Filed Pursuant to Rule 424(b)(5)
File Number 333-13617
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 25, 1998)
$139,528,300
(APPROXIMATE)
BEAR STEARNS MORTGAGE SECURITIES INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-5
The Mortgage Pass-Through Certificates, Series 1998-5 (collectively, the
"Certificates"), consist of all Classes identified in the chart below (the
"Offered Certificates") as well as certain additional Classes of Other
Certificates (as hereinafter defined) which are not being offered for sale
hereunder. The original principal amount of one or more Classes of Certificates
may be increased or decreased by up to 10% prior to their issuance, depending
on the Mortgage Loans actually delivered to the Trustee named herein, and may
be adjusted, as necessary to obtain the required ratings on the Offered
Certificates. It is a condition to their issuance that each Class of Offered
Certificates receive the respective ratings (set forth under "Summary of Terms
- -- Rating") of Standard & Poor's Ratings Services ("S&P") and Duff & Phelps
Credit Rating Co. ("DCR").
(COVER CONTINUED ON NEXT PAGE)
---------------
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN BSMSI, THE
TRUSTEE, ANY SERVICER, BSMCC OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE
CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL ENTITY, BSMSI, THE TRUSTEE, ANY SERVICER, BSMCC OR ANY OF THEIR
AFFILIATES, OR ANY OTHER PERSON. DISTRIBUTIONS ON THE CERTIFICATES WILL BE
PAYABLE SOLELY FROM THE ASSETS TRANSFERRED OR PLEDGED TO THE TRUST FOR THE
BENEFIT OF CERTIFICATEHOLDERS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------
<TABLE>
<S> <C> <C>
$ 14,325,000 (1) Class A-1 Certificates
$ 71,625,700 (1) Class A-2 Certificates
$ 42,382,750 (1) Class A-3 Certificates
$ 9,865,250 (1) Class A-4 Certificates
$ 699,700 (1) Class B-1 Certificates
</TABLE>
<TABLE>
<S> <C> <C>
$ 349,900 (1) Class B-2 Certificates
$ 279,900 (1) Class B-3 Certificates
$ 50 (1) Class R-1 Certificates
$ 25 (1) Class R-2 Certificates
$ 25 (1) Class R-3 Certificates
</TABLE>
- ---------
(1) The Certificates will bear interest at a variable rate equal to the
weighted average of the Net Rates (as defined herein) of the Mortgage Loans.
---------------
The Offered Certificates will be purchased by Bear, Stearns & Co. Inc.
(the "Underwriter") from BSMSI and will be offered by the Underwriter from time
to time in negotiated transactions at varying prices to be determined at the
time of sale. Proceeds to BSMSI are expected to be approximately 99.6% of the
aggregate principal balance of the Offered Certificates plus accrued interest
thereon, but before deducting expenses payable by BSMSI in connection with the
Offered Certificates, estimated to be $275,000.
The Offered Certificates are offered by the Underwriter when, as and if
issued, delivered to and accepted by the Underwriter and subject to certain
other conditions. It is expected that delivery of the Class R-1, Class R-2, and
Class R-3 Certificates will be made against payment therefor at the offices of
Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167 and that
delivery of the other Offered Certificates will be made in book entry form
only, through the Same Day Funds Settlement System of The Depository Trust
Company, in each case on or about April 30, 1998.
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is April 27, 1998
<PAGE>
The Offered Certificates and the Other Certificates will represent, in
the aggregate, the entire beneficial ownership interest in a trust (the
"Trust"), consisting of conventional, first lien, fixed rate mortgages secured
by one- to four-family residences and individual condominium and cooperative
units (each a "Mortgaged Property") and having original terms to stated maturity
of 15 years or less. The characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Loans" and in Annex A hereto.
Approximately $36,971,607 of the Mortgage Loans (the "BA Mortgage Loans") were
originated or acquired by FBS Mortgage Corporation ("FBS") and are being
serviced by Bank of America, FSB ("BA"). Approximately $102,976,593 of the
Mortgage Loans (the "Chase Mortgage Loans") were originated or acquired by The
Chase Manhattan Bank as successor to Chemical Bank ("Chemical") and are being
serviced by Chase Manhattan Mortgage Corporation ("Chase"). All the Mortgage
Loans will be acquired by Bear Stearns Mortgage Securities Inc. ("BSMSI") on the
date of issuance of the Certificates from Bear Stearns Mortgage Capital
Corporation ("BSMCC), an affiliate of BSMSI and the Underwriter, which acquired
the Mortgage Loans from The Dime Savings Bank of New York, FSB ("Dime").
Principal and interest on the Certificates are payable as described
herein on the 25th day of each month or, if such day is not a Business Day (as
defined herein), then on the next succeeding Business Day, beginning in May 1998
(each, a "Distribution Date"). Interest will accrue on the Certificates at the
applicable Pass-Through Rates described above and will be distributed in the
amounts as described under "Description of the Certificates -- Distributions on
the Certificates -- Interest" herein. Distributions of principal among the
Certificates will be made as described under "Description of the Certificates --
Distributions on the Certificates -- Principal" herein. Realized Losses (as
defined under "Description of the Certificates -- Realized Losses") on the
Mortgage Loans will be allocated to the Certificates as described under
"Description of the Certificates -- Allocation of Losses; Subordination" herein.
There is currently no secondary market for the Certificates and there
can be no assurance that one will develop. The Underwriter intends to establish
a market in the Offered Certificates but is not obligated to do so. There is no
assurance that any such market, if established, will continue.
The yield to investors in each Class of Certificates will be sensitive
to the rate and timing of principal payments (including prepayments) on the
Mortgage Loans. The Mortgage Loans generally may be prepaid in full or in part
at any time and without penalty. The yield to maturity of a Class of Offered
Certificates purchased at a discount or premium will be more sensitive to the
rate and timing of payments thereon. Holders of the Offered Certificates should
consider, in the case of any such Certificates purchased at a discount, the risk
that a slower than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield and, in the case of any
Offered Certificates purchased at a premium the risk that a faster than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. Moreover, as a result of the method of
calculation of the Pass-Through Rate on the Certificates, the yield to maturity
will be adversely affected by principal prepayments of the Mortgage Loans with
relatively high Net Rates. The yield to investors in the Certificates, and
particularly the Subordinate Certificates (as defined herein), also will be
adversely affected by Realized Losses and Net Interest Shortfalls (each, as
defined herein). No representation is made as to the anticipated rate of
prepayments on the Mortgage Loans, the amount and timing of Realized Losses or
Net Interest Shortfalls, or as to the resulting yield to maturity of any Class
of Certificates. See "Summary -- Yield and Prepayment Considerations" and "Yield
and Prepayment Considerations" herein.
As described herein, multiple real estate mortgage investment conduit
("REMIC" ) elections will be made in connection with the Trust for federal
income tax purposes. As described more fully herein and in the Prospectus, all
of the Certificates other than the Class R-1, Class R-2 and Class R-3
Certificates will be designated as "regular interests" in a REMIC and the Class
R-1, Class R-2 and Class R-3 Certificates will each represent a "residual
interest" in a REMIC. See "Federal Income Tax Considerations" herein and
"Certain Federal Income Tax Consequences" in the Prospectus. The Class R-1,
Class R-2 and Class R-3 Certificates will be subject to certain restrictions on
transfer and may have tax liabilities during the early years of the REMICs that
substantially exceed the principal and interest paid thereon during such period.
See "Restrictions on Purchase and Transfer of the Residual Certificates" herein.
S-2
<PAGE>
Certain limited representations and warranties concerning the BA
Mortgage Loans and Chase Mortgage Loans have been made by FBS and Chemical,
respectively, when the Mortgage Loans were initially sold by either of them in
1993. Additional limited representations and warranties concerning the Mortgage
Loans have been made by Dime and BSMCC in April 1998. The obligations of any
such company to repurchase or substitute for a BA Mortgage Loan or a Chase
Mortgage Loan as to which a breach has occurred and is continuing will
constitute the sole remedies available to Certificateholders with respect to a
breach of any representations or warranties concerning the applicable Mortgage
Loan. BA will act as servicer of the BA Mortgage Loans and Chase will act as
servicer of the Chase Mortgage Loans.
To the extent statements contained herein do not relate to historic or
current information, this Prospectus Supplement may be deemed to contain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "1933 Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "1934 Act"). Actual results could differ materially
from those contained in such statements as a result of the matters set forth
above, under "Summary of Terms -- Yield and Prepayment Considerations" and
"Yield and Prepayment Considerations" and elsewhere in this Prospectus
Supplement.
The Offered Certificates offered by this Prospectus Supplement
constitute a portion of a separate series of Certificates being offered by BSMSI
pursuant to its Prospectus dated February 25, 1998, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used but not defined in this
summary shall have the meaning assigned elsewhere in the Prospectus Supplement.
See "Index of Principal Definitions" herein.
<TABLE>
<S> <C>
Title of Series......................... Mortgage Pass-Through Certificates, Series
1998-5. The Offered Certificates and the
Other Certificates will represent in the
aggregate the entire beneficial ownership
interest in a trust (the "Trust") consisting
primarily of Mortgage Loans having aggregate
principal balances as of the Cut-off Date
of approximately $139,948,200. The
Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the
"Agreement") among Bear Stearns Mortgage
Securities Inc., as depositor ("BSMSI"), and
Norwest Bank Minnesota, National Association, as
trustee (the "Trustee").
Offered Certificates....................
$14,325,000 (1) Class A-1 Certificates
$71,625,700 (1) Class A-2 Certificates
$42,382,750 (1) Class A-3 Certificates
$ 9,865,250 (1) Class A-4 Certificates
$ 699,700 (1) Class B-1 Certificates
$ 349,900 (1) Class B-2 Certificates
$ 279,900 (1) Class B-3 Certificates
$ 50 (1) Class R-1 Certificates
$ 25 (1) Class R-2 Certificates
$ 25 (1) Class R-3 Certificates
(1) The Certificates will bear interest at a
variable rate equal to the weighted average of
the Net Rates of the Mortgage Loans.
The original principal amount of one or more
Classes of Certificates may be increased or
decreased by BSMSI by up to 10%, depending upon
the Mortgage Loans actually acquired by BSMSI
and delivered to the Trustee. In addition, the
original principal amount of any Class of
Certificates may be adjusted, as necessary, to
obtain the required ratings on the Certificates
from the Rating Agencies. Accordingly, any
investor's commitments with respect to the
Certificates may be correspondingly decreased or
increased.
Other Certificates...................... In addition to the Offered Certificates, the
Trust will issue the following Classes of
"Other Certificates," in the indicated
approximate original principal amounts,
which will provide credit support to the
Offered Certificates, but which are not
offered hereby:
S-4
<PAGE>
$140,000 (1) Class B-4 Certificates
$139,900 (1) Class B-5 Certificates
$140,000 (1) Class B-6 Certificates
----------
(1) The Certificates will bear interest at a
variable rate equal to the weighted average
of the Net Rates of the Mortgage Loans.
Any information contained herein with respect to
the Other Certificates is provided only to
permit a better understanding of the Offered
Certificates.
Designations
Certificates..................... Offered Certificates and Other Certificates.
Offered Certificates............. The Class A-1, Class A-2, Class A-3, Class A-4,
Class B-1, Class B-2, Class B-3, Class R-1,
Class R-2, and Class R-3 Certificates.
Other Certificates............... The Class B-4, Class B-5 and Class B-6
Certificates (not offered hereby).
Senior Certificates.............. The Class A-1, Class A-2, Class A-3, Class
A-4, Class R-1, Class R-2 and Class R-3
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.
Regular Certificates............. All Classes of Certificates other than the
Residual Certificates.
Residual Certificates............ The Class R-1, Class R-2 and Class R-3
Certificates.
Physical Certificates............ The Residual Certificates and the Class B-4,
Class B-5 and Class B-6 Certificates.
Book-Entry Certificates.......... All Certificates other than the Physical
Certificates.
Denominations......................... Each Class of Book-Entry Certificates will be
registered as a single Certificate held by a
nominee of The Depository Trust Company, and
beneficial interests will be held by investors
through the book-entry facilities of The
Depository Trust Company, as described
herein, in minimum denominations of (i) in the
case of the Senior Certificates (other than
the Residual Certificates), $1,000 and
increments of $1.00 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
Class of Book-Entry Certificates may be
issued in a different principal amount to
accommodate the remainder of the initial
principal amount of the Certificates of such
Class.
S-5
<PAGE>
Each Class of Residual Certificates
will each be issued in
certificated fully-registered
form in a single certificate of
$50 for Class R-1 and $25 for
Class R-2 and Class R-3.
Depositor............................. BSMSI, a wholly-owned subsidiary of BSMCC.
See "Bear Stearns Mortgage Securities Inc." in
the Prospectus.
Seller................................ BSMCC pursuant to a Mortgage Loan Purchase
Agreement between BSMCC and BSMSI.
BA ................................. Bank of America, FSB.
Chase................................. Chase Manhattan Mortgage Corporation.
Servicer.............................. BA with respect to the BA Mortgage Loans and
Chase with respect to the Chase Mortgage
Loans.
Cut-off Date.......................... April 1, 1998.
Closing Date.......................... On or about April 30, 1998.
The Mortgage Pool..................... The Mortgage Loans in the aggregate (the
"Mortgage Pool") consist of first lien, fixed
rate mortgage loans secured by one- to
four-family residences and individual
condominium and cooperative units having
original terms to stated maturity of 15 years or
less. See Annex A herein for additional
statistical information regarding the Mortgage
Loans.
The Mortgage Loans are conventional mortgage
loans. If the loan-to-value ratio of a Mortgage
Loan was more than 80% at origination, the
Mortgage Loan amount in excess of 75% of the
property value was covered by primary mortgage
insurance.
Approximately 93.94% of the Mortgage Loans by
their Scheduled Principal Balances as of the
Cut-off Date are so-called Jumbo Loans. "Jumbo
Loans" are mortgage loans that have principal
balances at origination that exceed the then
applicable limitations for purchase by the
Federal National Mortgage Association ("FNMA")
and Freddie Mac (formerly the Federal Home Loan
Mortgage Corporation) ("Freddie Mac").
Set forth below is 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.
All weighted average information provided below,
reflects weighting of the Mortgage Loans by
their respective Scheduled Principal Balances
(as defined herein) as of the Cut-off Date. In
each case, such Scheduled Principal Balance has
been calculated on the assumption that the
principal portion of all scheduled payments due
in respect of each Mortgage Loan on or before
the Cut-off Date have been received.
S-6
<PAGE>
Number of Mortgage Loans.................... 544
Aggregate Scheduled Principal Balance....... $ 139,948,200
Minimum Scheduled Principal Balance......... $ 16,994
Maximum Scheduled Principal Balance......... $ 780,273
Average Scheduled Principal Balance......... $ 257,258
Minimum Mortgage Rate....................... 6.375% per annum
Maximum Mortgage Rate....................... 8.250% per annum
Weighted Average Mortgage Rate.............. 7.201% per annum
Weighted Average Net Rate................... 6.514% per annum
Minimum Remaining Term
to Stated Maturity ....................... 66 months
Maximum Remaining Term
to Stated Maturity ....................... 127 months
Weighted Average Remaining
Term to Stated Maturity................... 123 months
Weighted Average Original Loan-to-Value
Ratio..................................... 67.40%
Location of Mortgaged Property
California............................... 14.90%
New York................................. 13.45%
Florida.................................. 8.21%
Illinois................................. 6.54%
New Jersey............................... 5.62%
Michigan................................. 5.09%
Other.................................... 46.19%
Net Rate............................. The "Net Rate" for each Mortgage Loan is the
Mortgage Rate less the applicable Servicing
Fee, Master Servicing Fee and Excess
Servicing Fee (each, as defined in the
Agreement) attributable thereto (in each case
expressed as a per annum rate) (the
"Aggregate Expense Rate"). It is expected
that with respect to each Distribution Date,
(i) for a BA Mortgage Loan, the Servicing
Fee will be 0.275% per annum and the Master
Servicing Fee will be 0.125% per annum, and
(ii) for a Chase Mortgage Loan, the Servicing
Fee will be a weighted average of 0.246% per
annum and the Excess Servicing Fee will be a
weighted average of 0.544% per annum. For any
Distribution Date, the "Due Date" for a Mortgage
Loan will be the date in each month on which
its Monthly Payment (as defined under
"Description of the Certificates -
Distributions of Principal" herein) is due,
which is the first day of the month.
The "Scheduled Principal Balance" of a Mortgage Loan with respect to
a Distribution Date is (i) the unpaid principal balance of such
Mortgage Loan as of the close of business on the related Due
Date (i.e., taking account of the principal payment to be made
on such Due Date and irrespective of any delinquency in its
payment), as specified in the amortization schedule at the time
relating thereto (before any adjustment to such amortization
schedule by reason of any bankruptcy or similar proceeding
occurring after the Cut-off Date (other than a Deficient
Valuation, as defined under "Description of the Certificates -
Realized Losses" herein) or any moratorium or similar waiver or
grace period) less (ii) any Principal Prepayments and the
principal portion of any Net Liquidation Proceeds (as defined
herein) received during or prior to the immediately preceding
Prepayment Period (as defined herein); provided that the
Scheduled Principal Balance of any Liquidated Mortgage Loan (as
defined herein) is zero.
S-7
<PAGE>
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 May 1998 (each, a
"Distribution Date").
Record Date.......................... The "Record Date" for each Distribution Date
will be the close of business on the last
Business Day of the month preceding the month
in which the related Distribution Date occurs.
Due Period........................... With respect to each Distribution Date, the
period commencing on the second day of the
month preceding the month in which the
Distribution Date occurs and ending at the
close of business on the first day of the month
in which the Distribution Date occurs (each, a
"Due Period").
Prepayment Period.................... With respect to each Distribution Date, the
period from the first day through the last day
of the month preceding the month in which the
Distribution Date occurs (each, a "Prepayment
Period").
Distributions on the Certificates.... General. As more fully described herein,
distributions with respect to each Class of
Certificates will be payable primarily from
certain collections and other recoveries on
the Mortgage Loans. On each Distribution Date,
(i) the Senior Certificates will be entitled to
receive all amounts distributable to them for
such Distribution Date before any
distributions are made to the Subordinate
Certificates on such date and (ii) any
Class of 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. In
general, an amount equal to the Available
Funds for each Distribution Date will be
allocated first, to pay interest due the
holders of the Senior Certificates; second, to
pay interest due the holders of the Senior
Certificates which remains unpaid from prior
periods; third, to reduce the Current
Principal Amounts (as defined herein) of the
Senior Certificates with respect to principal
on the Mortgage Loans; and fourth, to pay
interest on and then principal of each Class
of Subordinate Certificates in the order
of their numerical Class designations. The
available funds (the "Available Funds") will
be allocated among the Classes of Certificates
in the manner set forth in "Description of the
Certificates - Distributions on the Certificates
- Allocation of Available Funds" herein.
Interest. Interest will accrue during the
preceding Interest Accrual Period for each Class
at the rate for such Class set forth or
determined as provided on the cover page hereof
(each, a "Pass-Through Rate") on the Current
Principal Amount of such Class immediately
preceding such Distribution Date. With respect to
each
S-8
<PAGE>
Distribution Date, the "Interest Accrual Period"
for each Class of Certificates will be the
calendar month preceding the month in which the
Distribution Date occurs, in each case commencing
in April 1998. Interest will be calculated on the
basis of a 360-day year comprised of twelve
30-day months.
On each Distribution Date, interest will be
distributable on each Class of Certificates from
the Available Funds for such Distribution Date in
an aggregate amount equal to the Accrued
Certificate Interest for such Class on such
Distribution Date, plus any Accrued Certificate
Interest thereon remaining undistributed from
previous Distribution Dates.
The "Accrued Certificate Interest" for any
Certificate for any Distribution Date will
equal the interest accrued during the related
Interest Accrual Period at the applicable
Pass-Through Rate on the Current Principal
Amount of such Certificate immediately prior
to such Distribution Date, less (i) in the
case of a Senior Certificate, such
Certificate's share of any Net Interest
Shortfall and the interest portion of any
Excess Losses (as defined herein) and, after
the Distribution Date on which the Current
Principal Amounts of the Subordinate
Certificates are reduced to zero (the
"Cross-Over Date"), the interest portion of
any Realized Losses and (ii) in the case of a
Subordinate Certificate, such Certificate's
share of any Net Interest Shortfall and the
interest portion of any Realized Losses.
Such Net Interest Shortfall will be allocated
among the Certificates in proportion to the
amount of Accrued Certificate Interest that would
have been allocated thereto in the absence of
such shortfalls. To the extent described herein,
the interest portion of Realized Losses will be
allocated first to the Subordinate Certificates
in reverse order of their numerical designations
commencing with the Class B-6 Certificates and
following the Cross-Over Date, such Realized
Losses will be allocated pro rata to the Classes
of Senior Certificates.
Any Interest Shortfalls resulting from
prepayments on the Mortgage Loans during the
related Prepayment Period will be offset by the
related Servicer to the extent such Interest
Shortfalls do not exceed the Master Servicing Fee
with respect to BA and the Servicing Fee with
respect to Chase in connection with such
Distribution Date (the amount of such fee so
used, a "Compensating Interest Payment"). No
Servicer will be required to make Compensating
Interest Payments with respect to Interest
Shortfalls relating to Mortgage Loans of the
other Servicer. No assurance can be given that
the servicing compensation available to cover
Interest Shortfalls will be sufficient therefor.
See "The Pooling and Servicing Agreement -
Servicing Compensation and Payment of Expenses"
herein.
The "Current Principal Amount" of any
Certificate as of any Distribution Date will
equal such Certificate's initial principal
amount on the Closing Date, as reduced by
(i) all amounts distributed on previous
Distribution Dates on such
S-9
<PAGE>
Certificate on account of principal, (ii) the
principal portion of all Realized Losses
previously allocated to such Certificate taking
account of the applicable Loss Allocation
Limitation (as defined herein) and (iii) in
the case of a Subordinate Certificate, such
Certificate's pro rata share, if any, of the
applicable Subordinate Certificate Writedown
Amount (as defined herein), in each case for
previous Distribution Dates.
Principal. Principal will be distributable monthly
on the Senior Certificates on each Distribution
Date in an aggregate amount equal to the
applicable Senior Optimal Principal Amount (as
defined herein), for such Distribution Date, to
the extent of the Available Funds for such
Distribution Date remaining after distributions
of interest are made on the Senior Certificates.
Subject to such limitation, the Senior Optimal
Principal Amount will be allocated among the
Senior Certificates offered hereby in the manner
described herein.
Principal will be distributed monthly on each
Class of Subordinate Certificates on each
Distribution Date in an aggregate amount equal to
such Class's Allocable Share (as defined herein)
for such Distribution Date to the extent of the
Available Funds remaining after (i) distributions
of interest and principal have been made on each
Class of Senior Certificates entitled thereto and
each Class of Subordinate Certificates, if any,
with a lower numerical Class designation than
such Class, and (ii) distributions of interest
have been made on such Class of Subordinate
Certificates.
Distributions of principal of a Class of
Certificates will be made on a pro rata basis
among all outstanding Certificates of such Class.
See "Description of the Certificates -
Distributions on the Certificates" herein.
Additional Rights of the
Residual Certificates............... In addition to distributions of principal and
interest, the holders of the Residual
Certificates will be entitled to receive (i) the
amount, if any, of Available Funds remaining on
any Distribution Date after distributions of
interest and principal are made on all other
Certificates on such date and (ii) the
proceeds, if any, of the assets of the Trust
remaining after the Current Principal Amount
of each Class of Certificates has been reduced
to zero. It is not anticipated that any
material assets will be remaining for such
distributions at any such time.
Credit Enhancement................... Credit enhancement for the Senior
Certificates generally will be provided by the
Subordinate Certificates. Credit enhancement
for each Class of Subordinate Certificates
will be provided by the Class or Classes of
Subordinate Certificates with higher numerical
Class designations.
The subordination of the Subordinate
Certificates to the Senior Certificates and
the further subordination among the Subordinate
Certificates are each intended to increase
the likelihood of timely receipt by the
holders of the Certificates with higher
S-10
<PAGE>
relative payment priority of the maximum
amount to which they are entitled on any
Distribution Date and to provide such
holders protection against losses resulting
from defaults on Mortgage Loans, to the extent
described herein. The Subordinate Certificates
also provide protection against Special
Hazard Losses, Fraud Losses and Bankruptcy
Losses (each as defined herein) to the extent
described herein. However, in certain
circumstances, the amount of available
subordination (including the limited
subordination provided for certain types of
losses) may be exhausted and shortfalls in
distributions on the Offered Certificates could
result. Holders of Senior Certificates will
bear their pro rata share of any Realized
Losses with respect to the Mortgage Loans in
excess of the available total
subordination amount. See "Description of the
Certificates - Distributions on the
Certificates," "--Allocation of Losses;
Subordination" and " - Subordination" herein.
As of the Closing Date, the aggregate Current
Principal Amounts of the Subordinate Certificates
and of the Other Certificates which are part of
the Subordinate Certificates will equal
approximately 1.25% and 0.30% of the aggregate
Current Principal Amounts of all of 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 allocation has the effect of
accelerating the amortization of the Senior
Certificates as a whole while, in the absence
of losses in respect of the Mortgage Loans,
increasing the percentage interest in the
principal balance of the Mortgage Loans
evidenced by the related Subordinate
Certificates. See "Description of the
Certificates - Distributions on the
Certificates" and " - Subordination" herein.
Monthly Advances..................... Each Servicer will be obligated to advance
delinquent scheduled payments of principal and
interest on a Mortgage Loan which it services
under certain circumstances (each such
advance, a "Monthly Advance"). In addition,
BSMCC will make a Monthly Advance for a BA
Mortgage Loan under the circumstances described
herein. See "The Pooling and Servicing
Agreement - Monthly Advances" herein.
Allocation of Losses................. Subject to the limitations set forth below,
Realized Losses (other than a Debt Service
Reduction) on the Mortgage Loans will be
allocated as follows: (i) the principal
portion of such Realized Losses will be
allocated first to the Subordinate
Certificates in the inverse order of their
numerical Class designations and then pro rata
to the Senior Certificates until, in each case,
the Current Principal Amount of each such Class
of Certificates is reduced to zero.
Notwithstanding the foregoing, the aggregate
amount of Realized Losses which may be
allocated by means of subordination to cover
Special Hazard Losses, Fraud Losses and
Bankruptcy Losses are initially limited to
$699,741, $1,399,482 and $100,000 respectively.
See "Description of the Certificates -
Allocation of Losses; Subordination" herein.
All of the foregoing amounts are subject to
periodic reduction as described herein.
