable income determined solely with respect to that interest (including gains
and losses from sales and exchanges of those interests) and the "excess
inclusions," if any, as defined under the REMIC rules relating to REMIC Residual
Certificates for such tax year (see "REMIC Residual Certificates--Excess
Inclusions"). Therefore, holders of High-Yield Interests may not use net
operating losses to offset any FASIT income derived from the High-Yield
Interest. This rule is coordinated with the rule that limits a taxpayer's
ability to offset REMIC excess inclusion income against net operating losses.
Any net operating loss carryover is computed by disregarding any income from the
disallowed loss. For purposes of the alternative minimum tax, the taxable income
of the holder of any High-Yield Interest is determined without regard to the
above rules with respect to net operating losses. However, the alternative
minimum taxable income of the holder of any High-Yield Interest may not be less
than the holder's taxable income from the FASIT. In addition, the alternative
tax net operating loss deduction is computed without regard to any increase in
taxable income to the holder referred to above. For purposes of these rules, all
members of an affiliated group filing a consolidated return will be treated as
one taxpayer.
A transfer of a High-Yield Interest to a "disqualified holder" is not
recognized for income tax purposes. A "disqualified holder" is any holder other
than a FASIT or an "eligible corporation" (described above). The transferor will
continue to be taxed on the income from the High-Yield Interest, and the
disqualified holder will not
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include in its income earnings (other than gain) from the High-Yield Interest,
unless the transferee provides the transferor with an affidavit that the
transferee is not a disqualified holder or the Internal Revenue Service
determines that the High-Yield Interest is no longer held by a disqualified
holder and a corporate tax has been paid on the income from the High-Yield
Interest while it was held by a disqualified holder. Under this rule, no High-
Yield Interests will be treated as issued where the FASIT directly issues these
interests to a disqualified holder other than certain securities dealers.
An excise tax computed at the highest corporate income tax rate is imposed
on a securities dealer (in addition to other taxes) if it ceases to be a dealer
in securities or subsequently holds the High-Yield Interest for investment. A
securities dealer will not be treated as having changed his intent for holding
High-Yield Interests to investment for the first 31 days after it acquires the
interests unless the holding is a part of a plan to avoid the restriction on the
holding of High-Yield Interests by disqualified holders.
Where a pass-through entity, other than a FASIT, issues either debt or
equity interests that are supported (i.e., secured by FASIT regular interests
and those interests bear a yield to maturity greater than that held on the FASIT
regular interests or the applicable federal rate plus 5 percentage points), then
an excise tax is imposed on the pass-through entity at a rate equal to the
highest corporate income tax rate on the income of any holder of that instrument
attributable to the FASIT regular interests, unless the pass-through entity did
not issue the debt or equity with the principal purpose of avoiding the rule
that High-Yield Interests not be owned by disqualified holders.
Sale of FASIT Regular Securities. If a FASIT Regular Security 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 FASIT Regular Security. A
holder's adjusted basis in a FASIT Regular Security generally equals the cost of
the FASIT Regular Security to the holder, increased by income reported by the
holder with respect to the FASIT Regular Security and reduced (but not below
zero) by distributions on the FASIT Regular Security received by the holder and
by amortized premium. Any such gain or loss generally will be capital gain or
loss, provided the FASIT Regular Security is held as a capital asset.
FASIT Regular Securities 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 FASIT Regular Security by a bank or other financial institution to
which such section applies would be ordinary income or loss.
Termination. The FASIT will terminate, if not earlier, shortly following
the FASIT's receipt of the final payment in respect of the underlying qualified
mortgages. The last distribution on a FASIT Regular Security should be treated
as a payment in full retirement of a debt instrument.
Tax Treatment of Yield Supplement Agreements
Whether a holder of a FASIT Regular Security of a Series will have a
separate contractual right to payments under a Yield Supplement Agreement (which
may require an allocation of the purchase price between the FASIT Regular
Securities and the Yield Supplement Agreements) and the tax treatment of such
payments, if any, will be addressed in the related Prospectus Supplement.
FASIT Ownership Certificate
Generally. All assets, liabilities and items of income, gain, deduction
loss and credit of a FASIT are treated as assets, liabilities and items of
income, gain, deduction, loss and credit of the holder of the FASIT Ownership
Certificate (the "FASIT Owner") in determining the FASIT Owner's taxable income.
The FASIT Owner does not take into account any item of income, gain or deduction
allocable to prohibited transactions as discussed below and must treat
tax-exempt interest accrued by the FASIT as ordinary income. The FASIT Owner
must use the constant yield method, applied under an accrual method of
accounting, in determining all interest, original issue discount, market
discount and premium deductions with respect to debt instruments held by the
FASIT. Like the holder of a High-Yield Interest, the FASIT Owner is not allowed
to offset any net taxable income derived from its FASIT Ownership Certificate
(including gains and losses from sales and exchanges of such Security) with
losses, including net operating losses. See above discussion under "--FASIT
Regular Securities--Income on FASIT Regular Securities--High-Yield Interests."
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Net Income from Prohibited Transactions. The FASIT Owner is required to pay
a tax equal to 100 percent of the net income derived from prohibited
transactions. Prohibited transactions include (i) the receipt of income from an
asset that is not a permitted asset; (ii) the disposition of a permitted asset,
other than a permitted disposition as described below; (iii) the receipt of
income derived from any loan originated by the FASIT; and (iv) compensation for
services (other than any fee for a waiver, amendment or consent with respect to
permitted assets, other than foreclosure property). A permitted disposition of a
permitted asset includes a disposition pursuant to the complete liquidation of
any class of regular interests, even if the FASIT itself is not liquidated.
Further, a disposition of a permitted debt instrument is not a prohibited
transaction if the disposition is (i) incident to the foreclosure, default or
imminent default of the instrument; (ii) pursuant to the bankruptcy or
insolvency of the FASIT; (iii) pursuant to a qualified liquidation; (iv)
required to prevent default on a FASIT regular interest where the threatened
default is attributable to a default on one or more debt instruments held by the
FASIT; (v) to facilitate a clean-up call or (vi) to substitute one permitted
debt instrument for another or to reduce overcollateralization of the FASIT by
distributing a debt instrument contributed by the holder of the ownership
interest to such holder (but only if a principal purpose of acquiring the debt
instrument which is disposed of was not the recognition of gain (or the
reduction of loss) as a result of an increase in the market value of the debt
instrument after its acquisition by the FASIT.
Tax on Disposition of FASIT Ownership Certificate. The sale of a FASIT
Ownership Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the holder's adjusted
basis in the FASIT Ownership Certificate.