S-11
<PAGE>
Any Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the respective
amounts of coverage therefor (an "Excess
Special Hazard Loss," an "Excess Fraud
Loss" and an "Excess Bankruptcy Loss,"
respectively, and collectively, "Excess
Losses") on Mortgage Loans will be allocated
on a pro rata basis among the Senior
Certificates and Subordinate Certificates,
and any such Realized Losses so allocated to
such Senior Certificates will be allocated pro
rata without priority among the various
Classes thereof. After the applicable
Cross-Over Date, all Realized Losses
(including, without limitation, all Special
Hazard Losses, Fraud Losses and Bankruptcy
Losses) on the Mortgage Loans will be allocated
among the Senior Certificates as described
above. See "Description of the
Certificates--Allocation of Losses;
Subordination" herein.
Neither the Offered Certificates nor the Mortgage
Loans are insured or guaranteed by a governmental
agency or instrumentality, BSMSI, the Trustee,
any Servicer, or any affiliate thereof or any
other person.
Yield and Prepayment
Considerations.................... General Considerations. The yield to maturity
of each Class of Certificates will be
affected by the amount and timing of
principal payments on the Mortgage Loans,
the allocation of Available Funds to such
Class of Certificates, the applicable
Pass-Through Rate for such Class of
Certificates and the purchase price paid for
such Certificates. In addition, the yields to
investors in the Certificates will be
adversely affected by Realized Losses and Net
Interest Shortfalls. The interaction of the
foregoing factors may have different effects
on the various Classes of Certificates and
the effects on any Class may vary at
different times during the life of such
Class. No representation is made as to the
anticipated rate of prepayments on the Mortgage
Loans, the amount and timing of Realized
Losses or Net Interest Shortfalls or as
to the anticipated yield to maturity of any
Certificates. Prospective investors are urged
to consider their own estimates as to the
anticipated rate of future prepayments on the
Mortgage Loans and the suitability of the
Certificates to their investment objectives.
In addition to the discussion below,
prospective investors should review the
discussion under "Yield and Prepayment
Considerations" herein and in the Prospectus.
Mortgage Loan Payments. If prevailing mortgage
rates fall significantly below the Mortgage Rates
on the Mortgage
S-12
<PAGE>
Loans, the Mortgage Loans are likely to be
subject to higher prepayment rates than if
prevailing rates remain at or above the Mortgage
Rates on the Mortgage Loans. Other factors
affecting prepayments of Mortgage Loans include
changes in Mortgagors' housing needs, job
transfers, unemployment, net equity in the
Mortgaged Properties and servicing decisions.
Amounts received by virtue of liquidations of
Mortgage Loans, repurchases of Mortgage Loans
upon breach of representations or warranties,
optional repurchase of Mortgage Loans by Chase as
described herein and optional termination of the
Trust also affect the receipt of principal on the
Mortgage Loans. In general, the Mortgage Loans
may be prepaid at any time and without penalty.
Timing of Payments and Distributions. Unlike
certain corporate bonds, the timing and amount of
principal payments on the Certificates are not
fixed because they are generally determined by
the timing and amount of principal payments on
the applicable Mortgage Loans. The timing of
payments on the Mortgage Loans may significantly
affect an investor's yield. In general, the
earlier a prepayment of principal on the Mortgage
Loans, the greater will be the effect on an
investor's yield to maturity. As a result, the
effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower)
than the rate anticipated by the investor during
the period immediately following the issuance of
the Certificates will not be offset by a
subsequent like reduction (or increase) in the
rate of principal prepayments. Furthermore, the
effective yield to Certificateholders will be
slightly lower than the yield otherwise produced
by the applicable Pass-Through Rate and purchase
price because, while interest generally will
accrue on each such Certificate from the first
day of the month, the distribution of such
interest will not be made earlier than the 25th
day of the month following the month of accrual.
Moreover, to the extent any Net Interest
Shortfall or the interest portion of any Realized
Loss is allocated to a Class of Certificates the
yield to investors in such Class will be reduced.
Discounts and Premiums. In the case of any
Certificates purchased at a discount, a slower
than anticipated rate of principal payments could
result in an actual yield that is lower than the
anticipated yield. In the case of any
Certificates purchased at a premium, a faster
than anticipated rate of principal payments could
result in an actual yield that is lower than the
anticipated yield. A discount or premium would be
determined in relation to the price at which a
Certificate will yield its Pass-Through Rate,
after giving effect to any payment delay.
Reinvestment Risk. Because the Mortgage Loans may
be prepaid at any time, it is not possible to
predict the rate at which distributions on the
Certificates will be received. Since prevailing
interest rates are subject to fluctuation, there
can be no assurance that investors in the
Certificates will be able to reinvest the
distributions thereon at yields equaling or
exceeding the yields on the Certificates. Yields
on any such reinvestments may be lower, and may
even be significantly lower, than yields on the
Certificates. Generally, when prevailing interest
rates increase, prepayment rates on mortgage
loans tend to decrease, resulting in a reduced
rate of return of
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<PAGE>
principal to investors at a time when
reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing
interest rates decline, prepayment rates on
mortgage loans tend to increase, resulting in a
greater rate of return of principal to investors
at a time when reinvestment at comparable yields
may not be possible. Prospective investors in the
Certificates should consider carefully the
related reinvestment risks in light of other
investments that may be available to such
investors.
Weighted Average Interest Rates. Because the
Pass-Through Rate applicable to the Certificates
will be based upon the weighted average of the
Net Rates of all of the Mortgage Loans,
disproportionate prepayments of Mortgage Loans
with higher Net Rates will adversely affect the
yield. Mortgage Loans with higher Net Rates will
have higher Mortgage Rates as well, and such
Mortgage Loans are likely to prepay at rates that
are faster than those applicable to Mortgage
Loans with lower Mortgage Rates with adverse
effects on the yields on the Certificates.
Subordination of Certain Classes of Certificates.
The rights of the holders of the Subordinate
Certificates to receive distributions with
respect to the Mortgage Loans will be
subordinated to such rights of the holders of the
Senior Certificates, and to each Class of
Subordinate Certificates having a lower numerical
designation than such Class. The level of
subordination available as support to the Senior
Certificates will be directly affected by the
rate and timing of prepayments and the occurrence
of Realized Losses.
Prepayments. Prepayments on the Mortgage Loans
will be allocated solely to the Senior
Certificates during the first five years after
the Closing Date and then such allocation will
decrease subject to meeting certain loss and
delinquency tests during the next five years
until the Senior Certificates and the Subordinate
Certificates share pro rata in such allocations.
Consequently, during not less than the first ten
years after the Closing Date, prepayments will
have the effect of accelerating the amortization
of the Senior Certificates while increasing the
percentage interest in the Mortgage Loans
evidenced by the Subordinate Certificates. In
addition, in order to maintain the relative
subordination among the Subordinate Certificates
prepayments and certain other unscheduled
recoveries of principal in respect of the
Mortgage Loans will not be distributable to the
holders of any Class of Subordinate Certificates
on any Distribution Date for which the related
Class Prepayment Distribution Trigger is not
satisfied except as otherwise described herein.
If the Class Prepayment Distribution Trigger is
not satisfied with respect to any Class of
Subordinate Certificates, the amortization of
those Classes of Subordinate Certificates with a
lower numerical class designation may occur more
rapidly then would otherwise have been the case
and, in the absence of losses in respect of the
Mortgage Loans, the percentage interest in the
principal balance of the Mortgage Loans evidenced
by such Class of Subordinate Certificates may
increase.
S-14
<PAGE>
Sequential Pay Senior Certificates. The Classes of
Senior Certificates are subject to various
priorities for payment of principal as described
herein. Distributions on Classes currently
entitled to receive principal payments will be
immediately affected by the prepayment rate of
the Mortgage Loans at such time. Distributions on
Classes with a later priority of payment will not
be directly affected by the prepayment rate until
such time as principal is distributable on such
Classes. However, the timing of commencement of
principal distributions and the weighted average
lives of such Classes will be affected by the
prepayment rate experienced both before and after
the commencement of principal distributions on
such Classes. In addition, because principal
distributions are paid to certain Classes of
Senior Certificates before other Classes of
Senior Certificates, holders of Senior
Certificates that receive principal later bear a
greater risk of being allocated Realized Losses
on the Mortgage Loans than holders of such
Classes that receive principal earlier.
Residual Certificates. Holders of the Residual
Certificates are entitled to receive
distributions of principal and interest as
described herein. However, holders of such
Certificates may have tax liabilities with
respect to their Certificates during the early
years of the REMIC that substantially exceed the
principal and interest payable thereon during
such periods.
Liquidity............................ There is currently no secondary market for
the Certificates, and there can be no assurance
that one will develop. The Underwriter intends
to establish a market in the Offered
Certificates, but it is not obligated to do
so. There is no assurance that any such
market, if established, will
continue. Each Certificateholder will receive
monthly reports pertaining to the Certificates
as described under "The Pooling and
Servicing Agreement - Reports to
Certificateholders" in the Prospectus. There
are a limited number of sources which
provide certain information about mortgage
pass-through certificates in the secondary
market, and there can be no assurance that
any of these sources will provide information
about the Certificates. Investors should
consider the effect of limited information on
the liquidity of the Certificates.
Optional Repurchase.................. On any Distribution Date on which the
aggregate unpaid principal balance of the Chase
Mortgage Loans is $5,000,000 or less, Chase may
repurchase from the Trust all the Chase
Mortgage Loans remaining outstanding and any
related REO Property remaining in the Trust.
Such repurchase will not result in the
retirement of the Certificates unless no BA
Mortgage Loan or related REO Property remains
in the Trust. Such repurchase could result in
a substantial principal payment prior to
termination of the Trust. See "The Pooling
and Servicing Agreement - Optional
Repurchase" herein.
Optional Termination................. On any Distribution Date on which the
aggregate unpaid principal balance of the
Mortgage Loans is less than 10% of the
aggregate Cut-off Date Scheduled Principal
Balance of the Mortgage Loans, BSMSI or its
designee may repurchase from the Trust all
Mortgage Loans remaining outstanding and any
REO Property remaining in
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<PAGE>
the Trust at the purchase price set forth in the
Agreement. Any such repurchase will result
in the retirement of the Certificates. The
Trust may also be terminated and the
Certificates retired on any Distribution
Date upon the determination by BSMSI, based
upon an opinion of counsel, that the REMIC
status of any REMIC has been lost or that
a substantial risk exists that such status
will be lost for the then current taxable
year. See "The Pooling and Servicing
Agreement - Termination" herein.
Certain Federal Income Tax
Consequences...................... An election will be made to treat the Mortgage
Loans, the Certificate Account and certain
other assets owned by the Trust as a real
estate mortgage investment conduit ("REMIC II
and "REMIC III") for federal income tax
purposes. Each of REMIC II and REMIC III will
issue a "regular interest" and a "residual
interest." An election will be made to treat
the "regular interests" in such REMICs and
certain other assets owned by the Trust as a
REMIC ("REMIC I"). The Certificates (other
than the Residual Certificates) will be
designated as regular interests in REMIC I and
are herein referred to as the "Regular
Certificates" or the "REMIC Regular
Certificates." The Class R-1, Class R-2 and
Class R-3 Certificates will be designated
as the residual interest in REMIC I, REMIC
II and REMIC III, respectively (collectively,
the "Residual Certificates" or the "REMIC
Residual Certificates"). See "Federal
Income Tax Considerations" herein and
"Certain Federal Income Tax Consequences"
in the Prospectus and "Restrictions on
Purchase and Transfer of the Residual
Certificates" herein.
ERISA Considerations.................. Fiduciaries of employee benefit plans subject
to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
should consider the ERISA fiduciary
investment standards before authorizing an
investment by a plan in the Offered
Certificates. In addition, fiduciaries of
employee benefit plans or other retirement
arrangements (such as individual retirement
accounts or certain Keogh plans) which are
subject to Title I of ERISA, and/or Section
4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), as well as any entity,
including an insurance company general account,
whose underlying assets include plan assets by
reason of a plan or account investing in such
entity (collectively, "Plan(s)"), should
consult with their legal counsel to determine
whether an investment in the Offered Certificates
will cause the assets of the Trust ("Trust
Assets") to be considered plan assets
pursuant to the plan asset regulations set
forth in 29 C.F.R. (ss) 2510.3-101, thereby
subjecting the Plan to the prohibited
transaction rules with respect to the Trust
Assets and the Trustee or the Servicers to the
fiduciary investment standards of ERISA, or
cause the excise tax provisions of Section
4975 of the Code to apply to the Trust Assets,
unless some exemption granted by the Department
of Labor applies to the acquisition, holding
or transfer of the Offered Certificates.
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<PAGE>
Subject to the considerations set forth under
"ERISA Considerations" herein and in the
Prospectus, the purchase or holding of the Senior
Certificates by, on behalf of, or with plan
assets of, a Plan may qualify for exemptive
relief under Prohibited Transaction Exemption
90-30 (the "Exemption").
The Subordinate Certificates generally may be
purchased by, on behalf of, or with plan assets
of, a Plan, if a prohibited transaction class
exemption based on the identity of the fiduciary
making the decision to acquire such Certificates
on behalf of the Plan is applicable to the
acquisition, holding and transfer of the
applicable Certificates and the operation,
servicing and management of the Trust and its
assets, as further described in "ERISA
Considerations" herein.
Restrictions on Purchase and
Transfer of the Residual
Certificates...................... The Residual Certificates are not offered for
sale to certain tax exempt organizations that
are "disqualified organizations" as defined in
"Certain Federal Income Tax Consequences -
REMIC Residual Certificates - Tax on
Disposition of REMIC Residual Certificates;
Restrictions on Transfer, Holding by
Pass-Through Entities" in the Prospectus. Such
"disqualified organizations" are prohibited from
acquiring or holding any beneficial interest in
the Residual Certificates. Further, neither
the Residual Certificates nor any beneficial
interest therein may be sold or otherwise
transferred without the express written
consent of Norwest Bank Minnesota, National
Association, acting as agent for the Holders
of the Residual Certificates as tax matters
person (the "Tax Matters Person"), which may
be withheld to avoid a risk of REMIC
disqualification or REMIC-level tax. See
"Certain Federal Income Tax Consequences -
REMIC Residual Certificates - Tax on
Disposition of REMIC Residual Certificates;
Restrictions on Transfer, Holding by
Pass-Through Entities" in the Prospectus and
"Restrictions on Purchase and Transfer of the
Residual Certificates" herein. Finally,
unless the Tax Matters Person consents in
writing (which consent may be withheld in the
Tax Matters Person's sole discretion), the
Residual Certificates (including a beneficial
interest therein) may not be purchased by or
transferred to any person who is not a "United
States person," as such term is defined in
Section 7701(a)(30) of the Code. For certain
additional tax-related restrictions on the
transfer of the Residual Certificates, see
"Certain Federal Income Tax Consequences -
REMIC Residual Certificates - Mismatching of
Income and Deductions; Excess Inclusions" and
"Certain Federal Income Tax Consequences -
Foreign Investors - REMIC Residual
Certificates" in the Prospectus.
Rating............................... It is a condition to their issuance that
each Class of Offered Certificates receives
the ratings set forth below from Standard &
Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("S&P") and
Duff & Phelps Credit Rating Co. ("DCR"). S&P
and DCR are referred to herein as the
"Rating Agencies."
S-17
<PAGE>
Rating
--------------
Class S&P DCR
------ ----- ------
Class A-1 AAA AAA
Class A-2 AAA AAA
Class A-3 AAA AAA
Class A-4 AAA AAA
Class B-1 - AA
Class B-2 - A
Class B-3 - BBB
Class R-1 AAA AAA
Class R-2 AAA AAA
Class R-3 AAA AAA
The ratings of the Offered Certificates of any
Class should be evaluated independently from
similar ratings on other types of securities. A
rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or
withdrawal at any time by the Rating Agencies.
See "Rating" herein.
BSMSI has not requested a rating of the Offered
Certificates by any rating agency other than the
Rating Agencies. However, there can be no
assurance as to whether any other rating agency
will rate the Offered Certificates or, if it
does, what rating would be assigned by such other
rating agency. The rating assigned by such other
rating agency to the Offered Certificates could
be lower than the respective ratings assigned by
the Rating Agencies.
Legal Investment..................... The Senior Certificates and the Class B-1
Certificates will constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") so long as they are rated in one
of the two highest rating categories and, as
such, will be legal investments for certain
entities to the extent provided in SMMEA,
subject to state laws overriding SMMEA. Certain
states have enacted legislation overriding
the legal investment provisions of SMMEA.
The remaining Classes of Certificates will not
constitute "mortgage related securities" under
SMMEA (the "Non-SMMEA Certificates"). The
appropriate characterization of the Non-SMMEA
Certificates under various legal investment
restrictions, and thus the ability of
investors subject to these restrictions to
purchase Non-SMMEA Certificates, may be
subject to significant interpretive
uncertainties.
All investors whose investment activities
are subject to legal investment laws and
regulations or to review by certain
regulatory authorities may be subject to
restrictions on investment in the
Certificates. Any such institution should
consult its own legal advisors in determining
whether and to what extent there may be
restrictions on its ability to invest in the
Certificates. See "Legal Investment" herein
and in the Prospectus.
</TABLE>
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<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
In general, the Mortgage Loans are conventional, first lien, fixed rate
mortgages secured by one- to four-family residences and individual condominium
and cooperative units and having original terms to stated maturity of 15 years
or less. The following paragraphs and the tables set forth in Annex A set forth
additional information with respect to the Mortgage Pool.*
Approximately 93.94% of the Mortgage Loans by their Scheduled Principal
Balances as of the Cut-off Date are so-called Jumbo Loans. "Jumbo Loans" are
mortgage loans that have principal balances at origination that exceed the then
applicable limitations for purchase by FNMA and Freddie Mac. The Mortgage Loans
may be prepaid in full or in part at any time without penalty.
All of the Mortgage Loans were originated in 1992 or 1993. As of the
Cut-off Date, none of the Mortgage Loans will be delinquent more than 30 days,
except for three Mortgage Loans with an aggregate unpaid principal balance as of
the Cut-off Date of $615,991, which were between 30 and 59 days delinquent as of
the Cut-off Date, but are each current as of the date hereof. The likelihood
that mortgagors will become delinquent in the payment of their mortgage loans
and the rate of any subsequent foreclosures may be affected by a number of
factors related to borrower's personal circumstances, including, for example,
unemployment or change in employment (or in the case of self-employed mortgagors
relying on commission income, fluctuations in income), marital separation and a
mortgagor's equity in the related mortgaged property. In addition, delinquency
and foreclosure experience may be sensitive to adverse economic conditions,
either nationally or regionally, may exhibit seasonal variations and may be
influenced by the level of interest rates as they affect real estate sales
activity. Regional economic conditions (including declining real estate values)
may particularly affect delinquency and foreclosure experience on mortgage loans
to the extent that mortgaged properties are concentrated in certain geographic
areas.
THE SERVICERS
General. Pursuant to various servicing arrangements, BA as the assignee
of FBS will service the BA Mortgage Loans, and Chase as the assignee of Chemical
will service the Chase Mortgage Loans. The information set forth in the
following paragraphs with respect to BA and Chase has been provided by the
respective party. Neither BSMSI, BSMCC, 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.
BA
Residential mortgage loans are serviced currently by BA at either its
servicing facility located in Cypress, California (the "Cypress Center") or at
its servicing facility located in Richmond, Virginia (the "Richmond Center"). On
December 31, 1997, the Cypress Center was servicing approximately 440,000
mortgage loans with an aggregate principal balance of $54.1 billion and the
Richmond Center was servicing approximately 404,000 mortgage loans with an
aggregate principal balance of $35.6 billion. BA's headquarters is located in
- --------------------
* The description herein and in Annex A hereof of the Mortgage Loans is based
upon estimates of the composition thereof as of the Cut-off Date, as adjusted to
reflect the Scheduled Principal Balances as of the Cut-off Date. Prior to the
issuance of the Certificates, Mortgage Loans may be removed as a result of (i)
Principal Prepayments thereof in full prior to the dates on which BSMCC acquired
the Mortgage Loans, (ii) requirements of S&P or DCR or (iii) delinquencies or
otherwise. In any such event, other mortgage loans may be included in the Trust.
BSMSI believes that the estimated information set forth herein with respect to
the Mortgage Loans as presently constituted is representative of the
characteristics thereof at the time the Certificates are issued, although
certain characteristics of the Mortgage Loans may vary.
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<PAGE>
Portland, Oregon, and its administrative offices are located at 555 California
Street, San Francisco, California 94104 (telephone 415-622-2220).
Because both Centers service loans for governmental and
quasi-governmental agencies of the U.S. Government, the Centers are regularly
examined by BA's internal and external auditors and periodically by FNMA,
Freddie Mac, GNMA, the Comptroller of the Currency or the Office of Thrift
Supervision, as applicable, and HUD. Certain financial records of BA relating to
their mortgage servicing activities are reviewed annually by their independent
public accountants.
Chase
Chase is a New Jersey corporation formed in 1920. It is a wholly-owned
indirect subsidiary of Chase Manhattan Bank USA, National Association. Chase is
engaged in the mortgage origination and servicing businesses. Chase is a
HUD-approved mortgagee. Chase is subject to supervision, examination and
regulation by the Office of the Comptroller of the Currency and various state
regulatory bodies. Chase's address is 343 Thornall Street, Edison, New Jersey
08837 and its telephone number is (732) 205-0600.
Chase makes loans in all 50 states primarily for the purpose of
enabling borrowers to purchase or refinance residential real property, secured
by first liens on such property. Chase's real estate loans primarily are made to
homeowners based on the security of one- to four-family residences. As of March
31, 1998, Chase serviced approximately $175 billion of one- to four-family
residential mortgage loans.
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the
Certificates do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, the Prospectus and the provisions of the
Agreement relating to the Certificates offered hereby.
General
The Mortgage Pass-Through Certificates, Series 1998-5 will consist of
the classes of Certificates offered hereby in addition to the other classes of
Certificates, which are not being offered hereby as described under "Summary of
Terms -- Descriptions."
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in the Trust. The Trust will consist of (i) the Mortgage
Loans, (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the account (the "Protected Account")
established for the collection of payments on the Mortgage Loans serviced by a
Servicer and in the Certificate Account (as defined below) and belonging to the
Trust, (iii) property acquired by foreclosure of such Mortgage Loans or by deed
in lieu of foreclosure; (iv) any applicable Primary Insurance Policies (as
defined below) and standard hazard insurance policies; and (v) all proceeds of
the foregoing.
Each Class of Book-Entry Certificates will be represented initially by
a single certificate registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC"). Beneficial interests in
Book-Entry Certificates may be issued or held by investors in minimum
denominations of (i) in the case of the Senior Certificates (other than the
Residual Certificates), $1,000 and increments of $1.00 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 amount to accommodate the remainder of the initial
principal amount of the Certificates of such Class. No person acquiring an
interest in the Book-Entry Certificates (a "Certificate Owner") will be entitled
to receive a certificate representing such person's interest in the Trust,
except in the event Definitive Certificates are issued under the limited
circumstances set forth below under "-- Definitive Certificates." Unless and
until Definitive Certificates are issued, all references to actions by holders
of Book-Entry Certificates shall refer to actions taken by DTC upon instructions
from its Participants (as defined below), and all references herein to
S-20
<PAGE>
distributions, notices, reports and statements to holders of Book-Entry
Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Certificates, as the
case may be, for distribution to Certificate Owners in accordance with DTC
procedures.
Each Class of Residual Certificates will be issued in certificated
fully-registered form in a single certificate having an original principal
amount of $50 in the case of the Class R-1 Certificate, and $25 in the case of
the Class R-2 and Class R-3 Certificates.
Distributions of principal and interest as set forth below initially
will be made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to the holder of the Physical Certificates. Upon the issuance
of Definitive Certificates to persons other than Cede, distributions will be
made by the Trustee to the persons in whose names such Certificates are
registered at the close of business on each Record Date, which will be the last
Business Day (as defined below) of the month preceding the month in which the
related Distribution Date occurs. Such distributions will be made (i) by check
mailed to each Certificateholder entitled thereto at the address appearing in
the Certificate Register to be maintained in accordance with the provisions of
the Agreement or (ii) upon timely receipt by the Trustee of written instructions
from a Certificateholder holding Certificates representing an initial aggregate
Current Principal Amount of not less than $1,000,000, by wire transfer to a
United States dollar account maintained by the payee at any United States
depository institution with appropriate facilities for receiving such a wire
transfer, provided, however, that the final payment in respect of each Class of
Certificates will be made only upon presentation and surrender of such
respective Certificates at the office or agency of the Trustee specified in the
notice to Certificateholders of such final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City or the jurisdiction of the Trustee or any Servicer
are authorized or obligated by law or executive order to be closed.
Book-Entry Registration
DTC is a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934. DTC was created to hold securities for its participating
organizations ("Participants") and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers (including Bear, Stearns & Co. Inc.),
banks, trust companies and clearing corporations. Indirect access to the DTC
system also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Certificate Owners will receive all
distributions of principal and interest on the Book-Entry Certificates through
Participants. Under a book-entry format, Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or Certificate
Owners. It is anticipated that, except as provided below under" --Definitive
Certificates," the only "Certificateholder" with respect to the Book-Entry
Certificates will be Cede, as nominee for DTC. Certificate Owners will not be
recognized by the Trustee as Certificateholders, as such term is used in the
Agreement, and Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC will be required to make
book-entry transfers of Book-Entry Certificates among Participants and to
receive and transmit distributions of principal of, and interest on, Book-Entry
Certificates. Participants and Indirect Participants with which Certificate
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Owners have accounts with respect to the Book-Entry Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificate Owners. Accordingly, although,
Certificate Owners will not possess physical certificates, the Rules provide a
mechanism by which Participants and Certificate Owners will receive payments and
will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the ability of
a Certificate Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the DTC system, or to otherwise act with respect to
such Book-Entry Certificates, may be limited due to the absence of physical
certificates for such Book-Entry Certificates.
DTC has advised BSMSI that it will take any action permitted to be
taken by a holder of Book-Entry Certificates under the Agreement only at the
direction of one or more Participants to whose accounts with DTC the Book-Entry
Certificates are credited. Additionally, DTC has advised BSMSI that it will take
such action where the consent of specified percentages of the Book-Entry
Certificates is required under the Agreement only at the direction of and on
behalf of Participants whose interests represent such specified percentages. DTC
may take conflicting actions on behalf of other Participants.
Neither BSMSI, the Servicers nor the Trustee will have any liability
for any aspect of the records relating to or payment made on account of
beneficial ownership interests of the Book-Entry Certificates held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Definitive Certificates
Except for the Physical Certificates, the Offered Certificates will be
issued in fully registered, certificated form ("Definitive Certificates") to
Certificate Owners or their nominees, rather than to DTC or its nominee, only if
(i) BSMSI advises the Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
Certificates and BSMSI is unable to locate a qualified successor within 30 days
or (ii) BSMSI, at its option, elects to terminate the book-entry system through
DTC.
Upon the occurrence of either event described in clause (i) or (ii) of
the immediately preceding paragraph, the Trustee is required to notify DTC,
which in turn will notify all Certificate Owners through Participants, of the
availability of Definitive Certificates. Upon surrender by Cede, as nominee of
DTC, of the Definitive Certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as Definitive Certificates to Certificate Owners. Under
no circumstances will Definitive Certificates of any Class be issued in an
amount representing an interest in, as of the Cut-off Date, less than the
minimum denomination of the respective Class of Book-Entry Certificate, except
with respect to any initially issued Certificate in a lower principal amount as
described above.
Physical Certificates and Definitive Certificates will be transferable
and exchangeable on a "Certificate Register" to be maintained by the Trustee.
Physical Certificates and Definitive Certificates surrendered to the Trustee for
registration of transfer or exchange must be accompanied by a written instrument
of transfer in form satisfactory to the Trustee. No service charge will be made
for any registration of transfer or exchange of Physical Certificates and
Definitive Certificates, but payment of a sum sufficient to cover any tax or
other governmental charge may be required. Such office or agency of the Trustee
is currently located at Sixth Street and Marquette Avenue, Minneapolis,
Minnesota 55479.
Available Funds
Available funds for any Distribution Date will be an amount equal to the
aggregate of the following with respect to the related Mortgage Loans: (a) all
previously undistributed payments on account of principal (including the
principal portion of Monthly Payments, Principal Prepayments and the principal
amount of Liquidation Proceeds) and all previously undistributed payments on
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account of interest received after the Cut-off Date and on or prior to the
related Determination Date, (b) any Monthly Advances and Compensating Interest
Payments by a Servicer and (c) any reimbursed amount in connection with losses
on certain eligible investments, except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all Principal Prepayments and Liquidation Proceeds
received after the applicable Prepayment Period;
(iii) all payments, other than Principal Prepayments, that
represent early receipt of scheduled payments due on a date or dates
subsequent to the related Due Date;
(iv) amounts received on particular Mortgage Loans as late
payments of principal or interest and respecting which, and to the
extent that, there are any unreimbursed Monthly Advances;
(v) amounts of Monthly Advances determined to be
nonrecoverable; and
(vi) any investment earnings on amounts on deposit in the
Certificate Account and amounts otherwise permitted to be withdrawn
from the Certificate Account pursuant to the Pooling and Servicing
Agreement.
Distributions on the Certificates
Allocation of Available Funds. Interest and principal on the
Certificates will be distributed monthly on each Distribution Date, commencing
in May 1998, in an aggregate amount equal to the Available Funds for such
Distribution Date.
Senior Certificates. On each Distribution Date, the Available Funds
will be distributed in the following order of priority among the Senior
Certificates except as otherwise noted:
first, the Accrued Certificate Interest on each Class of Senior
Certificates for such Distribution Date. As described below, Accrued
Certificate Interest on each such Class of Senior Certificates is
subject to reduction in the event of certain Net Interest Shortfalls
allocable thereto. Any Net Interest Shortfalls shall be allocated among
the Senior Certificates as described below;
second, to any Accrued Certificate Interest on each Class of Senior
Certificates remaining undistributed from previous Distribution Dates,
to the extent of remaining Available Funds, with any shortfall in
available amounts being allocated among such Classes in proportion to
the amount of such Accrued Certificate Interest remaining undistributed
for each such Class for such Distribution Date;
third, to the Senior Certificates in reduction of the Current Principal
Amounts thereof:
first, concurrently to the Class R-1, Class R-2 and
Class R-3 Certificates, pro rata, based upon their
Current Principal Amounts, until their respective
Current Principal Amounts have been reduced to zero;
second, concurrently to the Class A-1, Class A-2 and
Class A-3 Certificates in the percentage of
approximately 10.8331337415%, 51.8280562697% and
37.3388099888%, respectively, until the Current
Principal Amount of the Class A-3 Certificate has
been reduced to zero;
third, concurrently to the Class A-1, Class A-2 and
Class A-4 Certificates in the percentage of
approximately 10.8331337415%, 51.8280562697% and
37.3388099888%, respectively, until the Current
Principal Amount of the Class A-1 Certificate has
been reduced to zero; and
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fourth, concurrently to the Class A-2 and Class A-4
Certificates in the percentage of approximately
51.8280562697% and 48.1719437303%, respectively,
until the Current Principal Amount of the Class A-2
and Class A-4 Certificates has been reduced to zero.
On each Distribution Date after the Cross-Over Date, distributions of
principal on the outstanding Senior Certificates will be made pro rata among all
Senior Certificates, regardless of the allocation, or sequential nature, of
principal payments described in priority third above, based upon the then
Current Principal Amounts of such Senior Certificates.
Subordinate Certificates. On each Distribution Date, the Available
Funds remaining after the distributions described above under "--Senior
Certificates" will be distributed among the Subordinate Certificates
sequentially, in the following order, to the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 Certificates, in each case up to an amount
equal to and in the following order: (a) the Accrued Certificate Interest
thereon for such Distribution Date, (b) any Accrued Certificate Interest thereon
remaining undistributed from previous Distribution Dates and (c) such Class's
Allocable Share (as defined herein) for such Distribution Date.
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then Current Principal Amount of such Classes.
Interest. Interest will accrue during the preceding Interest Accrual
Period for each Class of Certificates at its then applicable Pass-Through Rate
on the Current Principal Amount of such Class immediately preceding such
Distribution Date. The Pass-Through Rate for each Class of Certificates is
described on the cover page hereof. The effective yield to the holders of
Certificates will be lower than the yield otherwise produced by the applicable
Pass-Through Rate and purchase price, because interest will not be distributed
to such Certificateholders until the 25th day (or if such day is not a Business
Day, then on the next succeeding Business Day) of the month following the month
in which interest accrues on the Mortgage Loans. See "Yield and Prepayment
Considerations" herein.
The "Accrued Certificate Interest" for any Certificate for any
Distribution Date will equal the interest accrued during the related Interest
Accrual Period at the applicable Pass-Through Rate on the Current Principal
Amount of such Certificate immediately prior to such Distribution Date less (i)
in the case of a Senior Certificate, such Certificate's share of any Net
Interest Shortfall and the interest portion of any Excess Losses (as defined
herein) and, after the Cross-Over Date, the interest portion of any Realized
Losses and (ii) in the case of a Subordinate Certificate, such Certificate's
share of any Net Interest Shortfall and the interest portion of any Realized
Losses. Such Net Interest Shortfalls will be allocated among the Certificates in
proportion to the amount of Accrued Certificate Interest that would have been
allocated thereto in the absence of such shortfalls. The interest portion of
Realized Losses will be allocated first to the Subordinate Certificates in
reverse order of their numerical designations commencing with the Class B-6
Certificates, and following the Cross-Over Date, such Realized Losses will be
allocated pro rata to the Classes of Senior Certificates. Accrued Certificate
Interest is calculated on the basis of a 360-day year consisting of twelve
30-day months. No Accrued Certificate Interest will be payable with respect to
any Class of Certificates after the Distribution Date on which the outstanding
principal balance of such Certificate has been reduced to zero.
The "Current Principal Amount" of any Certificate as of any
Distribution Date will equal such Certificate's initial principal amount on the
Closing Date, as reduced by (i) all amounts distributed on previous Distribution
Dates on such Certificate on account of principal, (ii) the principal portion of
all Realized Losses previously allocated to such Certificate (taking account of
its Loss Allocation Limitation) and (iii) in the case of a Subordinate
Certificate, such Certificate's pro rata share, if any, of the Subordinate
Certificate Writedown Amount for previous Distribution Dates. With respect to
any Class of Certificates, the Current Principal Amount thereof will equal the
sum of the Current Principal Amounts of all Certificates in such Class.
As of any Distribution Date, the "Subordinate Certificate Writedown
Amount" will equal the amount by which (a) the sum of the Current Principal
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Amounts of all of the Certificates (after giving effect to the distribution of
principal and the allocation of applicable Realized Losses in reduction of the
Current Principal Amounts of such Certificates on such Distribution Date)
exceeds (b) the Scheduled Principal Balances of Mortgage Loans on the Due Date
related to such Distribution Date less any Deficient Valuation occurring prior
to the Bankruptcy Coverage Termination Date. The applicable Subordinate
Certificate Writedown Amount will be allocated to the Classes of Subordinate
Certificates in inverse order of their numerical Class designations, until the
Current Principal Amount of each such Class has been reduced to zero.
With respect to any Distribution Date, the "Interest Shortfall" is
equal to the aggregate shortfall, if any, in collections of interest (adjusted
to the related Net Rates) on Mortgage Loans resulting from (a) prepayments in
full received during the related Prepayment Period, (b) partial prepayments
received during the related Prepayment Period to the extent applied prior to the
Due Date in the month of the Distribution Date and (c) interest payments on
certain of the Mortgage Loans being limited pursuant to the provisions of the
Soldiers' and Sailors' Civil Relief Act of 1940 (the "Relief Act"). Interest
Shortfalls will result because (i) Mortgagors are obligated to pay interest on
prepayments in full only to the date of prepayment by the Mortgagor, (ii) (a)
partial prepayments are generally not required to be accompanied by interest on
the amount of such partial prepayment and (b) partial prepayments applied prior
to the Due Date in the month of the Distribution Date will result in a reduction
of the Scheduled Principal Balance of the related Mortgage Loan without a
corresponding reduction of the Current Principal Amount of any Certificate and
(iii) the Relief Act limits, in certain circumstances, the interest rate
required to be paid by a Mortgagor in the military service, to 6% per annum.
Interest Shortfalls resulting from prepayments in full or in part in any
calendar month will be offset by the Servicer which services the Mortgage Loan
on the Distribution Date in the following calendar month to the extent that such
Interest Shortfalls do not exceed the Compensating Interest Payments. Interest
Shortfalls net of Compensating Interest Payments are referred to herein as "Net
Interest Shortfalls."
If on any Distribution Date the applicable Available Funds for the
Senior Certificates is less than the Accrued Certificate Interest on such Senior
Certificates for such Distribution Date prior to reduction for Net Interest
Shortfall and the interest portion of Realized Losses, the shortfall will be
allocated among the holders of each Class of Senior Certificates in proportion
to the respective amounts of Accrued Certificate Interest that would have been
allocated thereto in the absence of such Net Interest Shortfall and/or Realized
Losses for such Distribution Date. In addition, the amount of any interest
shortfalls that are covered by subordination will constitute unpaid Accrued
Certificate Interest and will be distributable to holders of the Certificates of
the related Classes entitled to such amounts on subsequent Distribution Dates,
to the extent of the applicable Available Funds after current interest
distributions as required herein. Any such amounts so carried forward will not
bear interest. Shortfalls in interest payments will not be offset by a reduction
in the servicing compensation of the Servicers or otherwise, except to the
extent of applicable Compensating Interest Payments.
Principal. Distributions in reduction of the Current Principal Amount
of each Class of Senior Certificates will be made on each Distribution Date
pursuant to priority third above under "--Senior Certificates." In accordance
with such priority third, the Available Funds remaining after distribution of
interest on the Senior Certificates will be allocated to such Senior
Certificates in an aggregate amount not to exceed the Senior Optimal Principal
Amount for such Distribution Date.
Distributions in reduction of the Current Principal Amounts of the
Subordinate Certificates will be made pursuant to "--Subordinate Certificates"
above. In accordance therewith, the Available Funds, if any, remaining after
distributions of principal and interest on the Senior Certificates on such
Distribution Date will be allocated to the Subordinate Certificates in an amount
equal to each such Class's Allocable Share for such Distribution Date, provided
that no distribution of principal will be made on any such Class until any Class
ranking prior thereto has received distributions of interest and principal, and
such Class has received distributions of interest, on such Distribution Date.
The "Senior Optimal Principal Amount" for the Senior Certificates with
respect to each Distribution Date will be an amount equal to the sum of:
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(i) the applicable Senior Percentage of all scheduled payments of
principal allocated to the Scheduled Principal Balance due on each
Mortgage Loan on the related Due Date, as specified in the amortization
schedule at the time applicable thereto (after adjustment for previous
principal prepayments and the principal portion of Debt Service
Reductions after the Bankruptcy Coverage Termination Date, but before
any adjustment to such amortization schedule by reason of any other
bankruptcy or similar proceeding or any moratorium or similar waiver or
grace period);
(ii) the applicable Senior Prepayment Percentage of the Scheduled
Principal Balance of each Mortgage Loan which was the subject of a
prepayment in full received by the Servicer during the applicable
Prepayment Period;
(iii) the applicable Senior Prepayment Percentage of all partial
prepayments allocated to principal received during the applicable
Prepayment Period;
(iv) the lesser of (a) the applicable Senior Prepayment Percentage of
the sum of (A) all Net Liquidation Proceeds (as defined herein)
allocable to principal received in respect of each Mortgage Loan which
became a Liquidated Mortgage Loan during the related Prepayment Period
(other than Mortgage Loans described in clause (B)) and (B) the
Scheduled Principal Balance of each such Mortgage Loan purchased by an
insurer from the Trustee during the related Prepayment Period pursuant
to the related Primary Mortgage Insurance Policy, if any, or otherwise;
and (b) the applicable Senior Percentage of the sum of (A) the
Scheduled Principal Balance of each Mortgage Loan which became a
Liquidated Mortgage Loan during the related Prepayment Period (other
than the Mortgage Loans described in clause (B)) and (B) the Scheduled
Principal Balance of each such Mortgage Loan that was purchased by an
insurer from the Trustee during the related Prepayment Period pursuant
to the related Primary Mortgage Insurance Policy, if any, or otherwise,
less (C) in the case of clause (b), the then applicable Senior
Percentage of the principal portion of Excess Losses (other than Debt
Service Reductions) on each Mortgage Loan incurred during the related
Prepayment Period; and
(v) the applicable Senior Prepayment Percentage of the sum of (a) the
Scheduled Principal Balance of each Mortgage Loan or REO Property which
was repurchased in connection with such Distribution Date and (b) the
excess, if any, of the Scheduled Principal Balance of a Mortgage Loan
that has been replaced by BSMCC or its designee with a substitute
Mortgage Loan pursuant to the Agreement in connection with such
Distribution Date over the Scheduled Principal Balance of such
substitute Mortgage Loan.
The "Senior Percentage" for the Senior Certificates on any Distribution
Date will equal the lesser of (i) 100% and (ii) the percentage (carried to six
places rounded up) obtained by dividing the aggregate Current Principal Amount
of all the Senior Certificates immediately preceding such Distribution Date by
the aggregate Scheduled Principal Balance of the Mortgage Loans as of the
beginning of the related Due Period. The initial Senior Percentage is expected
to be approximately 98.75%.
The "Senior Prepayment Percentage" for the Senior Certificates on any
Distribution Date occurring during the periods set forth below will be as
follows:
Period (dates inclusive) Senior Prepayment Percentage
-------------------------- ------------------------------
May 25, 1998 - April 25, 2003......... 100%
May 25, 2003 - April 25, 2004......... Senior Percentage plus 70% of the
Subordinate Percentage
May 25, 2004 - April 25, 2005......... Senior Percentage plus 60% of the
Subordinate Percentage
May 25, 2005 - April 25, 2006......... Senior Percentage plus 40% of the
Subordinate Percentage
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May 25, 2006 - April 25, 2007......... Senior Percentage plus 20% of the
Subordinate Percentage
May 25, 2007 and thereafter........... Senior Percentage
Notwithstanding the foregoing, if on any Distribution Date the Senior
Percentage exceeds the Senior Percentage as of the Cut-off Date, the Senior
Prepayment Percentage for such Distribution Date will equal 100%.
In addition, no reduction of the Senior Prepayment Percentage shall
occur on any Distribution Date (such limitation being the "Senior Prepayment
Percentage Stepdown Limitation") unless, as of the last day of the month
preceding such Distribution Date, (i) the aggregate Scheduled Principal Balance
of Mortgage Loans delinquent 60 days or more (including for this purpose any
such Mortgage Loans in foreclosure and Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust), averaged over the
last six months, as a percentage of the sum of the aggregate Current Principal
Amount of the Subordinate Certificates does not exceed 50% and (ii) cumulative
Realized Losses on such Mortgage Loans do not exceed (a) 30% of the aggregate
Current Principal Amounts of the Subordinate Certificates as of the Cut-off Date
(the "Original Subordinate Principal Balance") if such Distribution Date occurs
between and including May 2003 and April 2004, (b) 35% of the Original
Subordinate Principal Balance if such Distribution Date occurs between and
including May 2004 and April 2005, (c) 40% of the Original Subordinate Principal
Balance if such Distribution Date occurs between and including May 2005 and
April 2006, (d) 45% of the Original Subordinate Principal Balance if such
Distribution Date occurs between and including May 2006 and April 2007, and (e)
50% of the Original Subordinate Principal Balance if such Distribution Date
occurs during or after May 2007.
The "Subordinate Percentage" for the Subordinate Certificates on any
Distribution Date will equal 100% minus the Senior Percentage. The "Subordinate
Prepayment Percentage" for the Subordinate Certificates on any Distribution Date
will equal 100% minus the Senior Prepayment Percentage, except that on any
Distribution Date after the Current Principal Amounts of the Senior Certificates
have each been reduced to zero, the Subordinate Prepayment Percentage will equal
100%. The initial Subordinate Percentage is expected to be approximately 1.25%.
The "Subordinate Optimal Principal Amount" for the Subordinate
Certificates with respect to each Distribution Date will be an amount equal to
the sum of the following (but in no event greater than the aggregate Current
Principal Amounts of the Subordinate Certificates immediately prior to such
Distribution Date):
(i) the Subordinate Percentage of the principal portion of all
Monthly Payments due on each Mortgage Loan on the related Due Date, as
specified in the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period);
(ii) the Subordinate Prepayment Percentage of the Scheduled
Principal Balance of each Mortgage Loan which was the subject of a
prepayment in full received by the Servicer during the applicable
Prepayment Period;
(iii) the Subordinate Prepayment Percentage of all partial
prepayments of principal received during the applicable Prepayment
Period;
(iv) the excess, if any, of (a) the Net Liquidation Proceeds
allocable to principal received during the related Prepayment Period in
respect of each Liquidated Mortgage Loan over (b) the sum of the
amounts distributable to Senior Certificateholders pursuant to clause
(iv) of the definition of "Senior Optimal Principal Amount" on such
Distribution Date;
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(v) the Subordinate Prepayment Percentage of the sum of (a)
the Scheduled Principal Balance of each Mortgage Loan or REO Property
which was repurchased in connection with such Distribution Date and (b)
the difference, if any, between the Scheduled Principal Balance of a
Mortgage Loan that has been replaced by BSMCC or its designee with a
substitute Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date and the Scheduled Principal Balance of such
substitute Mortgage Loan; and
(vi) on the Distribution Date on which the Current Principal
Amounts of the Senior Certificates have all been reduced to zero, 100%
of any applicable Senior Optimal Principal Amount.
The "Allocable Share" with respect to any Class of Subordinate
Certificates on any Distribution Date will generally equal such Class's pro rata
share (based on the Current Principal Amount of each Class entitled thereto) of
the sum of each of the components of the definition of the Subordinate Optimal
Principal Amount; provided, that, except as described in the second succeeding
sentence, no Class of Subordinate Certificates (other than the Class of
Subordinate Certificates outstanding with the lowest numerical designation)
shall be entitled on any Distribution Date to receive distributions pursuant to
clauses (ii), (iii) and (v) of the definition of the Subordinate Optimal
Principal Amount unless the Class Prepayment Distribution Trigger for the
related Class is satisfied for such Distribution Date. The "Class Prepayment
Distribution Trigger" for a Class of Subordinate Certificates for any
Distribution Date is satisfied if the fraction (expressed as a percentage), the
numerator of which is the aggregate Current Principal Amount of such Class and
each Class subordinated thereto, if any, and the denominator of which is the
Scheduled Principal Balances of all of the Mortgage Loans as of the related Due
Date, equals or exceeds such percentage calculated as of the Closing Date. If on
any Distribution Date the Current Principal Amount of any Class of Subordinate
Certificates for which the related Class Prepayment Distribution Trigger was
satisfied on such Distribution Date is reduced to zero, any amounts
distributable to such Class pursuant to clauses (ii), (iii) and (v) of the
definition of "Subordinate Optimal Principal Amount," to the extent of such
Class's remaining Allocable Share, shall be distributed to the remaining Classes
of Subordinate Certificates in reduction of their respective Current Principal
Amounts, sequentially, in the order of their numerical Class designations. If
the Class Prepayment Distribution Trigger is not satisfied for any Class of
Subordinate Certificates on any Distribution Date, this may have the effect of
accelerating the amortization of more senior Classes of Subordinate
Certificates.
"Determination Date" means (i) with respect to the BA Mortgage Loans,
the 15th day of the month of the Distribution Date, or if such day is not a
business day, the following business day and (ii) with respect to the Chase
Mortgage Loans, the 15th day of the month of the Distribution Date, or if such
day is not a business day, the preceding business day.
"Insurance Proceeds" are amounts paid by an insurer under any Primary
Mortgage Insurance Policy, standard hazard insurance policy, flood insurance
policy or title insurance policy covering any Mortgage Loan or Mortgaged
Property other than amounts required to be paid over to the Mortgagor pursuant
to law or the related Mortgage Note and other than amounts used to repair or
restore the Mortgaged Property or to reimburse certain expenses.
"Repurchase Proceeds" are proceeds of any Mortgage Loan repurchased
pursuant to the Agreement or the Servicing Agreements and any cash deposit in
connection with the substitution of a Mortgage Loan pursuant to the provisions
described under "The Pooling and Servicing Agreement--Assignment of Mortgage
Loans", "--Representations and Warranties" and "--Optional Repurchase" herein.
"Principal Prepayment" is any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date to the
extent that it is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months subsequent to
the month of prepayment, including Insurance Proceeds and Repurchase Proceeds,
but excluding Liquidation Proceeds received at the time a Mortgage Loan becomes
a Liquidated Mortgage Loan.
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"Monthly Payment" with respect to any Mortgage Loan and any month is
the scheduled payment or payments of principal and interest due during such
month on such Mortgage Loan which either is payable by a Mortgagor in such month
under the related Mortgage Note, or in the case of any Mortgaged Property
acquired through foreclosure or deed-in-lieu of foreclosure (each such Mortgaged
Property, an "REO Property"), would otherwise have been payable under the
related Mortgage Note.
Allocation of Losses; Subordination
A "Realized Loss" with respect to a Mortgage Loan is (i) a Bankruptcy
Loss (as defined below) or (ii) as to any Liquidated Mortgage Loan, the unpaid
principal balance thereof plus accrued and unpaid interest thereon at the
Mortgage Rate through the last day of the month of liquidation less the Net
Liquidation Proceeds with respect to such Mortgage Loan and the related
Mortgaged Property. A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan
as to which the Servicer has determined that all amounts which it expects to
recover from or on account of such Mortgage Loan have been recovered.
"Liquidation Proceeds" are amounts received by the Servicer in
connection with the liquidation of a defaulted Mortgage Loan whether through
trustee's sale, foreclosure sale, proceeds of insurance policies, condemnation
proceeds or otherwise.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are
Liquidation Proceeds net of unreimbursed advances by the Servicer, Monthly
Advances and expenses incurred by the Servicer in connection with the
liquidation of such Mortgage Loan and the related Mortgaged Property.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property at an amount less than
the then Outstanding Principal Balance of the Mortgage Loan secured by such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan would become an unsecured creditor to the
extent of the difference between the Outstanding Principal Balance of such
Mortgage Loan and such reduced secured debt (such difference, a "Deficient
Valuation"). In addition, certain other modifications of the terms of a Mortgage
Loan can result from a bankruptcy proceeding, including the reduction of the
amount of the monthly payment on the related Mortgage Loan (a "Debt Service
Reduction").
A "Bankruptcy Loss" with respect to any Mortgage Loan is a Deficient
Valuation or Debt Service Reduction.
A "Fraud Loss" is any Realized Loss attributable to fraud in the
origination of the related Mortgage Loan.
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a Mortgaged Property) other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of such
Mortgaged Property under the Agreement or any loss due to normal wear and tear
or certain other causes.
On any Distribution Date, the principal portion of Realized Losses
during the related Prepayment Period (other than Excess Losses) will not be
allocated to any Senior Certificates until the applicable Cross-Over Date. Prior
to the applicable Cross-Over Date (or on such dates under certain circumstances)
the principal portion of Realized Losses will be allocated among the outstanding
classes of Subordinate Certificates in inverse order of priority, until the
Current Principal Amount of each such Class has been reduced to zero (i.e., such
Realized Losses will be allocated first to the Class B-6 Certificates while such
Certificates are outstanding, second, to the Class B-5 Certificates,
respectively, and so on). The principal portion of any Excess Fraud Loss, Excess
Special Hazard Loss or Excess Bankruptcy Loss (other than a Debt Service
Reduction) for any Distribution Date will be allocated pro rata among all
outstanding Classes of Certificates based on their Current Principal Amounts. An
"Excess Fraud Loss," "Excess Special Hazard Loss" or "Excess Bankruptcy Loss" is
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<PAGE>
any Fraud Loss, Special Hazard Loss or Bankruptcy Loss, respectively, occurring
after the Fraud Coverage Termination Date, Special Hazard Termination Date or
Bankruptcy Termination Date, respectively, as described more fully below.
Commencing on the Cross-Over Date, the principal portion of Realized Losses
(other than a Debt Service Reduction) will be allocated among the outstanding
Classes of Senior Certificates pro rata based upon their respective Current
Principal Amounts.
No reduction of the Current Principal Amount of any Class shall be made
on any Distribution Date on account of Realized Losses to the extent that such
reduction would have the effect of reducing the aggregate Current Principal
Amount of all of the Classes as of such Distribution Date to an amount less than
the Scheduled Principal Balances of the Mortgage Loans as of the related Due
Date, less any Deficient Valuations occurring on or prior to the Bankruptcy
Coverage Termination Date (such limitation being the "Loss Allocation
Limitation").
The principal portion of Debt Service Reductions will not be allocated
in reduction of the Current Principal Amount of any Certificate. However, after
the Bankruptcy Coverage Termination Date, the amounts distributable under clause
(i) of the definitions of Senior Optimal Principal Amount and Subordinate
Optimal Principal Amount will be reduced by the amount of any Debt Service
Reductions. Regardless of when they occur, Debt Service Reductions may reduce
the amount of Available Funds that would otherwise be available for distribution
on a Distribution Date. As a result of the subordination of the Subordinate
Certificates in right of distribution, any Debt Service Reductions prior to the
Bankruptcy Coverage Termination Date will be borne by the Subordinate
Certificates (to the extent then outstanding) in inverse order of priority.
All allocations of Realized Losses will be accomplished on a
Distribution Date by reducing the Current Principal Amount of the applicable
Classes by their appropriate shares of any such losses occurring during the
month preceding the month of such Distribution Date and, accordingly, will be
taken into account in determining the distributions of principal and interest on
the Certificates commencing on the following Distribution Date.
The interest portion of Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby to the extent described under
"Distributions on the Certificates--Interest" above.