If the seller of a FASIT Ownership Certificate held the FASIT Ownership
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Section 582(c) of the Code, the sale of a FASIT
Ownership 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. The tax treatment with respect to a FASIT Ownership Certificate
that has unrecovered basis after all funds of the Trust Fund have been
distributed has not been addressed in Treasury regulations, but 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 been issued), if a holder sells a FASIT Ownership Certificate and
acquires the same or other FASIT Ownership Certificates in another FASIT or any
similar interests in a "taxable mortgage pool" (see "--Tax Characterization of
the Trust as a Partnership--Taxable Mortgage Pools" below) 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 sales" 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.
Status of FASIT Securities. The FASIT Regular Securities (but not FASIT
Ownership Certificates) will be "real estate assets" for purposes of Section
856(c)(4)(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 FASIT's assets
are qualifying assets, but not to the extent that the FASIT's assets consist of
Yield Supplement Agreements. However, if at least 95 percent of the FASIT's
assets are qualifying assets, then 100 percent of the FASIT Securities will be
qualifying assets. Similarly, income on the FASIT Securities 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 Assets, the Fasit's assets will
include payments on the Mortgage Assets held pending distribution to holders of
FASIT Securities, amounts in Reserve Accounts (if any), other credit
enhancements (if any), and possibly buydown funds ("Buydown Funds"). The related
Prospectus Supplement will indicate whether the Mortgage Assets will be
qualifying assets under the foregoing sections of the Code. The REMIC
regulations treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate and, therefore, by analogy to the REMIC
Regulations, credit enhancements generally should be qualifying assets.
Similarly, by analogy to the REMIC Regulations, amounts paid on the Mortgage
Assets and held pending distribution to holders of FASIT Securities ("cash flow
investments") should be treated as qualifying assets. Whether amounts in a
Reserve Account or Buydown Funds would also constitute qualifying assets has not
been addressed in Treasury regulations. The Prospectus Supplement for each
Series will indicate (if applicable) that it has Buydown Funds. The FASIT
Securities will not be "residential loans" for purposes of the residential loan
requirement of Section 593(g)(4)(B) of the Code.
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Foreign Investors in FASIT Securities. FASIT Regular Securities are subject
to the same United States income tax and withholding tax rules as those that
apply to a REMIC Regular Security as described in "Foreign Investors in REMIC
Securities" and "Backup Withholding on REMIC Securities" herein.
FASIT Ownership Certificates and FASIT Regular Securities which are
High-Yield Interests may not be sold or transferred to holders who are not U.S.
persons, and such securities will be subject to transfer restrictions as
described in the Agreement for the Series.
Grantor Trusts
The discussion under this heading applies only to a Series of Securities
with respect to which neither a REMIC nor a FASIT election is made
("Non-Electing Securities") and which are issued by a grantor trust.
Tax Status of the Trust Fund. Upon the issuance of each Series of
Non-Electing Securities, Federal Tax Counsel will deliver its opinion 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
(see "--Tax Characterization of the Trust as a Partnership- Taxable Mortgage
Pools"). Accordingly, each holder of a Non-Electing Security will be treated for
federal income tax purposes as the owner of an undivided interest in the
Mortgage Assets included in the Trust Fund. As further described below, each
holder of a Non-Electing Security therefore must report on its federal income
tax return the gross income from the portion of the Mortgage Assets that is
allocable to such Non-Electing Security and may deduct the portion of the
expenses incurred by the Trust Fund that is allocable to such Non-Electing
Security, 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 Assets and received directly its share of the payments on the
Mortgage Assets 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-Electing Security 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-Electing Security 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 Assets. As a
result, individuals, estates, or trusts holding Non-Electing Securities may have
taxable income in excess of the cash received.
Status of the Non-Electing Securities. The Non-Electing Securities
generally will be "real estate assets" for purposes of Section 856(c)(4)(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-Electing Securities 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-Electing Securities 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 holders. The Non-Electing Securities 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-Electing Securities Under Stripped Bond Rules. The federal
income tax treatment of the Non-Electing Securities will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-Electing Securities will be subject to those rules if stripped
interest-only Securities are issued. In addition, whether or not stripped
interest-only Securities 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 Assets. 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 Section 1286 of
the Code.
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If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-Electing Securities will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-Electing Securities will account for any discount on
the Non-Electing Security (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-Electing Security
was treated as zero under the original issue discount de minimis rule when the
Non-Electing Security 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 Assets. If neither of the above exceptions
applies, the original issue discount rules will apply to the Non-Electing
Securities. See "--REMIC Regular Securities--Current Income on REMIC Regular
Securities--Original Issue Discount and --Market Discount" above.
If the original issue discount rules apply, the holder of a Non-Electing
Security (whether a cash or accrual method taxpayer) will be required to report
interest income from the Non-Electing Security in each taxable year equal to the
income that accrues on the Non-Electing Security in that year calculated under a
constant yield method based on the yield of the Non-Electing Security (or,
possibly, the yield of each Mortgage Loan underlying such Non-Electing Security)
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 Assets, would
cause the present value of those payments to equal the price at which the holder
purchased the Non-Electing Security. The Taxpayer Relief Act of 1997 amended the
original issue discount provisions to provide that for "any pool of debt
instruments, the yield on which may be affected by reason of prepayments,"
original issue discount shall be accrued based on a prepayment assumption
determined in a manner prescribed by forthcoming regulations. This might require
the use of the pricing prepayment assumption instead of the prepayment
assumptions used in the underlying transactions. The Prospectus Supplement for
each Series of Non-Electing Securities will describe the prepayment assumption
that will be used for this purpose, but no representation is made that the
Mortgage Assets will prepay at that rate or at any other rate.
In the case of a Non-Electing Security acquired at a price equal to the
principal amount of the Mortgage Assets allocable to the Non-Electing Security,
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-Electing Security acquired at a discount or
premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-Electing
Security 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-Electing
Security and the portion of the adjusted basis of the Non-Electing Security (see
"Sales of Non-Electing Securities" below) that is allocable to the Mortgage
Loan.
Non-Electing Securities of certain Series ("Variable Rate Non-Electing
Securities") may provide for an Interest Rate based on the weighted average of
the interest rates of the Mortgage Assets held by the Trust Fund, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-Electing
Security 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
Securities--Current Income on REMIC Regular Securities--Original Issue
Discount--Variable Rate REMIC Regular Securities" will be applied.
Taxation of Non-Electing Securities If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Non-Electing Security, then the holder
will be required to include in income its share of the interest payments on the
Mortgage Assets in accordance with its tax accounting method. In addition, if
the holder purchased the Non-Electing Security 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 Assets directly. The
treatment of any discount will depend on whether the discount with respect to
the Mortgage Assets 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
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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 Assets. 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 Securities--Current Income on REMIC Regular
Securities--Original Issue Discount" and "--Variable Rate REMIC Regular
Securities."