Any Deficient Valuation will on each Distribution Date be allocated
solely to the outstanding Subordinate Certificates until the Bankruptcy Coverage
Termination Date. The "Bankruptcy Coverage Termination Date" is the Distribution
Date upon which the Bankruptcy Loss Amount has been reduced to zero or a
negative number (or the Cross-Over Date, if earlier). On each Distribution Date,
the "Bankruptcy Loss Amount" will equal approximately $100,000, subject to
reduction as described in the Agreement, minus the aggregate amount of previous
Bankruptcy Losses. The Bankruptcy Loss Amount and the related coverage levels
described above may be reduced or modified upon written confirmation from S&P
and DCR that such reduction or modification will not adversely affect the then
current ratings of the Senior Certificates by S&P and DCR. Such reduction may
adversely affect the coverage provided by subordination with respect to
Bankruptcy Losses.
Any Fraud Loss will on each Distribution Date be allocated solely to
the Subordinate Certificates until the Fraud Coverage Termination Date. The
"Fraud Coverage Termination Date" is the Distribution Date upon which the Fraud
Loss Amount has been reduced to zero or a negative number (or the applicable
Cross-Over Date, if earlier). Upon the initial issuance of the Certificates, the
"Fraud Loss Amount" will equal 1.0% of the aggregate Scheduled Principal
Balances of the Mortgage Loans, as the case may be, as of the Cut-off Date (or
approximately $1,399,482). As of any Distribution Date prior to the first
anniversary of the Cut-off Date, the Fraud Loss Amount will equal the initial
Fraud Loss Amount, minus the aggregate amount of Fraud Losses that would have
been allocated to the Subordinate Certificates in the absence of the Loss
Allocation Limitation since the Cut-off Date. As of any Distribution Date from
the first through the second anniversaries of the Cut-off Date, the Fraud Loss
Amount will equal (1) the lesser of (a) the applicable Fraud Loss Amount as of
the most recent anniversary of the Cut-off Date and (b) 1.0% of the aggregate
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outstanding principal balance of all of the Mortgage Loans as of the most recent
anniversary of the Cut-off Date minus (2) the Fraud Losses that would have been
allocated to the Subordinate Certificates in the absence of the applicable Loss
Allocation Limitation since the most recent anniversary of the Cut-off Date. As
of any Distribution Date after the second and through the fifth anniversary of
the Cut-off Date, the Fraud Loss Amount will equal (i) the lesser of (a) the
applicable Fraud Loss Amount as of the most recent anniversary of the Cut-off
Date and (b) 0.50% of the aggregate outstanding principal balance of all
Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (2)
the Fraud Losses that would have been allocated to the Subordinate Certificates
in the absence of the applicable Loss Allocation Limitation since the most
recent anniversary of the Cut-off Date. After the fifth anniversary of the
Cut-off Date, the Fraud Loss Amount shall be zero.
Any Special Hazard Loss will on each Distribution Date be allocated
solely to the outstanding Subordinate Certificates until the Special Hazard
Termination Date. The "Special Hazard Termination Date" is the Distribution Date
upon which the Special Hazard Loss Amount has been reduced to zero or a negative
number (or the applicable Cross-Over Date, if earlier). Upon the initial
issuance of the Certificates, the "Special Hazard Loss Amount" for the Mortgage
Loans will equal $699,741, as calculated by S&P and approved by S&P and DCR. As
of any Distribution Date, the Special Hazard Loss Amount will equal the initial
Special Hazard Loss Amount, minus the sum of (i) the aggregate amount of Special
Hazard Losses that would have been previously allocated to the Subordinate
Certificates in the absence of the Loss Allocation Limitation and (ii) the
Adjustment Amount. For each anniversary of the Cut-off Date, the "Adjustment
Amount" shall be equal to the amount, if any, by which the applicable Special
Hazard Loss Amount (without giving effect to the deduction of the Adjustment
Amount for such anniversary) exceeds the lesser of (A) an amount calculated by
the Depositor and approved by each of S&P and DCR, which amount shall not be
less than $500,000, and (B) the greater of (x) 1.0% (or if greater than 1.0%,
the highest percentage of Mortgage Loans by principal balance secured by
Mortgaged Properties in any California zip code) of the outstanding principal
balance of all the Mortgage Loans on the Distribution Date immediately preceding
such anniversary and (y) twice the outstanding principal balance of the Mortgage
Loan which has the largest outstanding principal balance on the Distribution
Date immediately preceding such anniversary.
Subordination
Priority of Senior Certificates. The rights of the holders of the
Subordinate Certificates to receive distributions with respect to the Mortgage
Loans will be subordinated to such rights of the holders of the Senior
Certificates and to each Class of Subordinate Certificates having a lower
numerical designation than such Class. The subordination of Subordinate
Certificates to the Senior Certificates and the further subordination among the
Subordinate Certificates are each intended to increase the likelihood of timely
receipt by the holders of the Certificates with higher relative payment priority
of the maximum amount to which they are entitled on any Distribution Date and to
provide such holders protection against losses resulting from defaults on
Mortgage Loans to the extent described above.
However, in certain circumstances, the amount of available
subordination (including the limited subordination provided for Excess Losses)
may be exhausted and shortfalls in distributions on the Offered Certificates
could result. Holders of Senior Certificates will bear their proportionate share
of Realized Losses in excess of the total subordination amount. The allocation
of Realized Losses to the Subordinate Certificates on any Distribution Date will
decrease the protection provided to the Senior Certificates then outstanding on
future Distribution Dates by reducing the aggregate Current Principal Amount of
the Subordinate Certificates then outstanding.
In addition, in order to extend the period during which the Subordinate
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of any prepayment or other unscheduled recovery of principal
with respect to a Mortgage Loan will be allocated to the Senior Certificates to
the extent described herein during the first five years after the Closing Date
(with such allocation being subject to reduction thereafter as described
herein). This allocation has the effect of accelerating the amortization of the
Senior Certificates while, in the absence of losses in respect of the related
Mortgage Loans, increasing the percentage interest in the principal balance of
the related Mortgage Loans evidenced by the Subordinate Certificates.
In certain other circumstances as described under "--Distributions on
the Certificates--Allocation of Available Funds," above, principal prepayments
otherwise distributable to the Subordinate Certificates will in lieu thereof be
distributed to the Senior Certificates.
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<PAGE>
After the payment of amounts distributable in respect of the Senior
Certificates on each Distribution Date, the Subordinate Certificates will be
entitled on such date to the remaining portion, if any, of the Available Funds
in an aggregate amount equal to the Accrued Certificate Interest on the
Subordinate Certificates for such date, any remaining undistributed Accrued
Certificate Interest thereon from previous Distribution Dates and the sum of the
Allocable Shares of the Subordinate Certificates. Amounts so distributed to
Subordinate Certificateholders will not be available to cover any delinquencies
or any Realized Losses on Mortgage Loans in respect of subsequent Distribution
Dates.
Priority Among Subordinate Certificates. On each Distribution Date, the
holders of any particular Class of Subordinate Certificates will have a
preferential right to receive the amounts due them on such Distribution Date out
of Available Funds, prior to any distribution being made on such date on each
Class of Certificates subordinated to such Class. In addition, Realized Losses
will be allocated, to the extent set forth herein, in reduction of the Current
Principal Amounts of the Classes of Subordinate Certificates in the inverse
order of their numerical Class designation. The effect of the allocation of
Realized Losses to a Class of Subordinate Certificates will be to reduce future
distributions allocable to such Class and increase the relative portion of
distributions allocable to more senior Classes of Subordinate Certificates.
In order to maintain the relative levels of subordination among the
Classes of Subordinate Certificates, prepayments and certain other unscheduled
recoveries of principal in respect of the Mortgage Loans (which generally will
not be distributable to such Certificates for at least the first five years
after the Cut-Off Date) will not be distributable to the holders of any Class of
Subordinate Certificates on any Distribution Date for which the related Class
Prepayment Distribution Trigger is not satisfied, except as described above. See
"Description of the Certificates--Distributions on the Certificates--Principal."
If the Class Prepayment Distribution Trigger is not satisfied with respect to
any Class of Subordinate Certificates, the amortization of more senior Classes
of Subordinate Certificates may occur more rapidly than would otherwise have
been the case and, in the absence of losses in respect of the related Mortgage
Loans, the percentage interest in the principal balance of the Mortgage Loans
evidenced by such Subordinate Certificates may increase.
As a result of the subordination of any Class of Subordinate
Certificates, such Class of Certificates will be more sensitive than more senior
Classes of Certificates to the rate of delinquencies and defaults on the
Mortgage Loans, and under certain circumstances investors in such Certificates
may not recover their initial investment.
YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and weighted average lives of the Certificates
will be affected by the amount and timing of principal payments and the
allocation of Available Funds to various Classes of Certificates. Investors
should carefully consider the associated risks discussed under the headings
"Yield and Prepayment Considerations" and "Legal Investment" in the "Summary of
Terms" herein and under the headings "Yield and Prepayment Considerations" and
"Legal Investment" in the Prospectus.
Assumed Final Distribution Date
The "Assumed Final Distribution Date" for distributions on the
Certificates is as follows: January 25, 2007 for Class A-3, March 25, 2008 for
Class A-1, and December 25, 2008 for the remaining Classes of Certificates. The
Assumed Final Distribution Date in the case of the Class A-3 and Class A-1
Certificates is the Distribution Date on which the Current Principal Amount of
Class A-3 and Class A-1 Certificates, respectively, is reduced to zero, assuming
a constant percentage of 0% SPA and the assumptions set forth under "--Decrement
Tables" hereafter. The Assumed Final Distribution Date in the case of all
Classes of Certificates other than the Class A-1 and Class A-3 Certificates is
the Distribution Date in the month following the latest scheduled maturity date
of all of the Mortgage Loans. Since the rate of payment (including prepayments)
of principal on the Mortgage Loans can be expected to exceed the scheduled rate
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of payments, and could exceed the scheduled rate by a substantial amount, the
disposition of the last remaining Mortgage Loan may be earlier, and could be
substantially earlier, than the Assumed Final Distribution Date. In addition,
BSMSI or its designee may, at its option, repurchase all the Mortgage Loans from
the Trust on or after any Distribution Date on which the aggregate unpaid
principal balances of the Mortgage Loans are less than 10% of the Cut-off Date
Scheduled Principal Balance of the Mortgage Loans, and Chase may, at its option,
repurchase the Chase Mortgage Loans from the Trust when the aggregate unpaid
principal balances of the Chase Mortgage Loans are $5,000,000 or less. See "The
Pooling and Servicing Agreement--Termination" herein.
Weighted Average Lives
The weighted average life of a security refers to the average amount of
time that will elapse from the date of its issuance until each dollar of
principal of such security will be distributed to the investor. The weighted
average life of a Certificate is determined by (a) multiplying the amount of the
reduction, if any, of the principal balance of such Certificate from one
Distribution Date to the next Distribution Date by the number of years from the
date of issuance to the second such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate referred to in clause (a). The weighted
average lives of the Certificates will be influenced by, among other factors,
the rate at which principal is paid on Mortgage Loans. Principal payments of
Mortgage Loans may be in the form of scheduled amortization or prepayments
including as a result of foreclosure proceedings or by virtue of the purchase of
a Mortgage Loan in advance of its stated maturity as required or permitted by
the Agreement. In general, the Mortgage Loans may be prepaid by the Mortgagors
at any time and without payment of any prepayment fee or penalty. The actual
weighted average life and term to maturity of each Class of Certificates, in
general, will be shortened if the level of such prepayments of principal
increase.
Prepayment Models
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. 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.
Pricing Assumptions
The Certificates were structured assuming, among other things, a 250%
SPA. The prepayment assumptions to be used for pricing purposes for the
respective Classes may vary as determined at the time of sale. The actual rate
of prepayment may vary considerably from the rate used for any prepayment
assumption.
Decrement Tables
The following tables entitled "Percent of Initial Principal Amount
Outstanding" indicate the percentages of the initial principal amount of each
Class of Offered Certificates that would be outstanding after each of the dates
shown at various constant percentages of SPA and the corresponding weighted
average lives of such Classes of Offered Certificates.
The following tables have been prepared based on the assumptions that:
(i) the Mortgage Loans have the terms, rates, balances, and other
characteristics of the Mortgage Loans as described herein, (ii) the Mortgage
Loans prepay at the specified percentage of SPA, (iii) no defaults in the
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<PAGE>
payment by Mortgagors of principal of and interest on the Mortgage Loans are
experienced, (iv) scheduled payments on the Mortgage Loans are received on the
first day of each month commencing in May 1998 and are computed prior to giving
effect to prepayments received on the last day of the prior month, (v)
prepayments are allocated as described herein without giving effect to loss and
delinquency tests, (vi) there are no Net Interest Shortfalls and prepayments
represent prepayments in full of individual Mortgage Loans and are received on
the last day of each month, commencing in April 1998, (vii) scheduled Monthly
Payments of principal and interest on the Mortgage Loans are calculated on their
respective principal balances (prior to giving effect to prepayments received
thereon during the preceding calendar month), Mortgage Rate and remaining terms
to stated maturity such that the Mortgage Loans will fully amortize by their
stated maturities, (viii) the initial principal amounts of the Certificates are
as set forth on the cover page hereof and under "Summary of Terms--Other
Certificates," (ix) distributions in respect of the Certificates are received in
cash on the 25th day of each month, commencing in May 1998, (x) the Offered
Certificates are purchased on April 30, 1998 and (xi) BSMSI and Chase do not
exercise the option to repurchase the Mortgage Loans described under the caption
"The Pooling and Servicing Agreement--Optional Repurchase" or "--Termination".
While it is assumed that each of the Mortgage Loans prepays at the specified
constant percentages of SPA, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual
Mortgage Loans which will be delivered to the Trustee and characteristics of the
Mortgage Loans assumed in preparing the tables. To the extent that the Mortgage
Loans have characteristics which differ from those assumed in preparing the
tables, the Certificates may mature earlier or later than indicated by the
tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each Class of Offered Certificates and set forth the
percentages of the initial Current Principal Amount of each such Class that
would be outstanding after the Distribution Date in April of each of the years
indicated, assuming that the Mortgage Loans prepay at the percentage of SPA
indicated therein. Neither SPA nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. Variations in the actual prepayment experience and
the balance of the Mortgage Loans that prepay may increase or decrease the
percentage of initial Current Principal Amount (and weighted average life) shown
in the following tables. Such variations may occur even if the average
prepayment experience of all such Mortgage Loans equals any of the specified
percentages of SPA.
S-34
<PAGE>
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
DISTRIBUTION DATE CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
- ---------------------------- -------------------------------------------- --------------------------------------------
0% 125% 250% 375% 500% 0% 125% 250% 375% 500%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ......... 100 100 100 100 100 100 100 100 100 100
April 1999 ................. 92 85 78 70 63 93 86 79 72 65
April 2000 ................. 84 71 59 48 38 85 73 61 51 41
April 2001 ................. 76 59 44 32 22 77 60 47 35 26
April 2002 ................. 66 47 32 20 12 68 49 35 24 16
April 2003 ................. 56 36 22 12 5 58 39 25 16 9
April 2004 ................. 46 27 14 6 1 48 30 18 10 5
April 2005 ................. 35 18 8 2 0 37 22 12 6 3
April 2006 ................. 23 10 3 0 0 26 14 7 3 1
April 2007 ................. 11 3 0 0 0 15 7 3 1 1
April 2008 ................. 0 0 0 0 0 3 1 1 * *
April 2009 ................. 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(years)** .................. 5.4 4.1 3.1 2.4 1.9 5.6 4.3 3.4 2.7 2.2
</TABLE>
- ----------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate
referred to in clause (a).
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<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
DISTRIBUTION DATE CLASS A-3 CERTIFICATES CLASS A-4 CERTIFICATES
- ---------------------------- -------------------------------------------- --------------------------------------------
0% 125% 250% 375% 500% 0% 125% 250% 375% 500%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ......... 100 100 100 100 100 100 100 100 100 100
April 1999 ................. 91 83 74 65 57 100 100 100 100 100
April 2000 ................. 82 67 53 40 28 100 100 100 100 100
April 2001 ................. 71 52 35 21 9 100 100 100 100 100
April 2002 ................. 61 38 21 7 0 100 100 100 100 88
April 2003 ................. 49 26 9 0 0 100 100 100 89 55
April 2004 ................. 37 15 0 0 0 100 100 100 59 34
April 2005 ................. 24 4 0 0 0 100 100 68 38 19
April 2006 ................. 10 0 0 0 0 100 79 43 22 9
April 2007 ................. 0 0 0 0 0 82 44 22 9 3
April 2008 ................. 0 0 0 0 0 21 10 4 2 1
April 2009 ................. 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(years)* ................... 4.8 3.4 2.4 1.8 1.4 9.6 8.9 7.9 6.7 5.6
</TABLE>
- ----------
* The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate
referred to in clause (a).
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<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
DISTRIBUTION DATE CLASS B-1, B-2, B-3 CERTIFICATES CLASS R-1, R-2, R-3 CERTIFICATES
- ---------------------------- -------------------------------------------- --------------------------------------------
0% 125% 250% 375% 500% 0% 125% 250% 375% 500%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ......... 100 100 100 100 100 100 100 100 100 100
April 1999 ................. 93 93 93 93 93 0 0 0 0 0
April 2000 ................. 85 85 85 85 85 0 0 0 0 0
April 2001 ................. 77 77 77 77 77 0 0 0 0 0
April 2002 ................. 68 68 68 68 68 0 0 0 0 0
April 2003 ................. 58 58 58 58 58 0 0 0 0 0
April 2004 ................. 48 47 46 45 43 0 0 0 0 0
April 2005 ................. 37 35 33 31 29 0 0 0 0 0
April 2006 ................. 26 24 21 19 17 0 0 0 0 0
April 2007 ................. 15 12 10 9 7 0 0 0 0 0
April 2008 ................. 3 2 2 1 1 0 0 0 0 0
April 2009 ................. 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(years)* ................... 5.6 5.5 5.4 5.4 5.3 0.1 0.1 0.1 0.1 0.1
</TABLE>
- ----------
* The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate
referred to in clause (a).
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<PAGE>
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Agreement. The
Agreement provides for (i) the servicing of the BA Mortgage Loans pursuant to a
Seller's Warranties and Servicing Agreement between BA, as the assignee of the
servicing from FBS, and the purchaser of the BA Mortgage Loans, dated effective
November 1, 1993, as amended, and (ii) the servicing of the Chase Mortgage Loans
pursuant to a Seller's Warranties and Servicing Agreement between Chase, as the
assignee of the servicing from Chemical, and the purchaser of the Chase Mortgage
Loans, dated as of October 20, 1993, as amended (collectively, the "Servicing
Agreements"). Reference is made to the Prospectus for important information
additional to that set forth herein regarding the terms and conditions of the
Agreement and the Certificates. BSMSI will provide to a prospective or actual
Certificateholder without charge, upon written request, a copy (without
exhibits) of the Agreement including the Servicing Agreements. Requests should
be addressed to Bear Stearns Mortgage Securities Inc., 245 Park Avenue, New
York, New York 10167.
Voting Rights
Voting rights of the Trust in general will be allocated among the
Classes of Certificates based upon their respective Current Principal Amounts;
provided that voting rights equal to 1% will be allocated to each Class of
Residual Certificates.
Assignment of Mortgage Loans
At the time of issuance of the Certificates, BSMSI will cause the
Mortgage Loans, together with all principal and interest due on or with respect
to such Mortgage Loans after the Cut-off Date, to be sold to the Trust. The
Mortgage Loans will be identified in a schedule appearing as an exhibit to the
Agreement. Such schedule will include information as to the principal balance of
each Mortgage Loan as of the Cut-off Date, as well as information including,
among other things, the Mortgage Rate, the Net Rate, the Monthly Payment, the
maturity date of each Mortgage Note, the Servicing Fee, the Master Servicing
Fee, the Excess Servicing Fee and the loan-to-value ratio.
In addition, BSMSI will deposit with the Trustee with respect to each
Mortgage Loan the original Mortgage Note, which will be endorsed without
recourse to the order of the Trustee and show to the extent available to BSMSI
an unbroken chain of endorsements from the original payee thereof to the person
endorsing it to the Trustee; the original Mortgage which shall have been
recorded, with evidence of such recording indicated thereon; the assignment
(which may be in the form of a blanket assignment) to the Trustee of the
Mortgage, with evidence of recording with respect to each Mortgage Loan in the
name of the Trustee thereon; all intervening assignments of the Mortgage
available to BSMSI, if any, with evidence of recording thereon; the original or
a copy of the policy or certificate of primary mortgage guaranty insurance, if
any; originals of all available assumption and modification agreements;
provided, however, that in lieu of the foregoing, BSMSI may deliver certain
other documents, under the circumstances set forth in the Agreement. The
documents delivered to the Trustee with respect to each Mortgage Loan are
referred to collectively as the "Mortgage File." BSMSI will cause the Mortgage
and intervening assignments, if any, and the assignment of the Mortgage to be
recorded not later than 180 days after the Closing Date.
The Trustee will review each item of the Mortgage File within 45 days
of the Closing Date (and will review each document permitted to be delivered to
the Trustee after the Closing Date, if received by the Trustee after the initial
45-day period, promptly after its delivery). If, as a result of its review, the
Trustee determines that any document is missing, does not appear regular on its
face, or appears to be unrelated to the Mortgage Loans identified in the
Mortgage Loan schedules (a "Material Defect"), the Trustee shall notify BSMCC
and Dime of such Material Defect. BSMCC or Dime shall correct or cure any such
Material Defect within 90 days from the date of notice from the Trustee of the
Material Defect and if BSMCC or Dime 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, BSMCC or Dime
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will, within 120 days of the date of notice, provide the Trustee with a
substitute Mortgage Loan (if within two years of the Closing Date) or purchase
the related Mortgage Loan at the applicable Repurchase Price.
The Trustee also will review the Mortgage Files within 180 days of the
Closing Date. If the Trustee discovers a Material Defect, the Trustee shall
notify BSMCC and Dime of such Material Defect. BSMCC or Dime shall correct or
cure any such Material Defect within 90 days from the date of notice from the
Trustee of the Material Defect and if BSMCC or Dime 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,
BSMCC or Dime will, within 120 days of the date of notice, provide the Trustee
with a substitute Mortgage Loan (if within two years of the Closing Date) or
purchase the related Mortgage Loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan
required to be repurchased, an amount equal to (i) 100% of the Outstanding
Principal Balance of such Mortgage Loan plus accrued but unpaid interest on the
Outstanding Principal Balance at the related Mortgage Rate through and including
the last day of the month of repurchase reduced by (ii) any advances payable to
the purchaser of the Mortgage Loan.
As of any time of determination the "Outstanding Principal Balance" of
a Mortgage Loan is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor or, in the case of an REO Property, the principal balance
of the related Mortgage Loan remaining to be paid by the Mortgagor at the time
such property was acquired by the Trust.
Representations and Warranties
In the purchase agreement pursuant to which BSMSI purchased the
Mortgage Loans from BSMCC, BSMCC made certain limited representations and
warranties to BSMSI concerning the Mortgage Loans. In the purchase agreement
pursuant to which BSMCC purchased the Mortgage Loans from Dime, Dime made
certain limited representations and warranties to BSMCC concerning the Mortgage
Loans. The Trustee will be assigned all right, title and interest in such
purchase agreements insofar as they relate to such representations and
warranties, as well as the remedies provided for breach of such representations
and warranties. The representations and warranties of BSMCC and Dime primarily
include the following:
(a) The Mortgage Loan has not been delinquent 30 days or more on more
than one occasion during the 12 months preceding the Cut-Off Date. As of the
related closing date, the Mortgage Loan is not delinquent in payment more than
30 days; and the seller of the Mortgage Loan 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;
(b) The information set forth in the Mortgage Loan Schedule is true,
complete and correct in all material respects as of the Cut-Off Date;
(c) As of the related closing date, the terms of the Mortgage Note and
the Mortgage have not been modified or amended except by an instrument indicated
on the Mortgage Loan Schedule and, except for one Mortgage Loan, included in the
Mortgage File; and
(d) As of the related closing date, there is no default, breach or
violation in connection with the servicing on the part of or attributable to the
respective Servicer under the related Servicing Agreement in connection with any
Mortgage Loan.
In the case 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, within 90 days
from the date of discovery or notice from the Trustee or BSMSI, BSMCC or Dime
will (i) cure such breach in all material respects, (ii) provide the Trustee
with a substitute Mortgage Loan (if within two years of the Closing Date) or
(iii) purchase the related Mortgage Loan at the applicable Repurchase Price. The
obligations of BSMCC or Dime to cure, purchase or substitute shall constitute
the Trustee's sole and exclusive remedy respecting a breach of such
representations or warranties.
In the applicable Servicing Agreements, FBS and Chemical made certain
representations and warranties concerning the BA Mortgage Loans and Chase
Mortgage Loans, respectively. The Trustee will be assigned all right, title and
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interest in the Servicing Agreements including any remedies for breach of such
representations and warranties. The representations and warranties of FBS and
Chemical generally include, among other things, that as of the applicable date
in 1993:
(a) 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;
(b) There are no delinquent taxes, assessments or other outstanding
charges affecting the related Mortgaged Property;
(c) 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;
(d) 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, except with respect to
certain releases in part that do not materially affect the value of the
Mortgaged Property, nor has any instrument been executed that would effect any
such satisfaction, release, cancellation, subordination or rescission;
(e) 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 the Servicer had good and marketable title to and was the sole owner of, and
had full right to transfer and sell, the Mortgage Loan free and clear of any
encumbrance, equity, lien, pledge, charge, claim or security interest;
(f) 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 the Servicer nor any prior mortgagee has waived any
default, breach, violation or event permitting acceleration;
(g) 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;
(h) 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) except for de minimus
encroachments permitted by the FNMA Guide (MBS Special Servicing Option) and
which has been noted on the appraisal, and no improvements on 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;
(i) The Mortgaged Property at origination of the Mortgage Loan and upon
the date of representation was free of material damage and waste or any such
damage and waste is adequately covered by an insurance policy, and at
origination of the Mortgage Loan and upon the date of representation there was
no proceeding pending for the total or partial condemnation thereof; and
(j) If the loan-to-value ratio of a Mortgage Loan was more than 80% at
origination, the Mortgage Loan amount in excess of 75% of the property value was
covered by primary mortgage insurance, which policy is required to remain in
effect until the loan-to-value ratio of such Mortgage Loan is reduced to 80%.
In the case 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, within 90 days
with respect to FBS and 60 days with respect to Chemical, from the date of
discovery or notice as provided in the applicable Servicing Agreement, FBS or
Chemical, respectively, will (i) cure such breach in all material respects, or
(ii) purchase the affected Mortgage Loan at a price equal to the outstanding
principal amount plus interest at the Net Rate until the date of repurchase with
respect to FBS or the end of the month when the repurchase occurs with respect
to Chemical. The obligations of FBS or Chemical to cure or purchase shall
constitute the Trustee's sole and exclusive remedy respecting a breach of such
representations or warranties.
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FBS. FBS is a Nevada corporation which is a subsidiary of U.S. Bancorp,
a Delaware corporation headquartered in Minneapolis, Minnesota. FBS was a
subsidiary of First Bank System, Inc. when First Bank System, Inc. (i) acquired
U.S. Bancorp in August 1997 and (ii) changed its name to U.S. Bancorp. As
reported in its Annual Report on Form 10-K filed with the Securities and
Exchange Commission, as of December 31, 1997, U.S. Bancorp had $71.3 billion in
assets and was the 15th largest commercial bank holding company in the United
States.
Collection and Other Servicing Procedures
Each Servicer will ensure that all payments required under the terms
and provisions of the applicable Mortgage Loans are collected, and shall follow
collection procedures comparable to the collection procedures of prudent
mortgage lenders servicing mortgage loans for their own account, to the extent
such procedures shall be consistent with the Servicing Agreement. Consistent
with the foregoing, a 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 or arrange or permit an arrangement with a Mortgagor for a
schedule for the liquidation of delinquencies. In the event a Servicer shall
consent to the deferment of due dates for payments due on a Mortgage Note, such
Servicer, or under certain circumstances BSMCC as discussed under "--Monthly
Advances" below, 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 a Servicer to advance shall apply only to the extent that such
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 a Servicer or its designee has knowledge thereof, such Servicer
will accelerate the maturity of the Mortgage Loan, to the extent permitted by
the terms of the related Mortgage Note and applicable law. If it reasonably
believes that the due-on-sale clause cannot be enforced under applicable law,
the Servicer may enter into, or cause to be entered 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 applicable Servicer will retain any fee collected for entering into
an assumption agreement, as additional servicing compensation. In regard to
circumstances in which a Servicer may be unable to enforce, or cause to be
enforced, 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.
Each Servicer will establish and maintain, in addition to the Protected
Account described below under "--Protected Account," one or more accounts (each,
a "Servicing Account") in a depository institution the deposits of which are
insured by the FDIC to the maximum extent permitted by law. Each Servicer will
deposit and retain therein all collections from the applicable Mortgagors for
the payment of taxes, assessments, insurance premiums, or comparable items as
agent of the Mortgagors as provided in the applicable Servicing Agreement.
Amounts in any Servicing Account may relate to mortgage loans in more than one
mortgage pool or to mortgage loans not yet included in a mortgage pool. Each
Servicing Account and the investment of the deposits therein ("Permitted
Investments") shall comply with the requirements of the respective Servicing
Agreement and shall meet the requirements of the Rating Agencies. Withdrawals of
amounts from the Servicing Accounts may be made to effect timely payment of
taxes, assessments, insurance premiums, or comparable items, to reimburse the
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 applicable Servicer or to clear and
terminate the Servicing Accounts at or at any time after the termination of the
Servicing Agreement.
For each Mortgage Loan which as of the Cut-off Date was covered by a
Primary Mortgage Insurance Policy, the applicable 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, in excess at origination of
the percentage of value set forth in the Servicing Agreement, at least until
such excess has been eliminated. Pursuant to applicable state law, a Servicer
may permit the Primary Mortgage Insurance Policy to be terminated if a
reappraisal of the Mortgaged Property indicates a new appraised value of which
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the then outstanding principal balance of the Mortgage Loan does not exceed 75%.
Primary Insurance Policies may be replaced by substantially equivalent insurance
but such replacement is subject to the condition, to be evidenced by a writing
from each Rating Agency, that it would not cause the ratings on the Certificates
to be downgraded or withdrawn.
Each Servicer will maintain errors and omissions insurance and fidelity
bonds in certain specified amounts.
Hazard Insurance
Each Servicer will maintain and keep with respect to each Mortgage Loan
for which it is acting as Servicer, in full force and effect for each Mortgaged
Property a hazard insurance policy equal to at least the lesser of the
Outstanding Principal Balance of the Mortgage Loan or the current replacement
cost of the Mortgaged Property and containing a standard mortgagee clause. Any
amounts collected by a Servicer under any such hazard insurance policy (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or amounts released to the Mortgagor in accordance with normal
servicing procedures) shall be deposited in a Protected Account. Any cost
incurred in maintaining any such hazard insurance policy shall not be added to
the amount owing under the Mortgage Loan for the purpose of calculating monthly
distributions to Certificateholders, notwithstanding that the terms of the
Mortgage Loan so permit. Such costs shall be recoverable by a 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 a Servicer to reimbursement for such costs incurred will be prior to the
right of Certificateholders to receive any related Insurance Proceeds or
Liquidation Proceeds or any other amounts in the Certificate Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the property securing a Mortgage Loan is located at the time of
origination in a federally designated flood area, the applicable Servicer will
cause 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).
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Each Servicer, on behalf of the Trustee and Certificateholders, will
present, or cause to be presented, claims to the insurer under any applicable
Primary Mortgage Insurance Policy or hazard 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. The Servicer is required to deposit in a Protected Account
the amount of any deductible under a blanket hazard insurance policy.
Realization Upon Defaulted Mortgage Loans; Purchases of Defaulted Mortgage Loans
Each 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.
To the extent set forth in the applicable Servicing Agreement, a Servicer will
service, or cause to be serviced, the property acquired by the Trust through
foreclosure or deed-in-lieu of foreclosure and use its reasonable efforts to
maximize the receipt of principal and interest on Defaulted Mortgage Loans;
provided, however, that a 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.
Since Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by or on behalf of a Servicer, no insurance payments will
result in a recovery to Certificateholders which exceeds the principal balance
of the Mortgage Loan together with accrued interest thereon at its Net Rate.
Servicing Compensation and Payment of Expenses
BA will be entitled to a Servicing Fee and a Master Servicing Fee and
Chase will be entitled to a Servicing Fee and an Excess Servicing Fee, in each
case payable from full payments of accrued interest on each such Mortgage Loan,
as compensation for its activities under the Servicing Agreement. However,
Interest Shortfalls on Mortgage Loans serviced by a Servicer resulting from
prepayments in full or in part in any calendar month will be offset by the
applicable Servicer on the Distribution Date in the following calendar month to
the extent of Compensating Interest Payments. No Servicer will be required to
make Compensating Interest Payments with respect to Interest Shortfalls relating
to Mortgage Loans of the other Servicer.
In addition to the primary compensation described above, each Servicer
will retain, with respect to each Mortgage Loan for which it acts as Servicer,
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. To the extent specified in the Servicing Agreement,
Chase 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 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).
Each Servicer will pay all expenses incurred in connection with its
servicing responsibilities (subject to limited reimbursement as described
herein).
Protected Account
Each Servicer will establish and maintain an account (each, a
"Protected Account") into which it will deposit, or cause to be deposited,
within two business days 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 such Servicer's own funds (less servicing compensation as
permitted above). All Protected Accounts and the amounts at any time credited
thereto shall comply with the requirements of the respective Servicing Agreement
and shall meet the requirements of the Rating Agencies.
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On the 20th day of each month with respect to the BA Mortgage Loans and
the 18th day of each month with respect to the Chase Mortgage Loans, or if such
day is not a business day, the following business day (each a "Servicer
Remittance Date", each Servicer will withdraw from the Protected Accounts and
any other permitted accounts and will remit to the Trustee for deposit into the
Certificate Account amounts representing the following collections and payments
(other than with respect to principal of or interest on the Mortgage Loans due
on or before the Cut-off Date):
(i) Scheduled payments on the related Mortgage Loans received
or advanced by the Servicer which were due on the related Due Date, net
of servicing fees due the Servicer; and
(ii) Principal prepayments and any Liquidation Proceeds
received by or on behalf of the Servicer with respect to such Mortgage
Loans in the related Prepayment Period, with interest to the date of
prepayment or liquidation, net of the portion of the servicing fees due
the Servicer that exceeds the related Compensating Interest Payments.
As its compensation the Trustee shall be entitled to receive all
investment earnings on amounts in the Certificate Account. In the event a
successor Trustee is appointed by the Certificateholders pursuant to the
Agreement, that portion, if any, of the successor Trustee's fees which exceeds
the Trustee's fees established at the time of issuance of the Certificates will
be borne by the Certificateholders.
Certificate Account
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the Certificateholders, an account (the "Certificate
Account") as a non-interest bearing trust account. The Trustee will deposit in
the Certificate Account, as received, the amounts below, of which the amounts
related to the BA Mortgage Loans and the Chase Mortgage Loans shall be deposited
in separate subaccounts of the Certificate Account:
(i) Any amounts withdrawn from a Protected Account or other
permitted account;
(ii) Any Monthly Advance and Compensating Interest Payments;
(iii) Any Insurance Proceeds or Liquidation Proceeds received
by or on behalf of the Trustee which were not deposited in a Protected
Account or other permitted account;
(iv) The repurchase price with respect to any Mortgage Loans
or REO Property repurchased and all proceeds of any Mortgage Loans or
property acquired in connection with the optional termination of the
Trust;
(v) Any amounts required to be deposited with respect to
losses on Permitted Investments; and
(vi) Any other amounts received by or on behalf of the
Servicer or the Trustee and required to be deposited in the Certificate
Account pursuant to the Agreement.
All amounts deposited to the Certificate Account shall be held by the
Trustee in the name of the Trustee in trust for the benefit of the
Certificateholders in accordance with the terms and provisions of the Agreement.
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 selected by
the Trustee or deposited in demand deposits with such depository institutions as
selected by the Trustee, provided that time deposits of such depository
institutions would be a Permitted Investment.
On each Distribution Date, from the funds in the Certificate Account
the amount distributable to the Certificateholders shall be paid by the Trustee
in accordance with the provisions set forth under "Description of the
Certificates--Distributions on the Certificates."
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Certain Matters Regarding the Servicers
The Servicing Agreements generally provide that the related Servicer
may not resign from its obligations and duties thereunder, except upon
determination, evidenced by an opinion of counsel to such effect, that the
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until a successor has assumed the
obligations and duties of the related Servicer to the extent required under the
Servicing Agreement. BA has the right to assign, sell or transfer its rights and
delegate its duties and obligations under its Servicing Agreement; provided that
the purchaser or transferee accepting such assignment, sale, transfer or
delegation (i) is qualified to service mortgage loans for FNMA or Freddie Mac,
(ii) is reasonably satisfactory to the Trustee, (iii) has a net worth of not
less than $15,000,000 and (iv) executes and delivers to the Trustee an
agreement, in form and substance reasonably satisfactory to the Trustee, which
contains an assumption by such purchaser or transferee of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the applicable Servicer under the Servicing Agreement from and after
the date of such agreement. Chase has the right to assign, sell or transfer its
rights and delegate its duties and obligations under its Servicing Agreement (i)
with the consent of the Trustee or (ii) to an affiliate which is qualified to
service mortgage loans for FNMA or Freddie Mac and has a net worth of not less
than $15,000,000.
The Servicing Agreements generally provide that neither the related
Servicer nor any of its directors, officers, employees and agents shall be under
any liability to the Trustee for taking any action or for refraining from taking
any action in good faith pursuant to the Servicing Agreement, or for errors in
judgment; provided, however, that neither the Servicer nor any such person will
be protected against any breach of warranties or representations made in the
Servicing Agreement. In addition, the Servicing Agreement will provide that the
Servicer is not under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties under the Servicing Agreement and
which in its opinion may involve it in any expense or liability. The Servicer
may, however, in its discretion undertake any such action which it may deem
necessary or desirable in respect of the Servicing Agreement and the rights and
duties of the parties thereto. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the accounts thereunder, and the Servicer will be entitled to be
reimbursed therefor from the related accounts.
Any corporation into which a Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
a Servicer is a party, or any corporation succeeding to the business of such
Servicer will be the successor of such Servicer under the Servicing Agreement,
provided that any such successor to the Servicer shall be qualified to service
Mortgage Loans on behalf of FNMA or Freddie Mac and shall satisfy the other
requirements listed in the Servicing Agreement with respect to the
qualifications of a successor to the Servicer.
Events of Default
"Events of Default" under the Servicing Agreement applicable to each
Servicer include (i) failure by the Servicer to cause to be deposited in the
Certificate Account amounts required to be deposited by such Servicer pursuant
to the Servicing Agreement, and such failure continues unremedied for the days
specified in the Servicing Agreement, (ii) failure by the Servicer to observe or
perform in any material respect any other material covenants and agreements set
forth in the Servicing Agreement to be performed by it, and such failure
continues unremedied for the days specified in the Servicing Agreement, (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, 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, (v) ceasing to be eligible as a single family mortgage loan
seller/servicer approved by FNMA or Freddie Mac, or (vi) with respect to BA
only, assigning its duties or rights in breach of the provisions of the
Servicing Agreement.
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In each and every such case, so long as such Event of Default with
respect to a Servicer shall not have been remedied, the Trustee may and, upon
the direction of the holders of Certificates aggregating ownership of not less
than 51% of the Trust, the Trustee shall by notice in writing to the Servicer,
with a copy to the Rating Agencies, terminate all of the rights and obligations
(but not the liabilities) of the Servicer under the Servicing Agreement and in
and to the Mortgage Loans and the proceeds thereof. Upon the receipt by the
Servicer of such written notice, all authority and power of the Servicer under
the 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 Servicing Agreement, automatically and without further action pass to and
be vested in the Trustee.
Upon the receipt by a Servicer of a notice of termination or an opinion
of counsel to the effect that the 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 Servicer in its
capacity under the 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 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 Servicer at or prior to the time of receipt by the
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 Servicer would have been entitled to retain if the Servicer had continued to
act as such, except for those amounts due the Servicer as reimbursement for
advances previously made. Notwithstanding the above, the Trustee may, if it
shall be unwilling so to act, or shall, if it is legally unable so to act,
appoint, or petition a court of competent jurisdiction to appoint, any
established housing and home finance institution which is a FNMA or Freddie Mac
approved servicer having a net worth of not less than $10,000,000, as the
successor to the Servicer under the Servicing Agreement in the assumption of all
or any part of the responsibilities, duties or liabilities of the Servicer under
the Servicing Agreement. Pending appointment of a successor to the Servicer
under the Servicing Agreement, the Trustee shall act in such capacity as
provided under the 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.
Monthly Advances
If the scheduled payment on an a Mortgage Loan which was due on a
related Due Date is delinquent other than as a result of application of the
Relief Act, the applicable Servicer will deposit in the Certificate Account on
the applicable Servicer Remittance Date an amount equal to such deficiency, net
of the Aggregate Expense Rate, except to the extent the applicable 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 by Chase with respect to the Chase
Mortgage Loans, and such advances will be made for 120 days from the date the
Mortgage Loan first becomes delinquent by BA and thereafter through liquidation
of the related Mortgaged Property by BSMCC with respect to the BA Mortgage
Loans. Failure by the Servicer to deposit in the Certificate Account any advance
required to be deposited by the Servicer under the Servicing Agreement, which
failure goes unremedied for the days specified in the applicable Servicing
Agreement, would constitute an Event of Default with respect to the Servicer as
discussed under "--Events of Default" above. The Trustee will be required to
make an advance which BSMCC is required to make but fails to do so.
Reports to Certificateholders
On each Distribution Date, a written report will be provided to each
holder of Certificates setting forth certain information with respect to the
composition of the payment being made, the Current Principal Amount of an
individual Certificate following the payment and certain other information
relating to the Certificates and the Mortgage Loans.
S-46
<PAGE>
Optional Repurchase
Chase has the right, but not the obligation, to repurchase Chase
Mortgage Loans when the outstanding principal amount of the Chase Mortgage Loans
is $5,000,000 or less. The purchase price would be the sum of (i) the unpaid
principal balance of each Mortgage Loan plus accrued and unpaid interest at the
Mortgage Rate (less any amounts constituting previously unreimbursed Monthly
Advances) and (ii) the appraised value of any REO Property (less the good faith
estimate of Chase of liquidation expenses to be incurred in connection with its
disposal thereof), such appraisal to be conducted by an appraiser mutually
agreed upon by Chase and the Trustee. After giving notice of repurchase to the
Trustee in one month, Chase would be required to remit the purchase price on the
Servicer Remittance Date during the following month. Such repurchase will not
result in the retirement of the Certificates unless no BA Mortgage Loan or
related REO Property remains in the Trust. Such repurchase could result in a
substantial principal payment prior to termination of the Trust.
Termination
The obligations of the Trustee created by the Agreement will terminate
upon (i) the later of the making of the final payment or other liquidation, or
any advance with respect thereto, of the last Mortgage Loan subject thereto or
the disposition of all property acquired upon foreclosure or acceptance of a
deed in lieu of foreclosure of any such Mortgage Loans and (ii) the payment to
Certificateholders of all amounts required to be paid to them pursuant to such
Agreement.
On any Distribution Date on which the aggregate unpaid principal
balance of the Mortgage Loans is less than 10% of the aggregate Cut-off Date
Scheduled Principal Balance of the Mortgage Loans, BSMSI, 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 purchaser, plus accrued but unpaid interest thereon at the
applicable Mortgage Rate to the next Due Date, plus (b) the appraised value of
any REO Property, less the good faith estimate of the 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 Mortgage Rate to
the next Due Date). Any such repurchase will result in the retirement of the
Certificates. The Trust may also be terminated and the Certificates retired on
any Distribution Date upon BSMSI's determination, based upon an opinion of
counsel, that the real estate mortgage investment conduit status of any of the
REMICs has been lost or that a substantial risk exists that such status will be
lost for the then current taxable year.
The Trustee
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes incapable of acting, bankrupt, insolvent or
if a receiver or public officer takes charge of the Trustee or its property.
Upon becoming aware of such circumstances, the Depositor 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 Depositor and the Trustee.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the BA Mortgage Loans, a subaccount
of the Certificate Account related to the BA Mortgage Loans and certain other
assets owned by the Trust as a real estate mortgage investment conduit ("REMIC
II") for federal income tax purposes. An election will be made to treat the
Chase Mortgage Loans, a subaccount of the Certificate Account related to the
Chase Mortgage Loans and certain other assets owned by the Trust as a real
estate mortgage investment conduit ("REMIC III") for federal income tax
purposes. Each of REMIC II and REMIC III will issue a "regular interest" and a
S-47
<PAGE>
"residual interest." An election will be made to treat the "regular interests"
in such REMICs and certain other assets owned by the Trust as a real estate
mortgage investment conduit ("REMIC I"). The Certificates (other than the
Residual Certificates) will be designated as regular interests in REMIC I and
are herein referred to as the "Regular Certificates" or the "REMIC Regular
Certificates." The Class R-1, Class R-2 and Class R-3 Certificates will be
designated as the residual interest in REMIC I, REMIC II and REMIC III,
respectively (collectively, the "Residual Certificates" or the "REMIC Residual
Certificates"). All Certificateholders are advised to see "Certain Federal
Income Tax Consequences" in the Prospectus for a discussion of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the REMIC Regular Certificates and the REMIC Residual Certificates.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. Some or
all of the Classes of Regular Certificates may be subject to the original issue
discount provisions. See "Certain Federal Income Tax Consequences--REMIC Regular
Certificates--Current Income on REMIC Regular Certificates--Original Issue
Discount" in the Prospectus. All purchasers of REMIC Regular Certificates are
urged to consult their tax advisors for advice regarding the effect, if any, of
the tax provisions of the Code and Treasury regulations relating to original
issue discount on the purchase of the Regular Certificates. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount is 250% 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. See "Yield and Prepayment
Considerations--Prepayment Models" for a description of the prepayment
assumption models used herein. However, no representation is made as to the rate
at which prepayments actually will occur. In addition, other Classes of Regular
Certificates may be treated as having been issued at a premium. See "Certain
Federal Income Tax Consequences--REMIC Regular Certificates--Premium" in the
Prospectus.
The Residual Certificates generally will not be treated as evidences of
indebtedness for federal income tax purposes. Instead, the Residual Certificates
will be considered as residual interests in a REMIC, representing rights to the
taxable income or net loss of the applicable 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 be
treated as "regular" or "residual interests in a REMIC" for domestic building
and loan associations, and "real estate assets" for real estate investment
trusts ("REITs"), subject to the limitations described in "Certain Federal
Income Tax Consequences--REMIC Certificates--Status of REMIC Certificates" in
the Prospectus. Similarly, interest on such Certificates will be considered
"interest on obligations secured by mortgages on real property" for REITs,
subject to the limitations described in "Certain Federal Income Tax
Consequences--REMIC Certificates--Status of REMIC Certificates" in the
Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA
should consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the Certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor, or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively, "Plan(s"),
should consult with their legal counsel to determine whether an investment in
S-48
<PAGE>
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. 10.3-101 (the "Plan Asset Regulations"), thereby subjecting the Plan
to the prohibited transaction rules with respect to the Trust Assets and the
Trustee or the Servicer to the fiduciary investments standards of ERISA, or
cause the excise tax provisions of Section 4975 of the Code to apply to the
Trust Assets, unless an exemption granted by the Department of Labor applies to
the purchase, sale, transfer or holding of the Certificates. In particular,
investors that are insurance companies should consult with their legal counsel
with respect to the United States Supreme Court case, John Hancock Mutual Life
Insurance Co. v. Harris Trust and Savings Bank, 114 S.Ct. 517 (1993). In John
Hancock, the Supreme Court ruled that assets held in an insurance company's
general account may be deemed to be plan assets under certain circumstances.
Investors should analyze whether that decision or recent federal legislation
enacted affecting insurance company general accounts (see Section 1460 of the
Small Job Protection Act of 1996) may have an impact with respect to purchases
of Certificates.
Prohibited Transaction Exemption 90-30 (the "Exemption") will generally
be met with respect to the Senior Certificates, except for those conditions
which are dependent on facts unknown to BSMSI or which it cannot control, such
as those relating to the circumstances of the Plan purchaser or the Plan
fiduciary making the decision to purchase such Class of Senior Certificates.
However, before purchasing a Senior Certificate, 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
exemptions, and whether the conditions of any such exemption will be applicable
to such Senior Certificates. See "ERISA Considerations" in the Prospectus.
The Exemption does not apply to the Subordinate Certificates because
the rights and interests evidenced by such Certificates are subordinated to the
rights and interests evidenced by other Classes of Certificates issued by the
Trust.
The Subordinate Certificates may be acquired for or on behalf of a
purchaser which is acquiring such Certificates directly or indirectly for or on
behalf of a Plan, provided that neither the proposed transfer and/or holding of
a Certificate nor the servicing, management and operation of the Trust (i) will
result in a prohibited transaction under Section 406 of ERISA or Section 4975 of
the Code which will not be covered under an individual or class prohibited
transaction exemption including but not limited to Department of Labor
Prohibited Transaction Exemption ("PTE") 84-14 (Class Exemption for Plan Asset
Transactions Determined by Independent Qualified Professional Asset Managers);
PTE 91-38 (Class Exemption for Certain Transactions Involving Bank Collective
Investment Funds); PTE 90-1 (Class Exemption for Certain Transactions Involving
Insurance Company Pooled Separate Accounts), PTE 95-60 (Class Exemption for
Certain Transactions Involving Insurance Company General Accounts), and PTCE
96-23 (Class Exemption for Plan Asset Transactions Determined by In-House Asset
Managers) or (ii) will give rise to any additional fiduciary duties under ERISA
on the part of the Servicer or the Trustee, which will be deemed represented by
an owner of a Book-Entry Certificate and will be evidenced by a representation
to such effect by or on behalf of a holder of a Physical Certificate.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the Senior Certificates. Assets of a Plan should not be invested in the Senior
Certificates unless it is clear that the 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.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
S-49
<PAGE>
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization, and, as such, will be legal investments for certain
entities to the extent provided in SMMEA, subject to state laws overriding
SMMEA. Certain states have enacted legislation overriding the legal investment
provisions of SMMEA. The remaining Classes of Certificates will not constitute
"mortgage related securities" under SMMEA (the "Non-SMMEA Certificates"). The
appropriate characterization of the Non-SMMEA Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Non-SMMEA Certificates, may be subject to significant
interpretive uncertainties.
All investors whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory authorities
may be subject to restrictions on investment in the Certificates. Any such
institution should consult its own legal advisors in determining whether and to
what extent there may be restrictions on its ability to invest in the
Certificates. See "Legal Investment" In the Prospectus.
ESTRICTIONS ON PURCHASE AND TRANSFER
OF THE RESIDUAL CERTIFICATES
The Residual Certificates are not offered for sale to any investor that
is a "disqualified organization" as described in "Certain Federal Income Tax
Consequences--Transfers of REMIC Residual Certificates--Tax on Disposition of
REMIC Residual Certificates" and "--Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus.
A Residual Certificate (or interests therein) may not be transferred
without the prior express written consent of the holder of such Residual
Certificate as "Tax Matters Person" as defined in the Code or by Norwest Bank
Minnesota, National Association, acting as agent for the Tax Matters Person. The
Tax Matters Person or its agent will not give its consent to any proposed
transfer to a disqualified organization. As a prerequisite to such consent to
any other transfer, the proposed transferee must provide the Tax Matters Person
and the Trustee with an affidavit that the proposed transferee is not a
disqualified organization (and, unless the Tax Matters Person or its agent
consents to the transfer to a person who is not a U.S. Person (as defined
below), an affidavit that it is a U.S. Person). Notwithstanding the fulfillment
of the prerequisites described above, the Tax Matters Person or its agent 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 any REMIC as a
REMIC) on the transfer of an interest in the Residual Certificate to any other
person or persons, the Tax Matters Person may, without action on the part of
Holders, amend the Agreement to restrict or prohibit prospectively such
transfer. A transfer in violation of the restrictions set forth herein may
subject a Residual Certificateholder to taxation. See "Certain Federal Income
Tax Consequences--REMIC Residual Certificates--Transfers of REMIC Residual
Certificates--Tax on Disposition of REMIC Residual Certificates" and
"--Restrictions on Transfer; Holding by Pass-Through Entities" in the
Prospectus. Moreover, certain transfers of 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 "Certain
Federal Income Tax Consequences--REMIC Residual Certificates--Transfers of REMIC
Residual Certificates" and "--Restrictions on Transfer; Holding by Pass-Through
Entities" in the Prospectus. Further, unless the Tax Matters Person consents in
writing (which consent may be withheld in the Tax Matters Person's sole
discretion), 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").
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Offered Certificates are being purchased from BSMSI by the
Underwriter upon issuance. The Underwriter is an affiliate of BSMSI.
Distribution of such Certificates will be made from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to BSMSI are expected to be approximately the percentage set
forth on the cover page of the aggregate principal balance of the Offered
Certificates, as of the Cut-off Date, plus accrued interest thereon, but before
S-50
<PAGE>
deducting expenses payable by BSMSI in connection with the Offered Certificates.
In connection with the purchase and sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from BSMSI in the form
of an underwriting discount.
BSMSI will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments the Underwriter may be required to make in respect
thereof.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for BSMSI and the Underwriter by Stroock & Stroock & Lavan LLP, New York, New
York.
RATING
It is a condition to the issuance of each Class of Offered Certificates
that it receives the ratings set forth below from S&P and DCR.