If discount on the Mortgage Assets 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 Assets 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-Electing Security 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-Electing Security will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Mortgage Assets allocable to the Non-Electing Security and (ii) the weighted
average life (determined using complete years) of the Mortgage Assets remaining
at the time of purchase of the Non-Electing Security. See "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Market Discount."
If a holder purchases a Non-Electing Security 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.
Treasury regulations do not address whether the foregoing adjustments for
discount or premium would be made based on the scheduled payments on the
Mortgage Assets or taking account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a Non-Electing
Security 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-Electing Security and the
portion of the adjusted basis of the Non-Electing Security (see "Sales of
Non-Electing Securities" below) that is allocable to the Mortgage Loan.
Sales of Non-Electing Securities. A holder that sells a Non-Electing
Security will recognize gain or loss equal to the difference between the amount
realized in the sale and its adjusted basis in the Non-Electing Security. In
general, such adjusted basis will equal the holder's cost for the Non-Electing
Security, increased by the amount of any income previously reported with respect
to the Non-Electing Security and decreased by the amount of any losses
previously reported with respect to the Non-Electing Security 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-Electing Security were
held as capital assets, except that, for a Non-Electing Security 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-Electing Securities 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-Electing Security and that was not previously included in income.
Foreign Investors. A holder of a Non-Electing Security 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
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States other than its ownership of a Non-Electing Security will not be subject
to United States income or withholding tax in respect of payments of interest or
original issue discount on a Non-Electing Security to the extent attributable to
Mortgage Assets 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-Electing
Security under penalties of perjury, certifying that such holder is not a United
States person and providing the name and address of such holder). Recently
issued Treasury regulations (the "Final Withholding Regulations"), which are
generally effective with respect to payments made after December 31, 1999,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisers regarding
the application of the Final Withholding Regulations. Interest or original issue
discount on a Non-Electing Security attributable to Mortgage Assets 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.
Tax Characterization of the Trust as a Partnership
If a Trust Fund is intended to be a partnership for federal income tax
purposes the applicable Agreement will provide that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Securities will
be structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation, and that no action will be taken that is inconsistent with the
treatment of the Trust Fund as a partnership (such as election to treat the
Trust Fund as a corporation for federal income tax purposes). If, however, the
Trust Fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the Trust Fund as a corporation for federal income tax
purposes.
Taxable Mortgage Pools. 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 or a FASIT, (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 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
Trust Fund were treated as a taxable mortgage pool, it 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. Federal Tax Counsel will
deliver its opinion for a Trust Fund which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
that the Trust Fund will not be a taxable mortgage pool. This opinion will be
based on the assumption that the terms of the related Agreement and related
documents will be complied with, and on Federal Tax Counsel's conclusion that
either the number of classes of debt obligations issued be the Trust Fund, or
the nature of the assets held by the Trust Fund will exempt the Trust Fund from
treatment as a taxable mortgage pool.
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Tax Consequences to Holders of Debt Securities Issued by a Partnership
General. Certain Non-Electing Securities ("Debt Securities") may be issued
with the intention to treat them, for federal income tax purposes, either as (i)
nonrecourse debt of the Seller secured by the related Mortgage Assets, in which
case the related Trust Fund will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust Fund will constitute a partnership for federal income tax
purposes, and Federal Tax Counsel will deliver its opinion that, for federal
income tax purposes, assuming compliance with all the provisions of the related
Indenture, (i) Debt Securities will be characterized as debt issued by, and not
equity in, the related Trust Fund and (ii) the related Trust Fund will not be
characterized as an association (or publicly traded partnership within the
meaning of Code Section 7704) taxable as a corporation or as a taxable mortgage
pool. Since different criteria are used to determine the non-tax accounting
treatment of the issuance of Debt Securities, however, the Seller expects to
treat such transactions, for financial accounting purposes, as a transfer of an
ownership interest in the related Mortgage Assets to the related Trust Fund and
not as the issuance of debt obligations. In this regard, it should be noted that
the IRS has issued a notice stating that, upon examination, it will scrutinize
instruments treated as debt for federal income tax purposes but as equity for
regulatory, rating agency or financial accounting purposes to determine if their
purported status as debt for federal income tax purposes is appropriate.
Assuming, as Federal Tax Counsel advises, that Debt Securities will be treated
as indebtedness for federal income tax purposes, holders of Debt Securities,
using their method of tax accounting, will follow the federal income tax
treatment hereinafter described.
Original Issue Discount. If interest payments on the Debt Securities may,
in the event of certain shortfalls, be deferred for periods exceeding one year,
it is likely that the Debt Securities will be treated as having been issued with
"original issue discount" within the meaning of Section 1273(a) of the Code. As
a result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Security having original issue discount must
include original issue discount in ordinary income as it accrues in advance of
receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Security will be computed generally as described under "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Original Issue Discount"
and "--Variable Rate Regular Securities." The Seller intends to report any
information required with respect to the Debt Securities based on the OID
Regulations.
Market Discount. A purchaser of a Debt Security may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Security issued with original issue discount, the adjusted
issue price) of the Debt Security exceeds the purchaser's basis in a Debt
Security. The holder of a Debt Security that has market discount generally will
be required to include accrued market discount in ordinary income to the extent
payments includible in the stated redemption price at maturity of such Debt
Security are received. The amount of market discount on a Debt Security will be
computed generally as described under "--REMIC Regular Securities-- Current
Income on REMIC Regular Securities--Market Discount."
Premium. A Debt Security purchased at a cost greater than its currently
outstanding stated redemption price at maturity is considered to be purchased at
a premium. A holder of a Debt Security which holds a Debt Security as a "capital
asset" within the meaning of Section 1221 of the Code may elect under Section
171 of the Code to amortize the premium under the constant interest method. That
election will apply to all premium obligations that the holder of a Debt
Security acquires on or after the first day of the taxable year for which the
election is made, unless the IRS permits the revocation of the election. In
addition, it appears that the same rules that apply to the accrual of market
discount on installment obligations are intended to apply in amortizing premium
on installment obligations such as the Debt Securities. The treatment of premium
incurred upon the purchase of a Debt Security will be determined generally as
described above under "--REMIC Regular Securities-- Premium."
Sale or Exchange of Debt Securities. If a holder of a Debt Security sells
or exchanges a Debt Security, the holder of a Debt Security will recognize gain
or loss equal to the difference, if any, between the amount received and the
holder of a Debt Security's adjusted basis in the Debt Security. The adjusted
basis in the Debt Security
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generally will equal its initial cost, increased by any original issue discount
or market discount previously included in the seller's gross income with respect
to the Debt Security and reduced by the payments previously received on the Debt
Security, other than payments of qualified stated interest, and by any amortized
premium.
In general, except as described above with respect to market discount, and
except for certain financial institutions subject to Code Section 582(c), any
gain or loss on the sale or exchange of a Debt Security recognized by an
investor who holds the Debt Security as a capital asset (within the meaning of
Code Section 1221), will be capital gain or loss and will be long-term or
short-term depending on whether the Debt Security has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, net capital gains are subject
to varying tax rates depending upon the holding period of the Debt Securities.
Backup Withholding. Holders of Debt Securities will be subject to backup
withholding rules identical to those applicable to REMIC Regular Securities.
See "--REMIC Regular Securities--Backup Withholding on REMIC Securities."
Tax Treatment of Foreign Investors. Holders of Debt Securities who are
foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC Regular Securities. See"--REMIC Regular Securities--Foreign
Investors in REMIC Securities."
Tax Consequences to Holders of Notes Issued by a Partnership
The Trust Fund will agree, and the holders of Notes will agree by their
purchase of Notes, to treat the Notes as debt for federal income tax purposes.
If the related Prospectus Supplement indicates that one or more Classes of Notes
are to be treated as debt for federal income tax purposes, Federal Tax Counsel
will advise the Seller that the Notes will be classified as debt for federal
income tax purposes. If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that one or more of the Notes did not represent debt for
federal income tax purposes, the Notes might be treated as equity interests in
the Trust Fund. If so treated, the Trust Fund would likely be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to foreign
investors generally would be subject to U.S. federal income tax and federal
income tax return filing and withholding requirements, income to certain
tax-exempt entities would be "unrelated business taxable income," and individual
holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
With respect to those Securities issued as Notes, no regulations, published
rulings or judicial decisions exist that discuss the characterization for
federal income tax purposes of instruments with terms substantially the same as
the Notes. However, if the related Prospectus Supplement indicates that one or
more Classes of Notes are to be treated as debt for federal income tax purposes,
Federal Tax Counsel will deliver its opinion that, for federal income tax
purposes, assuming compliance with all the provisions of the related Indenture,
(i) such Notes will be characterized as debt issued by, and not equity in, the
related Trust Fund and (ii) the related Trust Fund will not be characterized as
an association (or publicly traded partnership within the meaning of Section
7704 of the Code) taxable as a corporation or as a taxable mortgage pool.
Assuming, as Federal Tax Counsel advises, that Notes are treated as indebtedness
for federal income tax purposes, holders of Notes, using their method of tax
accounting, will follow the same federal income tax treatment as Debt
Securities, as described above under "--Tax Consequences for Holders of Debt
Securities Issued by a Partnership."
For federal income tax purposes, (i) Notes held by a thrift institution
taxed as a domestic building and loan association will not constitute "loans .
. . secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; (ii) interest on Notes held by a real estate
investment trust will not be treated as "interest on obligations secured by
mortgages on real property or on interests in real property "within the meaning
of Code Section 856(c)(3)(B); (iii) Notes held by a real estate investment trust
will not constitute "real estate assets" or "Government securities" within the
meaning of Section 856(c)(4)(A) of the Code; and (v) Notes held by a regulated
investment company will not constitute "Government securities" within the
meaning of Section 851(b)(3)(A)(i) of the Code.
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Tax Consequences to Holders of Certificates Issued by a Partnership
Treatment of the Trust Fund as a Partnership. In the case of a Trust Fund
intended to qualify as a partnership for federal income tax purposes, the Trust
Fund and the Seller will agree, and the holders of Certificates will agree by
their purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust Fund, the partners of the partnership being the
holders of Certificates, and the Notes, if any, being debt of the partnership,
or if there is a single holder of Certificates for federal income tax purposes,
to disregard the Trust Fund as an entity separate from the holder of
Certificates.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Generally, provided
such Certificates are issued at or close to face value, any such
characterization would not result in materially adverse tax consequences to
holders of Certificates as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership. The following discussion also assumes that all payments on the
Certificates are denominated in U.S. dollars, none of the Certificates have
interest rates which would qualify as contingent interest under the OID
regulations, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each holder of Certificates will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Assets
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Assets. The Trust Fund's
deductions will consist primarily of interest and OID accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Assets.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreement). The Agreement will provide, in general, that the holders of
Certificates will be allocated taxable income of the Trust Fund for each month
equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Interest Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable to
discount on the Mortgage Assets that corresponds to any excess of the principal
amount of the Certificates over their initial issue price; (iii) prepayment
premium payable to the holders of Certificates for such month; and (iv) any
other amounts of income payable to the holders of Certificates for such month.
Such allocation will be reduced by any amortization by the Trust Fund of premium
on the Mortgage Assets that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Seller. Based on the economic arrangement of
the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to holders of Certificates. Moreover, even under the foregoing method of
allocation, holders of Certificates may be allocated income equal to the entire
Interest Rate plus the other items described above even though the Trust Fund
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and holders of Certificates may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all holders of Certificates
but holders may be purchasing Certificates at different times and at different
prices, such holders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust
Fund.
If Notes are also issued, all of the taxable income allocated to a holder
of Certificates that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
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An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to holders of Certificates on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on such holders.
Discount and Premium. It is believed that the Mortgage Assets will not have
been issued with OID and, therefore, the Trust Fund should not have original
issue discount income. However, the purchase price paid by the Trust Fund for
the Mortgage Assets may be greater or less than the remaining principal balance
of the Mortgage Assets at the time of purchase. If so, the Mortgage Loan will
have been acquired at a premium or discount, as the case may be. (As indicated
above, the Trust Fund will make this calculation on an aggregate basis, but
might be required to recompute it on a Mortgage Loan by Mortgage Loan basis.)