Class S&P DCR
-------- ---------- -----------
Class A-1 AAA AAA
Class A-2 AAA AAA
Class A-3 AAA AAA
Class A-4 AAA AAA
Class B-1 - AA
Class B-2 - A
Class B-3 - BBB
Class R-1 AAA AAA
Class R-2 AAA AAA
Class R-3 AAA AAA
The ratings assigned by S&P and DCR to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements pursuant
to which such certificates were issued. S&P and DCR's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under such
certificates. S&P's and DCR's ratings on such certificates do not, however,
constitute a statement regarding frequency of prepayments on the mortgages.
The ratings of the Rating Agencies do not address the possibility that,
as a result of principal prepayments or recoveries Certificateholders might
suffer a lower than anticipated yield. The ratings on the Residual Certificates
address only the return of their principal balance and interest thereon at their
respective Pass-Through Rates.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the Rating Agencies.
BSMSI has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies. However, there can be no assurance
as to whether any other rating agency will rate the Offered Certificates or, in
such event, what rating would be assigned to the Offered Certificates by such
other rating agency. The ratings assigned by such other rating agency to the
Offered Certificates may be lower than the ratings assigned by the Rating
Agencies.
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<PAGE>
PRINCIPAL DEFINITIONS
1933 Act..................................................................S-3
1934 Act..................................................................S-3
Accrued Certificate Interest..............................................S-9
Adjustment Amount........................................................S-31
Aggregate Expense Rate....................................................S-7
Agreement.................................................................S-4
Allocable Share..........................................................S-28
Assumed Final Distribution Dates.........................................S-32
Available Funds...........................................................S-8
BA....................................................................... S-2
BA Mortgage Loans.........................................................S-2
Bankruptcy Coverage Termination Date.....................................S-30
Bankruptcy Loss..........................................................S-29
Bankruptcy Loss Amount...................................................S-30
BSMCC.....................................................................S-2
BSMSI.....................................................................S-2
Business Day.............................................................S-21
Cede.....................................................................S-20
Certificate Account......................................................S-44
Certificate Owner........................................................S-20
Certificate Register.....................................................S-22
Certificateholder........................................................S-21
Certificates..............................................................S-1
Chase.....................................................................S-2
Chemical..................................................................S-2
Class.....................................................................S-2
Class Prepayment Distribution Trigger....................................S-28
Closing Date..............................................................S-6
Code.....................................................................S-16
Compensating Interest Payment.............................................S-9
Cross-Over Date...........................................................S-9
Current Principal Amount..................................................S-9
DCR.......................................................................S-1
Debt Service Reduction...................................................S-29
Deficient Valuation......................................................S-29
Definitive Certificates..................................................S-22
Depositor.................................................................S-6
Determination Date.......................................................S-28
Distribution..............................................................S-2
Distribution Date.........................................................S-8
DTC......................................................................S-20
Due Date..................................................................S-7
Due Period................................................................S-8
S-52
<PAGE>
ERISA....................................................................S-16
Events of Default........................................................S-45
Excess Fraud Loss........................................................S-29
Excess Losses............................................................S-12
Excess Servicing Fee......................................................S-7
Excess Special Hazard Loss...............................................S-12
Exemption................................................................S-17
FBS.......................................................................S-2
FNMA......................................................................S-6
Fraud Coverage Termination Date..........................................S-30
Fraud Loss...............................................................S-29
Fraud Loss Amount........................................................S-30
Freddie Mac...............................................................S-6
Indirect Participants....................................................S-21
Insurance Proceeds.......................................................S-28
Interest Accrual Period...................................................S-8
Interest Shortfall.......................................................S-25
Jumbo Loans...............................................................S-6
Liquidated Mortgage Loan.................................................S-29
Liquidation Proceeds.....................................................S-29
Material Defect..........................................................S-38
Monthly Advance..........................................................S-11
Monthly Payment..........................................................S-29
Mortgage File............................................................S-38
Mortgage Pool.............................................................S-6
Mortgage Rate.............................................................S-7
Net Interest Shortfalls..................................................S-25
Net Liquidation Proceeds.................................................S-29
Net Rate..................................................................S-7
Non-SMMEA Certificates...................................................S-18
Offered Certificates......................................................S-1
Original Subordinate Principal Balance...................................S-27
Other Certificates........................................................S-4
Outstanding Principal Balance............................................S-39
Participants.............................................................S-21
Pass-Through Rate.........................................................S-8
Permitted Investments....................................................S-41
Plan Asset Regulations...................................................S-49
Plan(s)..................................................................S-16
Prepayment Period.........................................................S-8
Principal................................................................S-25
Principal Prepayment.....................................................S-28
Protected Account........................................................S-20
PTE......................................................................S-49
Rating Agencies..........................................................S-17
Realized Loss............................................................S-29
Record Date...............................................................S-8
S-53
<PAGE>
Regular Certificates.....................................................S-16
REITs....................................................................S-48
Relief Act...............................................................S-25
REMIC.....................................................................S-2
REMIC I..................................................................S-16
REMIC II.................................................................S-16
REMIC III................................................................S-16
REMIC Residual Certificates..............................................S-16
REO Property.............................................................S-29
Repurchase Price.........................................................S-39
Repurchase Proceeds......................................................S-28
Residual Certificates....................................................S-16
Rules....................................................................S-21
S&P.......................................................................S-1
Scheduled Principal Balance...............................................S-7
Senior Optimal Principal Amount..........................................S-25
Senior Percentage........................................................S-26
Senior Prepayment Percentage.............................................S-26
Senior Prepayment Percentage Stepdown Limitation.........................S-27
Servicer Remittance Date.................................................S-44
Servicing Account........................................................S-41
Servicing Fee.............................................................S-7
Similar Law..............................................................S-49
SMMEA....................................................................S-18
Special Hazard Loss......................................................S-29
Special Hazard Loss Amount...............................................S-31
Special Hazard Termination Date..........................................S-31
Subordinate Certificate Writedown Amount.................................S-24
Subordinate Optimal Principal Amount.....................................S-27
Subordinate Percentage...................................................S-27
Subordinate Prepayment Percentage........................................S-27
Tax Matters Person.......................................................S-17
Trust.....................................................................S-2
Trust Assets.............................................................S-16
Trustee...................................................................S-4
U.S. Person..............................................................S-50
Underwriter...............................................................S-1
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<PAGE>
ANNEX A
CERTAIN CHARACTERTERISTICS 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, as adjusted for
all scheduled principal payments due on or before the Cut-off Date. Prior to
the issuance of the Certificates, Mortgage Loans may be removed as a result of
(i) Principal Prepayments thereof in full prior to the dates on which BSMCC
acquired the Mortgage Loans, (ii) requirements of S&P or DCR or (iii)
delinquencies or otherwise. In any such event, other mortgage loans may be
included in the Trust. BSMSI believes that the estimated information set forth
herein with respect to the Mortgage Loans as presently constituted is
representative of the characteristics of the mortgage Loans as they will be
constituted at the time the Certificates are issued, although certain
characteristics of the Mortgage Loans may vary.
ORIGINAL PRINCIPAL BALANCES OF MORTGAGE LOANS
AVERAGE: $335,814
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL PRINCIPAL BALANCE LOANS CUT-OFF DATE LOANS
- ---------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Less than $100,000.......... 1 $ 54,633 0.04%
$100,000--$149,999.......... 1 119,342 0.09
$200,000--$249,999.......... 118 20,987,542 15.00
$250,000--$299,999.......... 154 31,742,861 22.68
$300,000--$349,999.......... 101 24,518,635 17.52
$350,000--$399,999.......... 50 14,223,158 10.16
$400,000--$449,999.......... 37 11,841,899 8.46
$450,000--$499,999.......... 29 10,773,621 7.70
$500,000--$599,999.......... 23 9,634,410 6.88
$600,000--$699,999.......... 17 8,166,683 5.84
$700,000 or greater......... 13 7,885,416 5.63
--- ------------ ------
Total ................. 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
UNPAID PRINCIPAL BALANCES OF MORTGAGE LOANS
AVERAGE: $257,258
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
UNPAID PRINCIPAL BALANCE LOANS CUT-OFF DATE LOANS
- ---------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Less than $100,000.......... 6 $ 358,851 0.26%
$100,000--$149,999.......... 13 1,720,548 1.23
$150,000--$199,999.......... 149 27,190,079 19.43
$200,000--$249,999.......... 169 37,917,480 27.09
$250,000--$299,999.......... 82 22,307,049 15.94
$300,000--$349,999.......... 43 13,889,861 9.93
$350,000--$399,999.......... 38 14,250,891 10.18
$400,000--$449,999.......... 12 5,145,528 3.68
$450,000--$499,999.......... 13 6,171,698 4.41
$500,000--$599,999.......... 13 6,971,713 4.98
$600,000--$699,999.......... 4 2,467,360 1.76
$700,000 or greater......... 2 1,557,140 1.11
--- ------------ ------
Total ................. 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
A-1
<PAGE>
MORTGAGE INTEREST RATES AS OF THE CUT-OFF DATE OF MORTGAGE LOANS
WEIGHTED AVERAGE: 7.201%
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MORTGAGE INTEREST RATE LOANS CUT-OFF DATE LOANS
- -------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
7.000% or less ........... 180 $ 47,374,357 33.85%
7.001% -- 7.250% ......... 170 43,131,142 30.82
7.251% -- 7.500% ......... 129 33,802,770 24.15
7.501% -- 7.750% ......... 52 12,792,143 9.14
7.751% -- 8.000% ......... 11 2,426,890 1.73
8.001% -- 8.250% ......... 2 420,898 0.30
--- ------------ ------
Total ............... 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
LOAN-TO-VALUE RATIOS AT ORIGINATION OF MORTGAGE LOANS
WEIGHTED AVERAGE: 67.40%
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
ORIGINAL LOAN-TO- MORTGAGE OUTSTANDING AS OF MORTGAGE
VALUE RATIOS LOANS CUT-OFF DATE LOANS
- -------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
50.00% or less ........... 66 $ 18,261,713 13.05%
50.01% -- 55.00% ......... 27 7,492,484 5.35
55.01% -- 60.00% ......... 48 13,963,509 9.98
60.01% -- 65.00% ......... 41 11,209,046 8.01
65.01% -- 70.00% ......... 59 15,304,430 10.94
70.01% -- 75.00% ......... 117 29,288,889 20.93
75.01% -- 80.00% ......... 148 36,610,750 26.16
80.01% -- 85.00% ......... 8 1,693,171 1.21
85.01% -- 90.00% ......... 30 6,124,207 4.38
--- ------------ ------
Total ............... 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
PROPERTY TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PROPERTY TYPE LOANS CUT-OFF DATE LOANS
- ----------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Single Family ..................... 523 $134,735,769 96.28%
Two-Family to Four-Family ......... 3 705,440 0.50
Condo ............................. 9 2,280,636 1.63
Cooperative ....................... 8 2,043,059 1.46
Planned Unit Development .......... 1 183,296 0.13
--- ------------ ------
Total ........................ 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
A-2
<PAGE>
LOAN PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOANS
- --------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Purchase ........................ 74 $ 19,069,252 13.63%
Rate and Term Refinance ......... 397 101,395,892 72.45
Cash Out Refinance .............. 73 19,483,056 13.92
--- ------------ ------
Total ...................... 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
OCCUPANCY STATUS OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
OCCUPANCY STATUS LOANS CUT-OFF DATE LOANS
- ------------------------------ ----------- ------------------- -----------
<S> <C> <C> <C>
Primary Residence ............ 529 $135,557,256 96.86%
Second/Vacation Home ......... 15 4,390,945 3.14
--- ------------ ------
Total ................... 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
ORIGINAL TERMS OF MORTGAGE LOANS
WEIGHTED AVERAGE: 180 MONTHS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL TERMS LOANS CUT-OFF DATE LOANS
- ------------------------------ ----------- ------------------- -----------
<S> <C> <C> <C>
Less than 180 Months ......... 3 $ 486,095 0.35%
180 Months ................... 541 139,462,105 99.65
--- ------------ ------
Total ................... 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
CALCULATED REMAINING TERMS TO MATURITY OF MORTGAGE LOANS
WEIGHTED AVERAGE: 120 MONTHS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
CALCULATED REMAINING TERM TO MATURITY LOANS CUT-OFF DATE LOANS
- --------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Less than 60 Months ................... 11 $ 1,217,426 0.87%
60 -- 107 Months ..................... 44 9,000,386 6.43
108 -- 119 Months ..................... 68 17,083,976 12.21
120 -- 131 Months ..................... 421 112,646,412 80.49
--- ------------ ------
Total ............................ 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
A-3
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES*
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATE LOANS CUT-OFF DATE LOANS
- -------------------------------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
California ................................................... 66 $ 20,848,002 14.90%
New York ..................................................... 71 18,824,819 13.45
Florida ...................................................... 49 11,495,911 8.21
Illinois ..................................................... 40 9,148,585 6.54
New Jersey ................................................... 29 7,865,526 5.62
Michigan ..................................................... 27 7,129,338 5.09
Texas ........................................................ 29 6,923,909 4.95
Colorado ..................................................... 21 5,387,142 3.85
Minnesota .................................................... 18 4,627,340 3.31
Connecticut .................................................. 14 4,434,747 3.17
Ohio ......................................................... 16 4,409,679 3.15
Tennessee .................................................... 17 3,493,630 2.50
Maryland ..................................................... 15 3,348,057 2.39
Virginia ..................................................... 14 3,274,862 2.34
Missouri ..................................................... 11 3,272,880 2.34
Pennsylvania ................................................. 10 3,104,809 2.22
Georgia ...................................................... 11 2,664,311 1.90
Arizona ...................................................... 9 2,460,547 1.76
Massachusetts ................................................ 10 2,230,500 1.59
North Carolina ............................................... 9 2,169,822 1.55
South Carolina ............................................... 9 1,818,726 1.30
Indiana ...................................................... 7 1,657,208 1.18
Other (no more than 1% in any one of 17 states and District of
Columbia ) ................................................. 42 9,357,851 6.69
-- ------------ ------
Total ................................................... 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
- ----------
* No more than 0.99% (94549 -- Lafayette, 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 1.02% (48323 -- West Bloomfield, MI ) of
the Mortgage Loans will be secured by Mortgaged Properties located in any
one zip code area outside of California.
BA OR CHASE MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
BA OR CHASE MORTGAGE LOANS LOANS CUT-OFF DATE LOANS
- ----------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
BA Mortgage Loan ............ 152 $ 36,971,607 26.42%
Chase Mortgage Loan ......... 392 102,976,593 73.58
--- ------------ ------
Total .................. 544 $139,948,200 100.00%
=== ============ ======
</TABLE>
A-4
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS MORTGAGE SECURITIES INC.
SELLER
--------
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), which may be sold from time to time in one or more Series on
terms determined at the time of sale and described in the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of
one or more trust funds (each a "Trust Fund"). As specified in the related
Prospectus Supplement, a Trust Fund for a Series of Certificates will include
certain mortgage-related assets (the "Mortgage Assets") consisting of (i) first
lien mortgage loans or participations therein secured by one- to four-family
residential properties ("Single Family Loans"), (ii) first lien mortgage loans
or participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by
security interests or similar liens on shares in cooperative housing
corporations and the related proprietary leases or occupancy agreements
("Cooperative Loans"), (iv) conditional sales contracts and installment sales
or loan agreements or participations therein secured by manufactured housing
("Contracts"), (v) mortgage pass-though securities (the "Agency Securities")
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") or other government agencies or
government-sponsored agencies or (vi) privately issued mortgage-backed
securities ("Private Mortgage-Backed Securities"). If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire beneficial
ownership interest in a Trust Fund which will contain a beneficial ownership
interest in another Trust Fund which will contain the Mortgage Assets. The
Mortgage Assets will be acquired by Bear Stearns Mortgage Securities Inc. (the
"Seller") from one or more institutions which may be affiliates of the Seller
(each, a "Lender") and conveyed by the Seller to the related Trust Fund. A
Trust Fund also may include insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies, third party guarantees or other
assets to the extent described in the related Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of
Certificates of such Series. One or more classes of Certificates of a Series
may be entitled to receive distributions of principal, interest or any
combination thereof prior to one or more other classes of Certificates of such
Series or after the occurrence of specified events or may be required to absorb
one or more types of losses prior to one or more other classes of Certificates,
in each case as specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Certificates of a Series will be made only from the assets of the related Trust
Fund.
The Certificates will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality or by any other person. Unless otherwise
specified in the related Prospectus Supplement, the only obligations of the
Seller with respect to a Series of Certificates will be to obtain certain
representations and warranties from the Lenders or other third parties and to
assign to the trustee (the "Trustee") for the related Series of Certificates
the Seller's rights with respect to such representations and warranties. The
principal obligations of one or more master servicers (each, a "Master
Servicer") named in the Prospectus Supplement with respect to the related
Series of Certificates will be limited to its or their contractual servicing
obligations, including any obligation to advance delinquent payments on the
Mortgage Assets in the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by
the rate of payment of principal (including prepayments) on the Mortgage Assets
in the related Trust Fund and the timing of receipt of such payments as
described herein and in the related Prospectus Supplement. A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be
made to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences."
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------
Prior to issuance there will have been no market for the Certificates of
any Series and there can be no assurance that a secondary market for any
Certificates will develop. This Prospectus may not be used to consummate sales
of a Series of Certificates unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
under "Method of Distribution" herein and in the related Prospectus Supplement.
All Certificates will be distributed by, or sold by underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is February 25, 1998.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series to
be offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates; (ii) the rate of interest (the "Pass-Through Rate") or method of
determining the amount of interest, if any, to be passed through to each such
class; (iii) the aggregate principal amount, if any, relating to each such
class; (iv) the distribution dates (each a "Distribution Date") for interest
and principal payments and, if applicable, the initial and final scheduled
Distribution Dates for each class; (v) if applicable, the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class
of Certificates; (vi) information as to the nature and extent of subordination
with respect to any class of Certificates that is subordinate to any other
class; (vii) information as to the assets comprising the Trust Fund, including
the general characteristics of the Mortgage Assets included therein and, if
applicable, the amount and source of any reserve fund (a "Reserve Account"),
and the insurance, letters of credit, guarantees, or other instruments or
agreements included in the Trust Fund; (viii) the circumstances, if any, under
which the Trust Fund may be subject to early termination; (ix) additional
information with respect to the plan of distribution of such Certificates; (x)
whether one or more REMIC elections will be made and designation of the regular
interests and residual interests; (xi) information as to the Trustee; and (xii)
information as to the Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of Certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Chicago Regional Office, Northwestern Atrium
Center, 500 West Madison Street -- Suite 1400, Chicago, Illinois 60661; and New
York Regional Office, 7 World Trade Center -- 13th Floor, New York, New York
10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in
any state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus at any time does not imply that information herein
is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, with respect to a
series of Certificates subsequent to the date of this Prospectus and the
related Prospectus Supplement and prior to the termination of the offering of
such series of Certificates shall be deemed to be incorporated by reference in
this Prospectus as supplemented by the related Prospectus Supplement. If so
specified in any such documents, such document shall also be deemed to be
incorporated by reference in the Registration Statement of which this
Prospectus forms a part.
Any statement contained herein or in a Prospectus Supplement for a series
of Certificates or in a document incorporated or deemed to be incorporated by
reference herein or therein shall be deemed to be modified
-2-
<PAGE>
or superseded for purposes of this Prospectus and such Prospectus Supplement
and, if applicable, the Registration Statement to the extent that a statement
contained herein or therein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein or therein modifies or
supersedes such statement, except to the extent that such subsequently filed
document expressly states otherwise. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or the related Prospectus Supplement or,
if applicable, the Registration Statement.
The Depositor will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, Bear Stearns Mortgage Securities Inc., 245
Park Avenue, New York, New York 10167. Telephone requests for such copies
should be directed to the President at (212) 272-2000.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Certificateholders. See "Description of the Certificates --
Reports to Certificateholders."
-3-
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED
PROSPECTUS SUPPLEMENT WHICH WILL BE PREPARED IN CONNECTION WITH EACH SERIES OF
CERTIFICATES.
Title of Securities................ Mortgage Pass-Through Certificates
(Issuable in Series).
Seller............................. Bear Stearns Mortgage Securities Inc., a
Delaware corporation and a wholly-owned
subsidiary of Bear Stearns Mortgage
Capital Corporation. See "The Seller."
Trustee............................ The Trustee for each Series of
Certificates will be specified in the
related Prospectus Supplement.
Master Servicer.................... One or more entities named as a Master
Servicer in the related Prospectus
Supplement, which may be an affiliate of
the Seller. See "The Pooling and Servicing
Agreement -- Certain Matters Regarding the
Master Servicer and the Seller."
Trust Fund Assets.................. A Trust Fund for a Series of
Certificates will include the Mortgage
Assets consisting of (i) a pool (a
"Mortgage Pool") of Single Family Loans,
Multifamily Loans, Cooperative Loans or
Contracts (collectively, the "Mortgage
Loans"), (ii) Agency Securities or (iii)
Private Mortgage-Backed Securities,
together with payments in respect of such
Mortgage Assets and certain other
accounts, obligations or agreements, in
each case as specified in the related
Prospectus Supplement.
A. Single Family, Cooperative
and Multi-family Loans.......... Unless otherwise specified in the
related Prospectus Supplement, Single
Family Loans will be secured by first
mortgage liens on one- to four-family
residential properties. Unless otherwise
specified in the related Prospectus
Supplement, Cooperative Loans will be
secured by security interests in shares
issued by private, nonprofit, cooperative
housing corporations ("Cooperatives") and
in the related proprietary leases or
occupancy agreements granting exclusive
rights to occupy specific dwelling units
in such Cooperatives' buildings. Single
Family Loans and Cooperative Loans may be
conventional loans (i.e., loans that are
not insured or guaranteed by any
governmental agency), insured by the
Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans
Administration ("VA") as specified in the
related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, Single Family Loans
and Cooperative Loans will all have
individual principal balances at
origination of not less than $25,000 and
not more than $1,000,000, and original
terms to stated maturity of 15 to 40
years.
Multifamily Loans will be secured by
first mortgage liens on rental apartment
buildings or projects containing five or
more residential units, including
apartment buildings owned by
Cooperatives. Such loans may be
conventional loans or insured by the FHA,
as specified in the related
-4-
<PAGE>
Prospectus Supplement. Unless otherwise
specified in the related Prospectus
Supplement, Multifamily Loans will all
have individual principal balances at
origination of not less than $25,000 and
original terms to stated maturity of not
more than 40 years.
The payment terms of the Mortgage Loans
to be included in a Trust Fund will be
described in the related Prospectus
Supplement and may include any of the
following features or combinations
thereof or other features described in
the related Prospectus Supplement:
(a) Interest may be payable at a fixed
rate, a rate adjustable from time
to time in relation to an index, a
rate that is fixed for a period of
time or under certain circumstances
and is followed by an adjustable
rate, a rate that otherwise varies
from time to time, or a rate that
is convertible from an adjustable
rate to a fixed rate. Changes to an
adjustable rate may be subject to
periodic limitations, maximum
rates, minimum rates or a
combination of such limitations.
Accrued interest may be deferred
and added to the principal of a
Mortgage Loan for such periods and
under such circumstances as may be
specified in the related Prospectus
Supplement. Mortgage Loans may
provide for the payment of interest
at a rate lower than the specified
interest rate on the Mortgage Loan
(the "Mortgage Rate") for a period
of time or for the life of the
Mortgage Loan, and the amount of
any difference may be contributed
from funds supplied by the seller
of the Mortgaged Property or
another source ("Buydown Loans") or
may be treated as accrued interest
and added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a level
debt service basis to fully
amortize the Mortgage Loan over its
term, may be calculated on the
basis of an assumed amortization
schedule that is significantly
longer than the original term to
maturity or on an interest rate
that is different from the interest
rate on the Mortgage Loan or may
not be amortized during all or a
portion of the original term.
Payment of all or a substantial
portion of the principal may be due
on maturity ("balloon" payments).
Principal may include interest that
has been deferred and added to the
principal balance of the Mortgage
Loan.
(c) Payments of principal and interest
may be fixed for the life of the
Mortgage Loan, may increase over a
specified period of time or may
change from period to period.
Mortgage Loans may include limits
on periodic increases or decreases
in the amount of monthly payments
and may include maximum or minimum
amounts of monthly payments.
-5-
<PAGE>
(d) Prepayments of principal may be
subject to a prepayment fee, which
may be fixed for the life of the
Mortgage Loan or may decline over
time, and may be prohibited for the
life of the Mortgage Loan or for
certain periods ("lockout
periods"). Certain Mortgage Loans
may permit prepayments after
expiration of the applicable
lockout period and may require the
payment of a prepayment fee in
connection with any such subsequent
prepayment. Other Mortgage Loans
may permit prepayments without
payment of a fee unless the
prepayment occurs during specified
time periods. The Mortgage Loans
may include due-on-sale clauses
which permit the mortgagee to
demand payment of the entire
Mortgage Loan in connection with
the sale or certain transfers of
the related Mortgaged Property.
Other Mortgage Loans may be
assumable by persons meeting the
then applicable underwriting
standards of the Lender.
Certain Mortgage Loans may be originated
or acquired in connection with employee
relocation programs. The real property
constituting security for repayment of a
Mortgage Loan may be located in any one
of the fifty states or the District of
Columbia. Unless otherwise specified in
the related Prospectus Supplement, all of
the Mortgage Loans will be covered by
standard hazard insurance policies
insuring against losses due to fire and
various other causes. The Mortgage Loans
will be covered by primary mortgage
insurance policies to the extent provided
in the related Prospectus Supplement. All
Mortgage Loans will have been purchased
by the Seller, either directly or through
an affiliate, from Lenders.
B. Contracts....................... Contracts will consist of conditional
sales and installment sales or loan
agreements secured by new or used
Manufactured Homes (as defined herein).
Contracts may be conventional loans,
insured by the FHA or partially guaranteed
by the VA, as specified in the related
Prospectus Supplement. Unless otherwise
specified in the related Prospectus
Supplement, each Contract will be fully
amortizing and will bear interest at a
fixed accrual percentage rate ("APR").
Unless otherwise specified in the related
Prospectus Supplement, Contracts will all
have individual principal balances at
origination of not less than $10,000 and
not more than $1,000,000 and original
terms to stated maturity of 5 to 30 years.