If the Trust Fund acquires the Mortgage Assets at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Assets or to offset any
such premium against interest income on the Mortgage Assets. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to holders of Certificates.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Trust Fund will be considered
to distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates issued by a partnership in an amount equal
to the difference between the amount realized and the seller's tax basis in the
Certificates sold. The tax basis of a holder in a Certificate will generally
equal the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with respect
to such Certificate. In addition, both the tax basis in the Certificates and the
amount realized on a sale of a Certificate would include the holder's share of
the Notes and other liabilities of the Trust Fund. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Assets would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a holder of Certificates is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Sellers and Transferees. In general, the Trust Fund's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the holders of Certificates
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
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The legislative history relating to these provisions directs Treasury to
establish a convention for such allocations, but no Treasury regulations have
been issued or proposed. Accordingly, the use of such a monthly convention may
not be permitted. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the holders of Certificates. The
Trust Fund's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a holder sells its Certificates at
a profit (loss), the purchasing holder will have a higher (lower) basis in the
Certificates than the selling holder had. The tax basis of the Trust Fund's
assets will not be adjusted to reflect that higher (or lower) basis unless the
Trust Fund were to file an election under Section 754 of the Code. In order to
avoid the administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Trust Fund currently does not intend to make such election. As
a result, holders of Certificates might be allocated a greater or lesser amount
of Trust Fund income than would be appropriate based on their own purchase price
for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each holder's allocable share of items of Trust Fund
income and expense to holders and the IRS on Schedule K-1. The Trust Fund will
provide the Schedule K-1 information to nominees that fail to provide the Trust
Fund with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Seller will be designated as the tax matters partner in the related
Agreement and, as such, will be responsible for representing the holders of
Certificates in any dispute with the IRS. The Code provides for administrative
examination of a partnership as if the partnership were a separate and distinct
taxpayer. Generally, the statute of limitations for partnership items does not
expire before three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the Trust Fund by the appropriate taxing authorities could result in an
adjustment of the returns of the holders of Certificates, and, under certain
circumstances, a holder of Certificates may be precluded from separately
litigating a proposed adjustment to the items of the Trust Fund. An adjustment
could also result in an audit of returns of a holder of Certificates and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Holders of Certificates. There is no clear
authority addressing the issue of whether the Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to foreign investors. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold pursuant to Section 1446 of the
Code on the portion of its
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taxable income that is allocable to holders of Certificates that are foreign
investors, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures.
Each holder of Certificates that is a foreign investor might be required to
file a U.S. individual or corporate income tax return (including, in the case of
a corporation, the branch profits tax) on its share of the Trust Fund's income.
A foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust Fund taking the position that
no taxes were due because the Trust Fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a holder of
Certificates who is a foreign investor generally will be considered guaranteed
payments to the extent such payments are determined without regard to the income
of the Trust Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest probably will not be considered
"portfolio interest." As a result, holders of Certificates will be subject to
United States federal income tax and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
investor would only be entitled to claim a refund for that portion of the taxes,
if any, in excess of the taxes that should be withheld with respect to the
guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the holder of Certificates fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code and, if necessary, adequately demonstrates
such status.
Taxation of Classes of Exchangeable Securities
General
The arrangement pursuant to which the ES Classes of a Series are created,
sold and administered (an "ES Pool") will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code. The interests in the classes of
Securities that have been exchanged for ES Classes will be the assets of the ES
Pool and the ES Classes represent beneficial ownership of these interests in the
classes of Securities.
Tax Status
The ES Classes should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(4)(A) and assets described in Section
7701(a)(19)(C) of the Code. Original issue discount and interest accruing on ES
Classes should be considered to represent "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. ES Classes will be "qualified mortgages" under Section 860G(a) (3) of the
Code for a REMIC.
Tax Accounting for Exchangeable Securities
An ES Class represents beneficial ownership of an interest in one or more
classes of Securities on deposit in an Exchangeable Security Trust Fund, as
specified in the applicable Prospectus Supplement. If it represents an interest
in more than one class of Securities, a purchaser must allocate its basis in the
ES Class among the interests in the classes of Securities in accordance with
their relative fair market values as of the time of acquisition. Similarly, on
the sale of such an ES Class, the holder must allocate the amount received on
the sale among the interests in the classes of Securities in accordance with
their relative fair market values as of the time of sale.
The holder of an ES Class must account separately for each interest in a
class of Securities (there may be only one such interest). Where the interest
represents a pro rata portion of a class of Securities, the holder of the ES
Class should account for such interest as described under "--Current Income on
REMIC Regular Securities" above. Where the interest represents beneficial
ownership of a disproportionate part of the principal and interest payments on
a class of Securities (a "Strip"), the holder is treated as owning, pursuant to
Section 1286 of the Code, "stripped bonds" to the extent of its share of
principal payments and "stripped coupons" to the extent of its share of interest
payments on such class of Securities. The Seller intends to treat each Strip as
a single debt instrument for purposes of information reporting. The Internal
Revenue Service, however, could take a different
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position. For example, the Internal Revenue Service could contend that a Strip
should be treated as a pro rata part of the class of Securities to the extent
that the Strip represents a pro rata portion thereof, and "stripped bonds" or
"stripped coupons" with respect to the remainder. An investor should consult its
tax advisor regarding this matter.
A holder of an ES Class should calculate original issue discount with
respect to each Strip and include it in ordinary income as it accrues, which may
be prior to the receipt of cash attributable to such income, in accordance with
a constant interest method that takes into account the compounding of interest.
See "--Current Income on REMIC Regular Securities--Original Issue Discount"
above. The holder should determine its yield to maturity based on its purchase
price allocated to the Strip and on a schedule of payments projected using a
prepayment assumption, and then make periodic adjustments to take into account
actual prepayment experience. With respect to a particular holder, Treasury
regulations do not address whether the prepayment assumption used to calculate
original issue discount would be determined at the time of purchase of the Strip
or would be the original prepayment assumption with respect to the related class
of Securities. Further, if the related class of Securities is subject to
redemption as described in the applicable Prospectus Supplement, Treasury
regulations do not address the extent to which such prepayment assumption should
take into account the possibility of the retirement of the Strip concurrently
with the redemption of such class of Securities. An investor should consult its
tax advisor regarding these matters. For purposes of information reporting
relating to original issue discount, the original yield to maturity of the
Strip, determined as of the date of issuance of the Series, will be calculated
based on the original prepayment assumption.
If original issue discount accruing with respect to a Strip, computed as
described above, is negative for any period, the holder is entitled to offset
such amount only against future positive original issue discount accruing from
such Strip, and income is reported in all cases in this manner. 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 the holder is entitled with respect to such Strip, assuming no
further prepayments of the Mortgages (or, perhaps, assuming prepayments at a
rate equal to the prepayment assumption). Although the issue is not free from
doubt, all or a portion of such loss may be treated as a capital loss if the
Strip is a capital asset in the hands of the holder.
A holder realizes gain or loss on the sale of a Strip in an amount equal to
the difference between the amount realized and its adjusted basis in such Strip.
The holder's adjusted basis generally is equal to the holder's allocated cost of
the Strip, increased by income previously included, and reduced (but not below
zero) by distributions previously received. Except as described below, any gain
or loss on such sale is capital gain or loss if the holder has held its interest
as a capital asset and is long-term if the interest has been held for the
long-term capital gain holding period (more than one year). Such gain or loss
will be ordinary income or loss (i) for a bank or thrift institution or (ii) to
the extent income recognized by the holder is less than the income that would
have been recognized if the yield on such interest were 110% of the applicable
federal rate under Section 1274(d) of the Code.
If a holder exchanges a single ES Class (an "Exchanged ES Class") for
several ES Classes (each, a "Received ES Class") and then sells one of the
Received ES Classes, the sale will subject the investor to the coupon stripping
rules of Section 1286 of the Code. The holder must allocate its basis in the
Exchanged ES Class between the part of such class underlying the Received ES
Class that was sold and the part of the Exchanged ES Class underlying the
Received ES Classes that was retained, in proportion to their relative fair
market values as of the date of such sale. The holder is treated as purchasing
the interest retained for the amount of basis allocated to such interest. The
holder must calculate original issue discount with respect to the retained
interest as described above.
Although the matter is not free from doubt, a holder that acquires in one
transaction a combination of ES Classes that may be exchanged for a single ES
Class that is identical to a class of Securities that is on deposit in the
related Exchangeable Security Trust Fund should be treated as owning the
relevant class of Securities.
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Exchanges of Exchangeable Securities
An exchange of an interest in one or more ES Classes for an interest in one
or more other related ES Classes that are part of the same Combination, or vice
versa, will not be a taxable exchange. After the exchange, the holder is treated
as continuing to own the interests in the class or classes of Exchangeable
Securities that it owned immediately prior to the exchange.
Tax Treatment of Foreign Investors
A holder of an ES Class is subject to taxation in the same manner as
foreign holders of REMIC Regular Securities. See "--REMIC Regular
Securities--Investors in REMIC Securities."
Backup Withholding
A holder of an ES Class is subject to backup withholding rules to those
applicable to REMIC Regular Securities. See "--REMIC Regular Securities--Backup
Withholding on REMIC Securities."
Reporting and Administrative Matters
Reports will be made to the Internal Revenue Service and to holders of
record of ES Classes that are not excepted from the reporting requirements.
Callable Classes
Any amount received in redemption of a class of Securities that is a
Callable Class will be treated under the original issue discount rules and
market discount rules as a distribution with respect to such class of Securities
in the same manner as REMIC Regular Securities. See "--REMIC Regular
Securities--Original Issue Discount" and "--Market Discount."
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
General. 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
Securities. 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
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"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of Securities 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 Loans and not merely an interest in the
Securities, transactions occurring in the management of Mortgage Loans 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.
ERISA Considerations Relating to Certificates. In DOL Regulation
Section2510.3-101 (the "Plan Asset Regulations"), 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 Securities will qualify for any of the exceptions under the
Regulation. As a result, the Mortgage Loans may be considered the assets of any
Plan which acquires Securities, 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
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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 Ratings
Services, a division of The McGraw-Hill Companies, Inc., Moody's Investors
Services, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. ("Nationally
Recognized 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 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 Nationally Recognized 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
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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.
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to holders of Certificates and having
a principal amount equal to no more than 25% of the total principal amount of
the Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("DOL Pre-Funding Period"), instead of
requiring that all such Loans be either identified or transferred on or before
the Closing Date. The relief is effective for transactions occurring on or after
May 23, 1997, provided that the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding Limit")
must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans") must
meet the same terms and conditions for eligibility as the original Loans used to
create the Trust, which terms and conditions have been approved by the Rating
Agency.
(3) The transfer of such Additional Loans to the Trust during the DOL
Pre-Funding Period must not result in the Certificates receiving a lower credit
rating from the Rating Agency upon termination of the DOL Pre- Funding Period
than the rating that was obtained at the time of the initial issuance of the
Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the Trust Fund at the end of the DOL Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for the Loans
which were transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is independent of
the Seller; or (ii) an independent accountant retained by the Seller must
provide the Seller with a letter (with copies provided to the Rating Agency, the
Underwriter and the Trustee) stating whether or not the characteristics of the
Additional Loans conform to the characteristics described in the Prospectus,
Prospectus Supplement, Private Placement Memorandum ("Offering Documents")
and/or the Agreement. In preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Loans which were
transferred as of the Closing Date.
(6) The DOL Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier, in certain circumstances, if the amount
on deposit in the Pre-Funding Account is reduced below the minimum level
specified in the Agreement or an event of default occurs under the Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested only in
investments which are permitted by the Rating Agency and (i) are direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments").
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the DOL Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust Fund; and (iv) that
the amounts remaining in the Pre-Funding Account at the end of the DOL
Pre-Funding Period will be remitted to holders of Certificates (each a as
repayments of principal.
(9) The Agreement must describe the Acceptable Investments for the
Pre-Funding Account and Capitalized Interest Account and, if not disclosed in
the Offering Documents, the terms and conditions for eligibility of the
Additional Loans.
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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") (collectively, the "Investor Based Exemptions").
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.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
Erisa Considerations Relating to the Notes. Under the Plan Asset
Regulations, the assets of the Trust Fund would be treated as plan assets of a
Plan for the purposes of ERISA and the Code only if the Plan acquires an "Equity
Interest" in the Trust Fund and none of the exceptions contained in the Plan
Asset Regulations is applicable. An equity interest is defined under the Plan
Asset Regulations as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Assuming that a Series of Notes is treated as indebtedness without
substantial equity features for purposes of the Plan Asset Regulations, then
such Series of Notes will be eligible for purchase by Plans. However, without
regard to whether a Series of Notes is treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust Fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the Trust Fund or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes. However, one or more of the Investor Based Exemptions described
above may apply to any potential prohibited transactions arising as a
consequence of the acquisition, holding and transfer of the Notes.
With respect to those classes of Exchangeable Securities which were
eligible for exemptive relief under PTE 90-30 when purchased, PTE 90-30 would
also cover the acquisition or disposition of such Exchangeable Securities when
the Securityholder exercises its exchange rights. Similarly, with respect to
classes of Securities which were eligible for exemptive relief under PTE 90-30
and were issued as a Callable Class, the exercise of the Call would be covered
under PTE 90-30. However, with respect to classes of Exchangeable Securities and
Callable Classes which were not eligible for exemptive relief under PTE 90-30
when purchased, the exchange, purchase or sale of such securities pursuant to
the exercise of exchange rights or call rights may give rise to prohibited
transactions if a Plan and a party-in-interest with respect to such Plan are
involved in the transaction. However, one or more Investor Based Exemptions
discussed above may be applicable to these transactions.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH RESPECT
TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE OF THE
ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
A governmental plan as defined in Section (32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such governmental plan may be subject to
federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for the availability of any exemptive relief under any Similar Law.
FASIT REGULAR CERTIFICATES WHICH ARE HIGH-YIELD INTERESTS OR FASIT
OWNERSHIP CERTIFICATES ARE NOT ELIGIBLE TO BE ACQUIRED BY A PURCHASER WHICH IS
ACQUIRING SUCH FASIT CERTIFICATES DIRECTLY OR INDIRECTLY FOR, ON BEHALF OF OR
WITH THE ASSETS OF, A PLAN OR A GOVERNMENTAL PLAN.