C. Agency Securities............... The Agency Securities will consist of
(i) fully modified pass-through
mortgage-backed certificates guaranteed as
to timely payment of principal and
interest by the Government National
Mortgage Association ("GNMA
Certificates"), (ii) Guaranteed Mortgage
Pass-Through Certificates issued and
guaranteed as to timely payment of
principal and interest by the Federal
National Mortgage Association ("FNMA
Certificates"), (iii) Mortgage
Participation
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<PAGE>
Certificates issued and guaranteed as to
timely payment of interest and, unless
otherwise specified in the related
Prospectus Supplement, ultimate payment
of principal by the Federal Home Loan
Mortgage Corporation ("FHLMC
Certificates"), (iv) stripped
mortgage-backed securities representing
an undivided interest in all or a part of
either the principal distributions (but
not the interest distributions) or the
interest distributions (but not the
principal distributions) or in some
specified portion of the principal and
interest distributions (but not all of
such distributions) on certain GNMA,
FNMA, FHLMC or other government agency or
government-sponsored agency Certificates
and, unless otherwise specified in the
Prospectus Supplement, guaranteed to the
same extent as the underlying securities,
(v) another type of guaranteed
pass-through certificate issued or
guaranteed by GNMA, FNMA, FHLMC or
another government agency or
government-sponsored agency and described
in the related Prospectus Supplement, or
(vi) a combination of such Agency
Securities. All GNMA Certificates will be
backed by the full faith and credit of
the United States. No FNMA or FHLMC
Certificates will be backed, directly or
indirectly, by the full faith and credit
of the United States. The Agency
Securities may consist of pass-through
securities issued under the GNMA I
Program, the GNMA II Program, FHLMC's
Cash or Guarantor Program or another
program specified in the Prospectus
Supplement. The payment characteristics
of the Mortgage Loans underlying the
Agency Securities will be described in
the related Prospectus Supplement.
D. Private Mortgage-Backed
Securities...................... Private Mortgage-Backed Securities may
include (i) mortgage participations or
pass-through certificates representing
beneficial interests in certain Mortgage
Loans or (ii) Collateralized Mortgage
Obligations ("CMOs") secured by such
Mortgage Loans. Private Mortgage-Backed
Securities may include stripped
mortgage-backed securities representing an
undivided interest in all or a part of any
of the principal distributions (but not
the interest distributions) or the
interest distributions (but not the
principal distributions) or in some
specified portion of the principal and
interest distributions (but not all of
such distributions) on certain mortgage
loans. Although individual Mortgage Loans
underlying a Private Mortgage-Backed
Security may be insured or guaranteed by
the United States or an agency or
instrumentality thereof, they need not be,
and the Private Mortgage-Backed Securities
themselves will not be so insured or
guaranteed. See "The Trust Fund -- Private
Mortgage-Backed Securities." Unless
otherwise specified in the Prospectus
Supplement relating to a Series of
Certificates, payments on the Private
Mortgage-Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private
Mortgage-Backed Securities. See "The Trust
Fund -- Private Mortgage-Backed
Securities."
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<PAGE>
The related Prospectus Supplement for a
Series will specify (i) the aggregate
approximate principal amount and type of
any Private Mortgage-Backed Securities to
be included in the Trust Fund for such
Series; (ii) certain characteristics of
the Mortgage Loans which comprise the
underlying assets for the Private
Mortgage-Backed Securities including to
the extent available (A) the payment
features of such Mortgage Loans, (B) the
approximate aggregate principal amount,
if known, of the underlying Mortgage
Loans which are insured or guaranteed by
a governmental entity, (C) the servicing
fee or range of servicing fees with
respect to the Mortgage Loans, and (D)
the minimum and maximum stated maturities
of the Mortgage Loans at origination;
(iii) the maximum original term-to-stated
maturity of the Private Mortgage-Backed
Securities; (iv) the weighted average
term-to-stated maturity of the Private
Mortgage-Backed Securities; (v) the
pass-through or certificate rate or
ranges thereof for the Private
Mortgage-Backed Securities; (vi) the
weighted average pass-through or
certificate rate of the Private
Mortgage-Backed Securities; (vii) the
issuer of the Private Mortgage-Backed
Securities (the "PMBS Issuer"), the
servicer of the Private Mortgage-Backed
Securities (the "PMBS Servicer") and the
trustee of the Private Mortgage-Backed
Securities (the "PMBS Trustee"); (viii)
certain characteristics of credit
support, if any, such as reserve funds,
insurance policies, letters of credit,
financial guaranty insurance policies or
third party guarantees, relating to the
Mortgage Loans underlying the Private
Mortgage-Backed Securities, or to such
Private Mortgage-Backed Securities
themselves; (ix) the terms on which
underlying Mortgage Loans for such
Private Mortgage-Backed Securities may,
or are required to, be repurchased prior
to stated maturity; and (x) the terms on
which substitute Mortgage Loans may be
delivered to replace those initially
deposited with the PMBS Trustee. See "The
Trust Fund."
E. Pre-Funding and
Capitalized Interest
Accounts........................ If specified in the related Prospectus
Supplement, a Trust Fund will include one
or more segregated trust accounts (each, a
"Pre-Funding Account") established and
maintained with the Trustee for the
related Series. If so specified, on the
closing date for such Series, a portion of
the proceeds of the sale of the
Certificates of such Series (such amount,
the "Pre-Funded Amount") will be deposited
in the Pre-Funding Account and may be used
to purchase additional Primary Assets
during the period of time, not to exceed
six months, specified in the related
Prospectus Supplement (the "Pre-Funding
Period"). The Primary Assets to be so
purchased will be required to have certain
characteristics specified in the related
Prospectus Supplement. If any Pre-Funded
Amount remains on deposit in the Pre-
Funding Account at the end of the
Pre-Funding Period, such amount will be
applied in the manner specified in
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<PAGE>
the related Prospectus Supplement to
prepay the Certificates of the applicable
Series. The amount initially deposited in
a pre-funding account for a Series of
Certificates will not exceed fifty
percent of the aggregate principal amount
of such Series of Certificates.
If a Pre-Funding Account is established,
one or more segregated trust accounts
(each, a "Capitalized Interest Account")
may be established and maintained with
the Trustee for the related Series. On
the closing date for such Series, a
portion of the proceeds of the sale of
the Certificates of such Series will be
deposited in the Capitalized Interest
Account and used to fund the excess, if
any, of (x) the sum of (i) the amount of
interest accrued on the Certificates of
such Series and (ii) if specified in the
related Prospectus Supplement, certain
fees or expenses during the Pre-Funding
Period such as trustee fees and credit
enhancement fees, over (y) the amount of
interest available therefor from the
Primary Assets in the Trust Fund. Any
amounts on deposit in the Capitalized
Interest Account at the end of the
Pre-Funding Period that are not necessary
for such purposes will be distributed to
the person specified in the related
Prospectus Supplement.
Description of the
Certificates.................... Each Certificate will represent a
beneficial ownership interest in a Trust
Fund created by the Seller pursuant to a
Pooling and Servicing Agreement (each, an
"Agreement") among the Seller, the Master
Servicer(s) and the Trustee for the
related Series. The Certificates of any
Series may be issued in one or more
classes as specified in the related
Prospectus Supplement. A Series of
Certificates may include one or more
classes of senior Certificates
(collectively, the "Senior Certificates")
which receive certain preferential
treatment specified in the related
Prospectus Supplement with respect to one
or more classes of subordinate
Certificates (collectively, the
"Subordinated Certificates"). Certain
Series or classes of Certificates may be
covered by insurance policies, cash
accounts, letters of credit, financial
guaranty insurance policies, third party
guarantees or other forms of credit
enhancement as described herein and in the
related Prospectus Supplement.
One or more classes of Certificates of
each Series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be entitled
to receive distributions only of
prepayments of principal throughout the
lives of the Certificates or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Certificates
of such Series throughout the lives of
the Certificates or during specified
periods or may be subordinated with
respect to certain losses or
delinquencies; (iv) may be entitled to
receive such distributions only after
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<PAGE>
the occurrence of events specified in the
Prospectus Supplement; (v) may be
entitled to receive distributions in
accordance with a schedule or formula or
on the basis of collections from
designated portions of the assets in the
related Trust Fund; (vi) as to
Certificates entitled to distributions
allocable to interest, may be entitled to
receive interest at a fixed rate or a
rate that is subject to change from time
to time; and (vii) as to Certificates
entitled to distributions allocable to
interest, may be entitled to
distributions allocable to interest only
after the occurrence of events specified
in the Prospectus Supplement and may
accrue interest until such events occur,
in each case as specified in the
Prospectus Supplement. The timing and
amounts of such distributions may vary
among classes, over time, or otherwise as
specified in the related Prospectus
Supplement.
Distributions on the
Certificates.................... Distributions on the Certificates
entitled thereto will be made monthly,
quarterly, semi-annually or at such other
intervals and on such other Distribution
Dates specified in the Prospectus
Supplement solely out of the payments
received in respect of the assets of the
related Trust Fund or other assets pledged
for the benefit of the Certificates as
specified in the related Prospectus
Supplement. The amount allocable to
payments of principal and interest on any
Distribution Date will be determined as
specified in the Prospectus Supplement.
Unless otherwise specified in the
Prospectus Supplement, all distributions
will be made pro rata to
Certificateholders of the class entitled
thereto, and the aggregate original
principal balance of the Certificates will
equal the aggregate distributions
allocable to principal that such
Certificates will be entitled to receive.
If specified in the Prospectus Supplement,
the Certificates will have an aggregate
original principal balance equal to the
aggregate unpaid principal balance of the
Mortgage Assets as of a date specified in
the related Prospectus Supplement related
to the creation of the Trust Fund (the
"Cut-off Date") and will bear interest in
the aggregate at a rate equal to the
interest rate borne by the underlying
Mortgage Loans, Agency Securities or
Private Mortgage-Backed Securities, net
of the aggregate servicing fees and any
other amounts specified in the Prospectus
Supplement. If specified in the
Prospectus Supplement, the aggregate
original principal balance of the
Certificates and interest rates on the
classes of Certificates will be
determined based on the cash flow on the
Mortgage Assets. The Pass-Through Rate at
which interest will be passed through to
holders of Certificates entitled thereto
may be a fixed rate or a rate that is
subject to change from time to time from
the time and for the periods, in each
case as specified in the Prospectus
Supplement. Any such rate may be
calculated on a loan-by-loan, weighted
average or other basis, in each case as
described in the Prospectus Supplement.
Credit Enhancement............... The assets in a Trust Fund or the
Certificates of one or more classes in the
related Series may have the benefit of
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<PAGE>
one or more types of credit enhancement
described in the related Prospectus
upplement. The protection against losses
afforded by any such credit support will
be limited. Such credit enhancement may
include one or more of the following
types:
A. Subordination................... The rights of the holders of the
Subordinated Certificates of a Series to
receive distributions with respect to the
assets in the related Trust Fund will be
subordinated to such rights of the holders
of the Senior Certificates of the same
Series to the extent described in the
related Prospectus Supplement. This
subordination is intended to enhance the
likelihood of regular receipt by holders
of Senior Certificates of the full amount
of payments which such holders would be
entitled to receive if there had been no
losses or delinquencies. The protection
afforded to the holders of Senior
Certificates of a Series by means of the
subordination feature may be accomplished
by (i) the preferential right of such
holders to receive, prior to any
distribution being made in respect of the
related Subordinated Certificates, the
amounts of principal and interest due them
on each Distribution Date out of the funds
available for distribution on such date in
the related Certificate Account and, to
the extent described in the related
Prospectus Supplement, by the right of
such holders to receive future
distributions on the assets in the related
Trust Fund that would otherwise have been
payable to the Subordinated
Certificateholders; (ii) reducing the
ownership interest of the related
subordinated Certificates; (iii) a
combination of clauses (i) and (ii) above;
or (iv) as otherwise described in the
related Prospectus Supplement. The
protection afforded to the holders of
Senior Certificates of a Series by means
of the subordination feature also may be
accomplished by allocating certain types
of losses or delinquencies to the
Subordinated Certificates to the extent
described in the related Prospectus
Supplement.
If so specified in the related Prospectus
Supplement, the same class of
Certificates may be Senior Certificates
with respect to certain types of payments
or certain types of losses or
delinquencies and Subordinated
Certificates with respect to other types
of payments or types of losses or
delinquencies. If so specified in the
related Prospectus Supplement,
subordination may apply only in the event
of certain types of losses not covered by
other forms of credit support, such as
hazard losses not covered by standard
hazard insurance policies or losses due
to the bankruptcy of the borrower. If
specified in the Prospectus Supplement, a
reserve fund may be established and
maintained by the deposit therein of
distributions allocable to the holders of
Subordinated Certificates until a
specified level is reached. The related
Prospectus Supplement will set forth
information concerning the amount of
subordination of a class or classes of
Subordinated Certificates in a Series,
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<PAGE>
the circumstances in which such
subordination will be applicable, the
manner, if any, in which the amount of
subordination will decrease over time,
the manner of funding the related reserve
fund, if any, and the conditions under
which amounts in any such reserve fund
will be used to make distributions to
holders of Senior Certificates or
released from the related Trust Fund.
B. Reserve Accounts................ One or more Reserve Accounts may be
established and maintained for each
Series. The related Prospectus Supplement
will specify whether or not any such
Reserve Account will be included in the
corpus of the Trust Fund for such Series
and will also specify the manner of
funding the related Reserve Account and
the conditions under which the amounts in
any such Reserve Account will be used to
make distributions to holders of
Certificates of a particular class or
released from the related Trust Fund.
C. Pool Insurance Policy........... A mortgage pool insurance policy or
policies (the "Pool Insurance Policy") may
be obtained and maintained for each Series
pertaining to Single Family Loans,
Cooperative Loans or Contracts, limited in
scope, covering defaults on the related
Single Family Loans, Cooperative Loans or
Contracts in an initial amount equal to a
specified percentage of the aggregate
principal balance of all Single Family
Loans, Cooperative Loans or Contracts
included in the Mortgage Pool as of the
Cut-off Date or such other date as is
specified in the related Prospectus
Supplement.
D. Special Hazard Insurance
Policy.......................... In the case of Single Family Loans,
Cooperative Loans or Contracts, certain
physical risks that are not otherwise
insured against by standard hazard
insurance policies may be covered by a
special hazard insurance policy or
policies (the "Special Hazard Insurance
Policy"). Unless otherwise specified in
the related Prospectus Supplement, each
Special Hazard Insurance Policy will be
limited in scope and will cover losses in
an initial amount equal to the greatest of
(i) a specified percentage of the
aggregate principal balance of the Single
Family Loans, Cooperative Loans or
Contracts as of the related Cut-off Date,
(ii) twice the unpaid principal balance as
of the related Cut-off Date of the largest
Single Family Loan, Cooperative Loan or
Contract in the related Mortgage Pool, or
(iii) the aggregate principal balance of
Single Family Loans, Cooperative Loans or
Contracts as of the Cut-off Date secured
by property in any single zip code
concentration.
E. Bankruptcy Bond................. A bankruptcy bond or bonds (the
"Bankruptcy Bond") may be obtained
covering certain losses resulting from
action which may be taken by a bankruptcy
court in connection with a Single Family
Loan, Cooperative Loan or Contract. The
level of coverage of each Bankruptcy Bond
will be specified in the related
Prospectus Supplement.
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<PAGE>
F. FHA Insurance and VA
Guarantee....................... All or a portion of the Mortgage Loans
in a Mortgage Pool may be insured by FHA
insurance and all or a portion of the
Single Family Loans or Contracts in a
Mortgage Pool may be partially guaranteed
by the VA.
G. Other Arrangements.............. Other arrangements as described in the
related Prospectus Supplement including,
but not limited to, one or more letters of
credit, financial guaranty insurance
policies or third party guarantees,
interest rate or other swap agreements,
caps, collars or floors, may be used to
provide coverage for certain risks of
defaults or losses. These arrangements may
be in addition to or in substitution for
any forms of credit support described in
the Prospectus. Any such arrangement must
be acceptable to each nationally
recognized rating agency that rates the
related Series of Certificates (the
"Rating Agency").
H. Cross Support................... If specified in the Prospectus
Supplement, the beneficial ownership of
separate groups of assets or separate
Trust Funds may be evidenced by separate
classes of the related Series of
Certificates. In such case, credit support
may be provided by a cross-support feature
which requires that distributions be made
with respect to certain Certificates
evidencing beneficial ownership of one or
more asset groups or Trust Funds prior to
distributions to other Certificates
evidencing a beneficial ownership interest
in other asset groups or Trust Funds. If
specified in the Prospectus Supplement,
the coverage provided by one or more forms
of credit support may apply concurrently
to two or more separate Trust Funds,
without priority among such Trust Funds,
until the credit support is exhausted. If
applicable, the Prospectus Supplement will
identify the asset groups or Trust Funds
to which such credit support relates and
the manner of determining the amount of
the coverage provided thereby and of the
application of such coverage to the
identified asset groups or Trust Funds.
Advances......................... Unless otherwise specified in the
related Prospectus Supplement, each Master
Servicer and, if applicable, each mortgage
servicing institution that services a
Mortgage Loan in a Mortgage Pool on behalf
of a Master Servicer (a "Sub-Servicer")
will be obligated to advance amounts
corresponding to delinquent principal and
interest payments on such Mortgage Loan
until the date on which the related
Mortgaged Property is sold at a
foreclosure sale or the related Mortgage
Loan is otherwise liquidated. Any such
obligation to make advances may be limited
to amounts due holders of Senior
Certificates of the related Series, to
amounts deemed to be recoverable from late
payments or liquidation proceeds, for
specified periods or any combination
thereof, or as otherwise specified in the
related Prospectus Supplement. See
"Description of the Certificates --
Advances." Advances will be reimbursable
to the extent described herein and in the
related Prospectus Supplement.
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<PAGE>
Optional Termination The Master Servicer, the holders of the
residual interests in a REMIC, or any
other entity specified in the related
Prospectus Supplement may have the option
to effect early retirement of a Series of
Certificates through the purchase of the
Mortgage Assets and other assets in the
related Trust Fund under the
circumstances and in the manner described
in "The Pooling and Servicing Agreement
-- Termination; Optional Termination."
Legal Investment................. Unless otherwise specified in the
related Prospectus Supplement, each class
of Certificates offered hereby and by the
related Prospectus Supplement will
constitute "mortgage-related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
and, as such, will be legal investments
for certain types of institutional
investors to the extent provided in
SMMEA, subject, in any case, to any other
regulations which may govern investments
by such institutional investors. See
"Legal Investment."
Institutions whose investment activities
are subject to legal investment laws and
regulations or to review by certain
regulatory authorities may be subject to
restrictions on investment in the
Certificates. Any such institution should
consult its own legal advisors in
determining whether and to what extent
there may be restrictions on its ability
to invest in the Certificates. See "Legal
Investment" herein.
Certain Federal Income Tax
Consequences..................... The federal income tax consequences of
the purchase, ownership and disposition of
the Certificates of each series will
depend on whether an election is made to
treat the corresponding Trust Fund (or
certain assets of the Trust Fund) as a
REMIC under the Internal Revenue Code of
1986, as amended (the "Code").
REMIC. If an election is to be made to
-----
treat the Trust Fund for a series of
Certificates as a REMIC for federal
income tax purposes, the related
Prospectus Supplement will specify which
class or classes thereof will be
designated as regular interests in the
REMIC ("REMIC Regular Certificates") and
which class of Certificates will be
designated as the residual interest in
the REMIC ("REMIC Residual
Certificates").
For federal income tax purposes, REMIC
Regular Certificates generally will be
treated as debt obligations of the Trust
Fund with payment terms equivalent to the
terms of such Certificates. Holders of
REMIC Regular Certificates will be
required to report income with respect to
such Certificates under an accrual
method, regardless of their normal tax
accounting method. Original issue
discount, if any, on REMIC Regular
Certificates will be includible in the
income of the Holders thereof as it
accrues, in advance of receipt of the
cash attributable thereto, which rate of
accrual will be determined based on a
reasonable assumed
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<PAGE>
prepayment rate. The REMIC Residual
Certificates generally will not be
treated as evidences of indebtedness for
federal income tax purposes, but instead,
as representing rights to the taxable
income or net loss of the REMIC.
Each holder of a REMIC Residual
Certificate will be required to take into
account separately its pro rata portion
of the REMIC's taxable income or loss.
Certain income of a REMIC (referred to as
"excess inclusions") generally may not be
offset by such a holder's net operating
loss carryovers or other deductions, and
in the case of a tax-exempt holder of a
REMIC Residual Certificate will be
treated as "unrelated business taxable
income". In certain situations,
particularly in the early years of a
REMIC, holders of a REMIC Residual
Certificate may have taxable income, and
possibly tax liabilities with respect to
such income, in excess of cash
distributed to them. "DISQUALIFIED
ORGANIZATIONS," AS DEFINED IN "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- REMIC
RESIDUAL CERTIFICATES -- TAX ON
DISPOSITION OF EMIC RESIDUAL
CERTIFICATES; RESTRICTION ON TRANSFER;
HOLDING BY PASS-THROUGH ENTITIES," ARE
PROHIBITED FROM ACQUIRING OR HOLDING ANY
BENEFICIAL INTEREST IN THE REMIC RESIDUAL
CERTIFICATES. In certain cases, a
transfer of a REMIC Residual Certificate
will not be effective for Federal income
tax purposes. See "Certain Federal Income
Tax Consequences -- Transfers of REMIC
Residual Certificates" and " -- Foreign
Investors" herein.
Grantor Trust. If no election is to be
-------------
made to treat the Trust Fund for a series
of Certificates ("Non-REMIC
Certificates") as a REMIC, the Trust Fund
will be classified as a grantor trust for
federal income tax purposes and not as an
association taxable as a corporation.
Holders of Non-REMIC Certificates will be
treated for such purposes, subject to the
possible application of the stripped bond
rules, as owners of undivided interests
in the related Mortgage Loans and
generally will be required to report as
income their pro rata share of the entire
gross income (including amounts paid as
reasonable servicing compensation) from
the Mortgage Loan and will be entitled,
subject to certain limitations, to deduct
their pro rata share of expenses of the
Trust Fund.
Investors are advised to consult their
tax advisors and to review "Certain
Federal Income Tax Consequences" herein
and, if applicable, in the related
Prospectus Supplement.
ERISA Considerations............... A fiduciary of any employee benefit plan
or other retirement plan or arrangement
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code
should carefully review with its legal
advisors whether the purchase, holding or
disposition of Certificates could give
rise to a prohibited transaction under
ERISA or the Code or subject the assets of
the Trust Fund to the fiduciary investment
standards of ERISA. See "ERISA
Considerations."
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<PAGE>
THE TRUST FUND
A Trust Fund for a Series of Certificates will include the Mortgage
Assets consisting of (A) a Mortgage Pool* comprised of (i) Single Family Loans,
(ii) Multifamily Loans, (iii) Cooperative Loans or (iv) Contracts, (B) Agency
Securities, or (C) Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire beneficial
ownership interest in a Trust Fund which will contain a beneficial ownership
interest in another Trust Fund which will contain the Mortgage Assets. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Assets
of any Trust Fund will consist of Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities but not a combination thereof.
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from the Lenders and conveyed by the Seller to the related
Trust Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program-Underwriting Standards."
The following is a brief description of the Mortgage Assets expected to
be included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be
provided in the Prospectus Supplement, and specific information will be set
forth in a report on Form 8-K to be filed with the Commission within fifteen
days after the initial issuance of such Certificates (the "Detailed
Description"). A copy of the Agreement with respect to each Series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Mortgage Assets relating to
such Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
THE MORTGAGE LOANS-GENERAL
The real property and Manufactured Homes, as the case may be, which
secure repayment of the Mortgage Loans (the "Mortgaged Properties") may be
located in any one of the fifty states or the District of Columbia, Guam,
Puerto Rico or any other territory of the United States. Certain Mortgage Loans
may be conventional loans (I.E., loans that are not insured or guaranteed by
any governmental agency), insured by the FHA or partially guaranteed by the VA,
as specified in the Prospectus Supplement and described below. Mortgage Loans
with certain Loan-to-Value Ratios (as defined herein) and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly. Unless otherwise specified in the related Prospectus
Supplement, all of the monthly-pay Mortgage Loans in a Mortgage Pool will have
payments due on the first day of each month. The payment terms of the Mortgage
Loans to be included in a Trust Fund will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
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*Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interests, as described below, in a single Trust Fund
consisting primarily of the Mortgage Loans in such Mortgage Pool. Similarly,
the term "Pass-Through Rate" will refer to the Pass-Through Rate borne by the
Certificates of one specific Series and the term "Trust Fund" will refer to one
specific Trust Fund.
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<PAGE>
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest may
be deferred and added to the principal of a Mortgage Loan for such
periods and under such circumstances as may be specified in the related
Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the Mortgage Rate for a period of time or
for the life of the Mortgage Loan, and the amount of any difference may
be contributed from funds supplied by the seller of the Mortgaged
Property or another source or may be treated as accrued interest added to
the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis
of an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the interest rate on the Mortgage Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity ("balloon" payments).
Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
or may change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments. Certain Mortgage
Loans sometimes called graduated payment mortgage loans may require the
monthly payments of principal and interest to increase for a specified
period, provide for deferred payment of a portion of the interest due
monthly during such period, and recoup the deferred interest through
negative amortization whereby the difference between the scheduled
payment of interest and the amount of interest actually accrued is added
monthly to the outstanding principal balance. Other Mortgage Loans
sometimes referred to as growing equity mortgage loans may provide for
periodic scheduled payment increases for a specified period with the full
amount of such increases being applied to principal. Other Mortgage Loans
sometimes referred to as reverse mortgages may provide for monthly
payments to the borrowers with interest and principal payable when the
borrowers move or die. Reverse mortgages typically are made to older
persons who have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified
time periods. The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage Loan in
connection with the sale or certain transfers of the related Mortgaged
Property. Other Mortgage Loans may be assumable by persons meeting the
then applicable underwriting standards of the Lender.
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then specifically known to the
Seller, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable
Cut-off Date, (ii) the type of property securing the Mortgage Loans (E.G., one-
to four-family houses, vacation and second homes, Manufactured Homes,
multifamily apartments or other real property), (iii) the original terms to
maturity of the Mortgage Loans, (iv) the largest original principal balance and
the smallest original principal balance of any of the Mortgage Loans, (v) the
earliest origination date and latest maturity date of any of the Mortgage
Loans, (vi) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, (vii) the Mortgage Rates or
APR's or range of Mortgage Rates or APR's borne by the Mortgage Loans, and
(viii) the geographical distribution of the Mortgage Loans on a state-by-state
basis. If specific information respecting the Mortgage Loans is not known to
the Seller at the time the related Certificates are initially offered, more
general information of
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the nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, the
"Collateral Value" of a Mortgaged Property, other than with respect to
Contracts and certain Mortgage Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Mortgage Loan and (b) the sales price for
such property. Unless otherwise specified in the related Prospectus Supplement,
in the case of Refinance Loans, the Collateral Value of the related Mortgaged
Property is the appraised value thereof determined in an appraisal obtained at
the time of refinancing. Unless otherwise specified in the related Prospectus
Supplement, for purposes of calculating the Loan-to-Value Ratio of a Contract
relating to a new Manufactured Home, the Collateral Value is no greater than
the sum of a fixed percentage of the list price of the unit actually billed by
the manufacturer to the dealer (exclusive of freight to the dealer site)
including "accessories" identified in the invoice (the "Manufacturer's Invoice
Price"), plus the actual cost of any accessories purchased from the dealer, a
delivery and set-up allowance, depending on the size of the unit, and the cost
of state and local taxes, filing fees and up to three years prepaid hazard
insurance premiums. Unless otherwise specified in the related Prospectus
Supplement, the Collateral Value of a used Manufactured Home is the least of
the sales price, appraised value, and National Automobile Dealer's Association
book value plus prepaid taxes and hazard insurance premiums. The appraised
value of a Manufactured Home is based upon the age and condition of the
manufactured housing unit and the quality and condition of the mobile home park
in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building
resulting in an oversupply of rental housing stock or a decrease in employment
reducing the demand for rental units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness to tenants of the Mortgaged Properties. To the extent
that such losses are not covered by credit enhancements, such losses will be
borne, at least in part, by the holders of the Certificates of the related
Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Pooling and Servicing Agreement." With respect to Mortgage Loans
serviced by a Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Seller with respect to a Series of Certificates will be to
obtain certain representations and warranties from the Lenders or other third
parties and to assign to the Trustee for such Series of Certificates the
Seller's rights with respect to such representations and warranties. See "The
Pooling and Servicing Agreement-Assignment of Mortgage Assets." The obligations
of each Master Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related
Agreement (including its obligation to enforce the obligations of the
Sub-Servicers, Lenders or other third parties as more fully described herein
under "Mortgage Loan Program-Representations by Lenders; Repurchases" and "The
Pooling and Servicing Agreement-Sub-Servicing by Lenders," "-Assignment of
Mortgage Assets") and its obligation to make certain cash advances in the event
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of delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Certificates-Advances." The
obligations of a Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, the Single Family Loans may include
loans or participations therein secured by mortgages or deeds of trust on
condominium units in condominium buildings together with such condominium
unit's appurtenant interest in the common elements of the condominium building.
Unless otherwise specified, the Cooperative Loans will be secured by security
interests in or similar liens on stock, shares or membership certificates
issued by Cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. Single Family Loans and Cooperative Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, Single Family Loans and Cooperative Loans
will all have individual principal balances at origination of not less than
$25,000 and not more than $1,000,000, and original terms to stated maturity of
15 to 40 years.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the
term of the leasehold will exceed the scheduled maturity of the Mortgage Loan
by at least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. Such loans may be conventional loans or FHA-insured loans, as specified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Multifamily Loans will all have original terms to stated
maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multifamily Loans may
be secured by apartment buildings owned by Cooperatives. The Cooperative owns
all the apartment units in the building and all common areas. The Cooperative
is owned by tenant-stockholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multifamily Loan, as well as all other operating expenses,
will be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial
areas the Cooperative might control. Unanticipated expenditures may in some
cases have to be paid by special assessments on the tenant-stockholders.
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CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR.
Unless otherwise specified in the related Prospectus Supplement, Contracts will
all have individual principal balances at origination of not less than $10,000
and not more than $1,000,000 and original terms to stated maturity of 5 to 40
years.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust Fund, among other things, the date of
origination of the Contracts; the APRs on the Contracts; the Contract Loan-to-
Value Ratios; the minimum and maximum outstanding principal balances as of the
Cut-off Date and the average outstanding principal balance; the outstanding
principal balances of the Contracts included in the related Trust Fund; and the
original maturities of the Contracts and the last maturity date of any
Contract.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned
corporate instrumentality of the United States with the United States
Department of Housing and Urban Development. Section 306(g) of Title II of the
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA
to guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"),
or partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitations as to amount, to
perform its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which may
be issued under either the GNMA I Program or the GNMA II Program) will be a
"fully modified pass-through" mortgaged-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or
VA Loans. The mortgage loans underlying the GNMA Certificates will consist of
FHA Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each
such GNMA Certificate.
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The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities
of substantially less than 30 years). Each such GNMA Certificate will be based
on and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties or manufactured homes and will provide for the payment
by or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to
the registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of
principal on the FHA Loans or VA Loans underlying such GNMA Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as
it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly
to the registered holder of such GNMA Certificate. In the event no payment is
made by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to
make such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments
on any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund
or any other early recovery of principal on such loan will be passed through to
the Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that,
during the early years of such mortgage loans, will be less than the amount of
stated interest on such mortgage loans. The interest not so paid will be added
to the principal of such graduated payment mortgage loans and, together with
interest thereon, will be paid in subsequent years. The obligations of GNMA and
of a GNMA Issuer will be the same irrespective of whether the GNMA Certificates
are backed by graduated payment mortgage loans or Buydown Loans. No statistics
comparable to the FHA's
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prepayment experience on level payment, non-buydown loans are available in
respect of graduated payment or buydown mortgages. GNMA Certificates related to
a Series of Certificates may be held in book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed
by multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
The GNMA Certificates included in a Trust fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
FNMA CERTIFICATES. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the
FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate is equal to the lowest interest rate
of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on
the mortgage loans underlying a FNMA Certificate will be between 50 basis
points and 250 basis points greater than in its annual pass-through rate and
under a special servicing option (pursuant to which FNMA assumes the entire
risk for foreclosure losses), the annual interest rates on the mortgage loans
underlying a FNMA Certificate will generally be between 55 basis points and 255
basis points greater than the annual FNMA Certificate pass-through rate. If
specified in the Prospectus Supplement, FNMA Certificates may be backed by
adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United
States nor any agency thereof is obligated to finance FNMA's operations or to
assist FNMA in any other manner. If FNMA were unable to satisfy its
obligations, distributions to holders of FNMA Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FNMA Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed
on or after May 1, 1985 (other than FNMA Certificates backed by pools
containing graduated payment mortgage loans or mortgage loans
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secured by multifamily projects) are available in book-entry form only.
Distributions of principal and interest on each FNMA Certificate will be made
by FNMA on the 25th day of each month to the persons in whose name the FNMA
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the FNMA Certificate register in the case of fully registered FNMA
Certificates) as of the close of business on the last day of the preceding
month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully
registered FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home
Loan Mortgage Corporation Act, Title III of the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the
Federal Home Loan Banks. FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC
Certificates are sold under the terms of a Mortgage Participation Certificate
Agreement. A FHLMC Certificate may be issued under either FHLMC's Cash Program
or Guarantor Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 30 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group. Under the Guarantor Program, any
such FHLMC Certificate group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of
the applicable Certificate rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the Prospectus Supplement for a Series of Certificates, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees
the timely payment of principal based on the difference between the pool
factor, published in the month preceding the month of distribution and the pool
factor published in such month of distribution. Pursuant to its guarantees,
FHLMC indemnifies holders of FHLMC Certificates against any diminution in
principal by reason of charges for property repairs, maintenance and
foreclosure. FHLMC may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than (i) 30 days following foreclosure sale, (ii) 30 days
following payment of the claim by any mortgage insurer, or (iii) 30 days
following the expiration of any right of redemption, whichever occurs later,
but in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding the
collection of principal after default on the mortgage loans underlying FHLMC
Certificates, including the timing of demand for acceleration, FHLMC reserves
the right to exercise its judgment with respect to the mortgage loans in the
same manner as for mortgage loans which it has purchased but not sold. The
length of time
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necessary for FHLMC to determine that a mortgage loan should be accelerated
varies with the particular circumstances of each mortgagor, and FHLMC has not
adopted standards which require that the demand be made within any specified
period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FHLMC Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on
the underlying mortgage loans, interest at the FHLMC pass-through rate and any
other sums such as prepayment fees, within 60 days of the date on which such
payments are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans
underlying a FHLMC Certificate may exceed the pass-through rate on the FHLMC
Certificate by 50 to 100 basis points. Under such program, FHLMC purchases
groups of whole mortgage loans from sellers at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which when
applied to the interest rate of the mortgage loans and participations
purchased, results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate
is established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day
of the second month following the month in which the purchaser became a
registered holder of the FHLMC Certificates. Thereafter, such remittance will
be distributed monthly to the registered holder so as to be received normally
by the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or
after January 2, 1985, and makes payments of principal and interest each month
to the registered holders thereof in accordance with such holders'
instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain FHLMC,
FNMA, GNMA or other government agency or government-sponsored agency
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA, GNMA or another government agency or government-sponsored agency,
each as trustee, or by another trustee named in the related Prospectus
Supplement. FHLMC, FNMA, GNMA or another government agency or
government-sponsored agency will guarantee each stripped Agency Security to the
same extent as such entity guarantees the underlying securities backing such
stripped Agency Security, unless otherwise specified in the related Prospectus
Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government
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agencies or government-sponsored agencies. The characteristics of any such
mortgage pass-through certificates will be described in such Prospectus
Supplement. If so specified, a combination of different types of Agency
Securities may be held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of
Mortgage Loans, or (b) collateralized mortgage obligations secured by Mortgage
Loans. Private Mortgage-Backed Securities will have been issued pursuant to a
PMBS agreement (the "PMBS Agreement"). The seller/servicer of the underlying
Mortgage Loans will have entered into the PMBS Agreement with the PMBS Trustee
under the PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will
possess the Mortgage Loans underlying such Private Mortgage-Backed Security.
Mortgage Loans underlying a Private Mortgage-Backed Security will be serviced
by the PMBS Servicer directly or by one or more sub-servicers who may be
subject to the supervision of the PMBS Servicer. Unless otherwise described in
the Prospectus Supplement, the PMBS Servicer will be a FNMA or FHLMC approved
servicer and, if FHA Loans underlie the Private Mortgage-Backed Securities,
approved by the Department of Housing and Urban Development ("HUD") as an FHA
mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Seller. The obligations of the PMBS Issuer will generally be limited to
certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the Mortgage Loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private
Mortgage-Backed Securities by the PMBS Trustee or the PMBS Servicer. The PMBS
Issuer or the PMBS Servicer may have the right to repurchase assets underlying
the Private Mortgage-Backed Securities after a certain date or under other
circumstances specified in the related Prospectus Supplement.
UNDERLYING LOANS. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property, multifamily
property, Manufactured Homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and
the related shares issued by such Cooperative. Except as otherwise specified in
the related Prospectus Supplement, (i) no Mortgage Loan will have had a
Loan-to-Value Ratio at origination in excess of 95%, (ii) each Single Family
Loan secured by a Mortgaged Property having a Loan-to-Value Ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy until
the principal balance is reduced to 80%, (iii) each Mortgage Loan will have had
an original term to stated maturity of not less than 5 years and not more than
40 years, (iv) no Mortgage Loan that was more than 30 days delinquent more 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.
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CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying
the Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify (i) the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of
the Mortgage Loans which comprise the underlying assets for the Private
Mortgage-Backed Securities including to the extent available (A) the payment
features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, and (D) the minimum and maximum stated
maturities of the underlying Mortgage Loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Mortgage-Backed Securities,
(iv) the weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Mortgage Loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying Mortgage Loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which Mortgage Loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee
to be incomplete. The period during which such substitution will be permitted
generally will be indicated in the related Prospectus Supplement. The related
Prospectus Supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the Trust
Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the sale
of the Certificates of each Series to repay short-term loans incurred to
finance the purchase of the Mortgage Assets related to such Certificates, to
acquire certain of the Mortgage Assets to be deposited in the related trust
Fund, and/or to pay other expenses connected with pooling Mortgage Assets and
issuing Certificates. Any amounts remaining after such payments may be used for
general corporate purposes. The Seller expects to sell Certificates in Series
from time to time.
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THE SELLER
Bear Stearns Mortgage Securities Inc., the Seller, is a Delaware
corporation organized on October 17, 1991 for the purpose of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller maintains
its principal office at 245 Park Avenue, New York, New York 10167. Its
telephone number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Seller, either
directly or through affiliates, from Lenders. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Loans so acquired by the Seller
will have been originated in accordance with the underwriting criteria
specified below under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will represent and warrant that all Mortgage Loans originated and/or
sold by it to the Seller or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage lenders
or manufactured home lenders generally during the period of origination. As to
any Mortgage Loan insured by the FHA or partially guaranteed by the VA, the
Lender will represent that it has complied with underwriting policies of the
FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Mortgaged Property as collateral. In general, a prospective
borrower applying for a Single Family Loan or a Cooperative Loan or for
financing secured by a Manufactured Home is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history
with local merchants and lenders and any record of bankruptcy. In most cases,
an employment verification is obtained from an independent source (typically
the borrower's employer) which verification reports the length of employment
with that organization, the current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of
deposits at financial institutions where the borrower has demand or savings
accounts. Underwriting standards which pertain to the creditworthiness of
borrowers seeking Multifamily Loans will be described in the related Prospectus
Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the
cost of replacing the home. With respect to Cooperative Loans, the appraisal is
based on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a
comparable Manufactured Home. With respect to a Multifamily Loan, the appraisal
must specify whether an income analysis, a market analysis or a cost analysis,
was used. An appraisal employing the income approach to value analyzes a
multifamily project's cashflow, expenses, capitalization and other operational
information in determining the property's value. The market approach to value
focuses its analysis on the prices paid for the purchase of similar properties
in the multifamily project's area, with adjustments made for variations between
these other properties and the multifamily project being appraised. The cost
approach calls for the appraiser to make an estimate of land value and then
determine the current cost of reproducing the building less any accrued
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depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts, once
all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a leasehold
interest in a real property, the title to which is held by a third party
lessor, the Lender will represent and warrant, among other things, that the
remaining term of the lease and any sublease is at least five years longer than
the remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such
Mortgage Loans may provide for escalating or variable payments by the mortgagor
or obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as
such payments increase.
QUALIFICATIONS OF LENDERS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will be required to satisfy the qualifications set forth herein. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Unless otherwise
specified in the Prospectus Supplement, each Lender must be a seller/servicer
approved by either FNMA or FHLMC, and each Lender must be a mortgagee approved
by the HUD or an institution the deposit accounts in which are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or
Agreement, each Lender will have made representations and warranties in respect
of the Mortgage Loans sold by such Lender and evidenced by a Series of
Certificates. Such representations and warranties generally include, among
other things: (i) that title insurance (or in the case of Mortgaged Properties
located in areas where such policies are generally not available, an attorney's
certificate of title) in the case of Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first lien on, or a perfected security interest with
respect to, the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Mortgaged Property was free from damage and was in good
repair; (iv) that there were no delinquent tax or assessment liens against the
Mortgaged Property, (v) that no required payment on a Mortgage Loan was more
than thirty days delinquent; and (vi) that each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable state and federal
laws and regulations in all material respects.
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Unless otherwise specified in the related Prospectus Supplement, all of
the representations and warranties of a Lender in respect of a Mortgage Loan
will have been made as of the date on which such Lender sold the Mortgage Loan
to the Seller or one of its affiliates. A substantial period of time may have
elapsed between such date and the date of initial issuance of the Series of
Certificates evidencing an interest in such Mortgage Loan. Since the
representations and warranties of a Lender do not address events that may occur
following the sale of a Mortgage Loan by such Lender, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Mortgage Loan occurs after
the date of sale of such Mortgage Loan by such Lender to the Seller or its
affiliates. If the Master Servicer is also a Lender with respect to a
particular Series, such representations will be in addition to the
representations and warranties, if any, made by the Master Servicer in its
capacity as a Master Servicer.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or the Trustee, if the Master Servicer is the Lender, will
promptly notify the relevant Lender of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and
adversely affects the interests of the Certificateholders in such Mortgage
Loan. Unless otherwise specified in the related Prospectus Supplement, if such
Lender cannot cure such breach within 60 days after notice from the Master
Servicer or the Trustee, as the case may be, then such Lender will be obligated
to repurchase such Mortgage Loan from the Trust Fund at a price (the "Purchase
Price") equal to the unpaid principal balance thereof as of the date of the
repurchase plus accrued interest thereon to the first day of the month
following the month of repurchase at the Mortgage Rate (less any amount payable
as related servicing compensation if the Lender is the Master Servicer) or such
other price as may be described in the related Prospectus Supplement. Except in
those cases in which the Master Servicer is the Lender, the Master Servicer
will be required under the applicable Agreement to enforce this obligation for
the benefit of the Trustee and the holders of the Certificates, following the
practices it would employ in its good faith business judgment were it the owner
of such Mortgage Loan. This repurchase obligation will constitute the sole
remedy available to holders of Certificates or the Trustee for a breach of
representation by a Lender. Certain rights of substitution for defective
Mortgage Loans may be provided with respect to a Series in the related
Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer is
the Lender) will be obligated to purchase a Mortgage Loan if a Lender defaults
on its obligation to do so, and no assurance can be given that Lenders will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under "The Pooling and Servicing Agreement -- Assignment of Mortgage
Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Certificateholders. In such cases, the third party
will be obligated to purchase a Mortgage Loan upon a breach of such
representations and warranties, and the Lender will not be obligated to
purchase a Mortgage Loan if the third party defaults on its obligation to do
so.
The Lender and any third party which conveyed the Mortgage Loans to the
Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the
Mortgage Loans. Any arrangements for the assignment of representations and the
repurchase of Mortgage Loans must be acceptable to the Rating Agency rating the
related Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer
may, at its option, purchase from the Trust Fund any Mortgage Loan which is
delinquent in payment by 91 days or more. Any such purchase shall be at such
price as may be described in the related Prospectus Supplement.
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DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement,
dated as of the related Cut-off Date, among the Seller, one or more Master
Servicers and the Trustee for the benefit of the holders of the Certificates of
such Series. The provisions of each Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the
related Trust Fund. A form of an Agreement is an exhibit to the Registration
Statement of which this Prospectus is a part. The following summaries describe
certain provisions which may appear in each Agreement. The Prospectus
Supplement for a Series of Certificates will describe any provision of the
Agreement relating to such Series that materially differs from the description
thereof contained in this Prospectus. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement for each Series of Certificates and
the applicable Prospectus Supplement. The Seller will provide a copy of the
Agreement (without exhibits) relating to any Series without charge upon written
request of a holder of a Certificate of such Series addressed to Bear Stearns
Mortgage Securities Inc., 245 Park Avenue, New York, New York 10167.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in fully registered form only, in the
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the Mortgage Assets included in any other Trust Fund established by the Seller.
The Certificates will not represent obligations of the Seller or any affiliate
of the Seller. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the Prospectus
Supplement ("Retained Interest"), (ii) such assets as from time to time are
required to be deposited in the related Protected Account, Certificate Account
or any other accounts established pursuant to the Agreement (collectively, the
"Accounts"); (iii) property which secured a Mortgage Loan and which is acquired
on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure and (iv) any Primary Insurance Policies, FHA insurance (the "FHA
Insurance"), VA guarantees (the "VA Guarantees"), other insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may include one or more of the following: reinvestment income on payments
received on the Mortgage Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a financial guaranty insurance policy, third party
guarantees or similar instruments or other agreements. If provided in the
related Agreement, a certificate administrator may be obligated to perform
certain duties in connection with the administration of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that receive certain preferential
treatment with respect to one or more other classes of Certificates of such
Series. Certain Series or classes of Certificates may he covered by insurance
policies or other forms of credit enhancement, in each case as described herein
and in the related Prospectus Supplement. Distributions on one or more classes
of a Series of Certificates may be made prior to one or more other classes,
after the occurrence of specified events, in accordance with a schedule or
formula, on the basis of collections from designated portions of the Mortgage
Assets in the related Trust Fund or on a different basis, in each case, as
specified in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Certificates will be made by the Trustee
on each Distribution Date (I.E, monthly, quarterly, semi-annually or at such
other intervals and on the dates as are specified in the Prospectus Supplement)
in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Certificates are registered at the close
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of business on the dates specified in the Prospectus Supplement (each, a
"Record Date"). Distributions will be made by check or money order mailed to
the persons entitled thereto at the address appearing in the register
maintained for holders of Certificates (the "Certificate Register") or, if
specified in the related Prospectus Supplement, in the case of Certificates
that are of a certain minimum denomination, upon written request by the
Certificateholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee or other person specified
in the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
DISTRIBUTIONS ON CERTIFICATES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Certificates will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any Reserve
Account and funds received as a result of credit enhancement. As between
Certificates of different classes and as between distributions of interest and
principal and, if applicable, between distributions of prepayments of principal
and scheduled payments of principal, distributions made on any Distribution
Date will be applied as specified in the Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class.
AVAILABLE FUNDS. All distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust Fund
received by the Master Servicer after the Cut-off Date and on or prior to
the day of the month of the related Distribution Date specified in the
Prospectus Supplement (the "Determination Date") except:
(a) all payments which were due on or before the Cut-off
Date;
(b) all Liquidation Proceeds, all Insurance Proceeds, all
Principal Prepayments (each defined herein) and all proceeds of any
Mortgage Loan purchased by a Lender or any other entity pursuant to
the Agreement that were received after the prepayment period
specified in the Prospectus Supplement and all related payments of
interest representing interest for any period after such prepayment
period;
(c) all scheduled payments of principal and interest due on a
date or dates subsequent to the first day of the month of
distribution;
(d) amounts received on particular Mortgage Loans as late
payments of principal or interest or other amounts required to be
paid by the mortgagors (the "Mortgagors"), but only to the extent
of any unreimbursed advance in respect thereof made by the Master
Servicer (including the related Sub-Servicers);
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(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under "Advances" below,
for advances made by the Master Servicer and advances made by
Sub-Servicers that were deposited into the Certificate Account, and
amounts representing reimbursement for certain other losses and
expenses incurred by the Master Servicer or the Seller and
described below or in the related Agreement; and
(f) that portion of each collection of interest on a
particular Mortgage Loan in such Trust Fund which represents
servicing compensation payable to the Master Servicer or Retained
Interest which is to be retained from such collection or is
permitted to be retained from related Insurance Proceeds,
Liquidation Proceeds or proceeds of Mortgage Loans purchased
pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer
(including Sub-Servicers) as described under "Advances" below and
deposited by it in the Certificate Account; and
(iii) if applicable, amounts withdrawn from a Reserve Account or
received in connection with other credit support.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Current Principal Amount
(defined herein) (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate notional principal balance)
of each class of Certificates entitled to interest from the date, at the
Pass-Through Rate and for the periods specified in the Prospectus Supplement.
To the extent funds are available therefor, interest accrued during each such
specified period on each class of Certificates entitled to interest (other than
a class of Certificates that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Certificates") will be
distributable on the Distribution Dates specified in the Prospectus Supplement
until the aggregate Current Principal Amount of the Certificates of such class
has been distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate notional principal
balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. The original Current Principal Amount
of each Certificate will equal the aggregate distributions allocable to
principal to which such Certificate is entitled. Unless otherwise specified in
the Prospectus Supplement, distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will
be calculated based on the notional principal balance of such Certificate. The
notional principal balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
With respect to any class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Current Principal Amount of
such class of Certificates on that Distribution Date. Unless otherwise
specified in the Prospectus Supplement, distributions of interest on each class
of Accrual Certificates will commence only after the occurrence of the events
specified in the Prospectus Supplement. Unless otherwise specified in the
Prospectus Supplement, prior to such time, the beneficial ownership interest of
such class of Accrual Certificates in the Trust Fund, as reflected in the
aggregate Current Principal Amount of such class of Accrual Certificates, will
increase on each Distribution Date by the amount of interest that accrued on
such class of Accrual Certificates during the preceding interest accrual period
but that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Certificates will thereafter accrue interest on
its outstanding Current Principal Amount as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the Prospectus
Supplement, the aggregate "Current Principal Amount" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Current Principal Amount of such class of Certificates specified in
the Prospectus Supplement, reduced by all distributions and losses reported to
the holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates. The Prospectus Supplement will specify the method by which the
amount of principal to be distributed on the Certificates on each Distribution
Date will be calculated and the manner in which such amount will be allocated
among the classes of Certificates entitled to distributions of principal.
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If so provided in the Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in the Prospectus Supplement. Any such allocation of
Principal Prepayments to such class or classes of Certificateholders will have
the effect of accelerating the amortization of such Senior Certificates while
increasing the interests evidenced by the Subordinated Certificates in the
Trust Fund. Increasing the interests of the Subordinated Certificates relative
to that of the Senior Certificates is intended to preserve the availability of
the subordination provided by the Subordinated Certificates. See "Credit
Enhancement-Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the Prospectus Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in the Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the Prospectus Supplement if, due to substantial payments of
principal (including Principal Prepayments) on the Mortgage Assets, low rates
then available for reinvestment of such payments or both, the Trustee or the
Master Servicer determines, based on the assumptions specified in the
Agreement, that the amount anticipated to be on deposit in the Certificate
Account on the next Distribution Date, together with, if applicable, any
amounts available to be withdrawn from any Reserve Account, may be insufficient
to make required distributions on the Certificates on such Distribution Date.
Unless otherwise specified in the Prospectus Supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal
on the Certificates on the next Distribution Date. Unless otherwise specified
in the Prospectus Supplement, all unscheduled distributions will include
interest at the applicable Pass-Through Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or funds held in any of
the Accounts for future distributions to the holders of such Certificates), an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
will be recoverable out of late payments by Mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise with respect to the specific Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the
Mortgage Loans.
In making advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If advances
are made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable Account
on such Distribution Date would be less than the amount required to be
available for distributions to Certificateholders on such date. Any Master
Servicer funds advanced will be reimbursable to the Master Servicer out of
recoveries on the specific Mortgage Loans with respect to which such advances
were made (E.G., late payments made by the related Mortgagor, any related
Insurance Proceeds, Liquidation Proceeds or proceeds of any Mortgage Loan
purchased by a Lender under the circumstances described hereinabove). Advances
by the Master Servicer (and any advances by a Sub-Servicer) also will be
reimbursable to the Master Servicer (or Sub-Servicer) from cash otherwise
distributable to Certificateholders (including the holders of Senior
Certificates) at such time as the Master Servicer determines that any such
advances previously made are not
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ultimately recoverable from the proceeds with respect to the specific Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a specific Mortgage Loan. The Master Servicer also
will be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the
Agreement. If specified in the related Prospectus Supplement, the obligations
of the Master Servicer to make advances may be supported by a cash advance
reserve fund, a surety bond or other arrangement, in each case as described in
such Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
and except as otherwise set forth in an applicable Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Certificateholder of record of the related Series a statement setting forth, to
the extent applicable or material to such Series of Certificates, among other
things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and if so specified in the related Prospectus Supplement, prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any advance by the Master Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Certificateholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the amounts
distributed to the Senior Certificateholders;
(v) the outstanding Current Principal Amount or notional principal
balance of such class after giving effect to the distribution of
principal on such Distribution Date;
(vi) if applicable, the percentage of principal payments on the
Mortgage Loans, if any, which such class will be entitled to receive on
the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate, the
Pass-Through Rate applicable to the distribution on the Distribution
Date;
(viii) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month and (b) two
or more months;
(ix) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure, and if such real estate
secured a Multifamily Loan, such additional information as may be
specified in the related Prospectus Supplement; and
(x) if applicable, the amount remaining in any Reserve Account or
the amount remaining of any other credit support, after giving effect to
the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having a denomination or
interest specified in the related Prospectus Supplement or the report to
Certificateholders. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year and (b) such other customary information as may be deemed
necessary or desirable for Certificateholders to prepare their tax returns.
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BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates
registered in the name of Cede & Co. ("Cede"), the nominee for The