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LEGAL INVESTMENT
SMMEA
The Prospectus Supplement for each Series of Securities will specify which,
if any, of the classes of Securities offered thereby will constitute "mortgage
related securities" for purposes of SMMEA. Any Securities which constitute
mortgage related securities, 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 Securities 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 Securities.
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 Securities
without limitation as to the percentage of their assets represented thereby,
federal credit unions may invest in Securities, and national banks may purchase
Securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. Section 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 Securities 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 Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is not
suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
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A depository institution must ascertain and document prior to purchase and
no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative product
possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the characteristics of a mortgage derivative product are
such that the first two tests cannot be applied (such as interest-only strips),
the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i) the
mortgage derivative product has an expected weighted average life greater than
10.0 years; (ii) the expected weighted average life of the mortgage derivative
product: (a) extends by more than 4.0 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or (b) shortens by
more than 6.0 years, assuming an immediate and sustained parallel shift in the
yield curve of minus 300 basis points; and (iii) the estimated change in the
price of the mortgage derivative product is more than 17%, due to an immediate
and sustained parallel shift in the yield curve of plus or minus 300 basis
points.
When performing the price sensitivity test, the same prepayment assumptions
and same cash flows that were used to estimate average life sensitivity must be
used. The discount rate assumptions should be determined by (i) assuming that
the discount rate for the security equals the yield on a comparable average life
U.S. Treasury security plus a constant spread, (ii) calculating the spread over
Treasury rates from the bid side of the market for the mortgage derivative
product, and (iii) assuming the spread remains constant when the Treasury curve
shifts up or down 300 basis points. Discounting the cash flows by their
respective discount rates estimates a price in the plus or minus 300 basis point
environments. The initial price must be determined by the offer side of the
market and used as the base price from which the 17% price sensitivity test will
be measured.
Generally, a floating-rate debt class will not be subject to the average
life and average life sensitivity tests described above if it bears a rate that,
at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate ("LIBOR"). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
Generally
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Securities, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Securities constitute
legal investments for such investors and comply with any other applicable
requirements.
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METHOD OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in Series. The distribution of the Securities 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 Securities 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 related Prospectus
Supplement may also specify that the underwriters will not be obligated to pay
for any Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Seller. In connection with the sale of the
Securities, underwriters may receive compensation from the Seller or from
purchasers of the Securities in the form of discounts, concessions or
commissions. The related Prospectus Supplement will describe any such
compensation paid by the Seller.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by Bear, Stearns acting as agent or in some cases
as principal with respect to Securities that it has previously purchased or
agreed to purchase. If Bear, Stearns acts as agent in the sale of Securities,
Bear, Stearns will receive a selling commission with respect to each Series of
Securities, depending on market conditions, expressed as a percentage of the
aggregate principal balance of the Securities sold hereunder as of the Cut-off
Date. The exact percentage for each Series of Securities will be disclosed in
the related Prospectus Supplement. To the extent that Bear, Stearns elects to
purchase Securities as principal, Bear, Stearns may realize losses or profits
based upon the difference between its purchase price and the sales price. The
related 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 Securities 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 Securities.
This Prospectus and the related Prospectus Supplement may be used by Bear
Stearns in connection with offers and sales related to market-making
transactions in the Securities. Bear Stearns may act as principal or agent in
such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale or otherwise.
The Seller anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, 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 Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the Seller
by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, or
by Thacher Proffit & Wood, Two World Trade Center, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
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 Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
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RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the related 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-backed securities address the likelihood of receipt by
Securityholders of all distributions on the underlying mortgage loans or other
assets. These ratings address the structural, legal and issuer-related aspects
associated with such Securities, the nature of the underlying mortgage loans or
other assets and the credit quality of the guarantor, if any. Ratings on
mortgage-backed securities 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, Securityholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped Securities 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.
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GLOSSARY
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
Term Page
- ------------------------------------------- -------
Accounts .................................. 36
Accrual Class ............................. 44
Accrual Securities ........................ 38
Agency Securities ......................... 1
Annual Interest Amount .................... 44
APR ....................................... 7
ARM ....................................... 98
Available Funds ........................... 37
Bankruptcy Bond ........................... 13
Basis Risk Shortfall ...................... 78
Bear, Stearns ............................. 115
Buydown Funds ............................. 79, 96
Buydown Loans ............................. 5
Call Class ................................ 11
Call Securities ........................... 1
Callable Class ............................ 11
Callable Securities ....................... 1
Capitalized Interest Account .............. 9
Cedel ..................................... 40
Certificates .............................. 1
Charter Act ............................... 27
Class Factor .............................. 48
Cleanup Costs ............................. 77
CMO ....................................... 7
Code ...................................... 15, 77
Collateral Value .......................... 23
Combinations .............................. 43
Commission ................................ 2
Contracts ................................. 1
Cooperative ............................... 42
Cooperative Loans ......................... 1
Cooperatives .............................. 4
Current Principal Amount .................. 38
Cut-off Date .............................. 11
Debt Securities ........................... 100
Definitive Security ....................... 40
Detailed Description ...................... 22
Distribution Date ......................... 2
DTC ....................................... 40
Equity Interest ........................... 112
ERISA ..................................... 18
ES Class .................................. 11
Euroclear ................................. 40
Euroclear Operator ........................ 42
European Depositaries ..................... 40
Events of Default ......................... 65, 66
Exchangeable Security ..................... 11
Exchangeable Security Trust Fund .......... 44
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Term Page
- ------------------------------------------------------- -------
Exchanged ES Class .................................... 107
Fannie Mae ............................................ 1
Fannie Mae Certificates ............................... 7
FASIT ................................................. 2, 78
FASIT Owner ........................................... 95
FASIT Ownership Security .............................. 92
FASIT Ownership Security .............................. 16
FASIT Regular Securities .............................. 16, 92
FASIT Securities ...................................... 92
FDIC .................................................. 34
Federal Tax Counsel ................................... 77
FHA ................................................... 5
FHA Insurance ......................................... 36
FHA Loans ............................................. 26
FHLMC Act ............................................. 28
Floating Rate Class ................................... 44
Freddie Mac ........................................... 1
Freddie Mac Certificate Group ......................... 28
Freddie Mac Certificates .............................. 7
FTC Rule .............................................. 75
Garn-St Germain Act ................................... 75
GNMA .................................................. 1
GNMA Certificates ..................................... 7
GNMA Issuer ........................................... 26
Guaranty Agreement .................................... 26
High-Yield Interests .................................. 92
Holders of Securities ................................. 17
Housing Act ........................................... 26
HUD ................................................... 30
Indenture ............................................. 36
Insurance Proceeds .................................... 58
Insured Expenses ...................................... 58
Interest Rate ......................................... 11
Inverse Floating Rate Class ........................... 44
Investor Based Exemptions ............................. 112
Lender ................................................ 1
LIBOR ................................................. 114
Liquidation Expenses .................................. 58
Liquidation Proceeds .................................. 58
Loan-to-Value Ratio ................................... 23
Lower Tier REMIC ...................................... 87
Manufactured Homes .................................... 25
Manufacturer's Invoice Price .......................... 23
Master Servicer ....................................... 1
Master Servicing Agreement ............................ 24
Mortgage .............................................. 56
Mortgage Assets ....................................... 1
Mortgage Loans ........................................ 4
Mortgage Pool ......................................... 4
Mortgage Rate ......................................... 5
Mortgaged Properties .................................. 22
Multifamily Loans ..................................... 1
Multiple Variable Rate REMIC Regular Security ......... 83
117
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Term Page
- ------------------------------------------------- -----------
Nationally Recognized Rating Agencies ........... 110
NCUA ............................................ 113
Non-Electing Securities ......................... 17
Non-REMIC Certificates .......................... 17
Notes ........................................... 1
OID Regulations ................................. 80
Owners .......................................... 40
Participants .................................... 40
Percentage Interests ............................ 65
Permitted Investments ........................... 53
Plan ............................................ 108
Plan Asset Regulations .......................... 108
Planned Amortization Class ...................... 45
PMBS Agreement .................................. 30
PMBS Issuer ..................................... 8
PMBS Servicer ................................... 8
PMBS Trustee .................................... 8
Policy Statement ................................ 113
Pool Insurance Policy ........................... 13
Pool Insurer .................................... 49
Pooling and Servicing Agreement ................. 36
Pre-Funded Amount ............................... 9
Pre-Funding Account ............................. 9
Pre-Funding Period .............................. 9
Prepayment Assumption ........................... 80
Presumed Single Qualified Floating Rate ......... 82
Presumed Single Variable Rate ................... 83
Primary Insurance Policy ........................ 22
Primary Insurer ................................. 62
Principal Prepayments ........................... 38
Private Mortgage-Backed Securities .............. 1
Protected Account ............................... 58
PTCE 83-1 ....................................... 109
PTE 90-30 ....................................... 109
Purchase Price .................................. 35
Rating Agency ................................... 14
Received ES Class ............................... 107
Record Date ..................................... 37
Refinance Loan .................................. 23
REIT ............................................ 87
Relevant Depositary ............................. 40
Relief Act ...................................... 76
REMIC ........................................... 2, 78
REMIC Regular Securities ........................ 15, 16, 78
REMIC Regulations ............................... 79, 96
REMIC Residual Securities ....................... 15
REMIC Securities ................................ 78
Reserve Account ................................. 2
Restricted Group ................................ 110
Retained Interest ............................... 36
RICs ............................................ 87
Securities ...................................... 1
Securities Account .............................. 59
118
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Term Page
- ----------------------------------------------------- -----
Securities Register ................................. 37
Securityholders ..................................... 1
Seller .............................................. 1, 3
Senior Securities ................................... 10
Series .............................................. 1
Single Family Loans ................................. 1
Single Variable Rate REMIC Regular Security ......... 83
SMMEA ............................................... 15
Special Hazard Insurance Policy ..................... 13
Special Hazard Insurer .............................. 50
Strip ............................................... 106
Subordinated Securities ............................. 10
Sub-Servicer ........................................ 14
Sub-Servicing Agreement ............................. 59
Superlien ........................................... 77
Terms and Conditions ................................ 42
Tiered FASITs ....................................... 93
Tiered REMICs ....................................... 79
Title V ............................................. 76
Trust Agreement ..................................... 36
Trust Assets ........................................ 1
Trust Fund .......................................... 1
Trustee ............................................. 36
U.S. Government Securities .......................... 1, 4
United States person ................................ 90
VA .................................................. 5
VA Guarantees ....................................... 36
VA Loans ............................................ 26
Variable Rate Non-Electing Securities ............... 98
Variable Rate REMIC Regular Security ................ 82
Yield Supplement Agreement .......................... 78
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INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THE DEPOSITOR OR THE
UNDERWRITER HAVE NOT AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH DIFFERENT
INFORMATION. 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>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
<S> <C>
Summary of Terms................................................................................................S-4
Risk Factors...................................................................................................S-15
Description of the Mortgage Pool...............................................................................S-16
Underwriting Standards.........................................................................................S-17
Description of the Certificates................................................................................S-20
Certain Yield and Prepayment Considerations....................................................................S-36
The Pooling and Servicing Agreement............................................................................S-46
Federal Income Tax Consequences................................................................................S-56
Restrictions on Purchase and Transfer of the Residual
Certificates................................................................................................S-57
ERISA Considerations...........................................................................................S-57
Method of Distribution.........................................................................................S-59
Legal Opinions.................................................................................................S-59
Ratings........................................................................................................S-59
Legal Investment...............................................................................................S-60
Index of Principal Definitions.................................................................................S-61
Schedule A-Certain Characteristics of the Mortgage
Loans........................................................................................................A-1
PROSPECTUS
----------
Prospectus Supplement............................................................................................ 2
Available Information............................................................................................ 2
Incorporation of Certain Documents By Reference.................................................................. 3
Reports to Securityholders....................................................................................... 3
Summary of Terms................................................................................................. 4
Risk Factors.....................................................................................................19
The Trust Fund...................................................................................................21
Use of Proceeds..................................................................................................32
The Depositor....................................................................................................32
The Mortgage Loans...............................................................................................33
Description of the Securities....................................................................................36
Exchangeable Securities..........................................................................................43
Credit Enhancement...............................................................................................48
Yield and Prepayment Considerations..............................................................................54
Administration...................................................................................................56
Legal Aspects of the Mortgage Loans..............................................................................69
Federal Income Tax Consequences..................................................................................77
State Tax Consequences..........................................................................................108
ERISA Considerations............................................................................................108
Legal Investment................................................................................................113
Method of Distribution..........................................................................................115
Legal Matters...................................................................................................115
Financial Information...........................................................................................116
Rating..........................................................................................................116
Glossary........................................................................................................117
</TABLE>
$245,226,989
(APPROXIMATE)
STRUCTURED ASSET MORTGAGE
INVESTMENTS INC.
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1998-11
-------------------------
PROSPECTUS SUPPLEMENT
--------------------------
BEAR, STEARNS & CO. INC.
NOVEMBER 24, 1998
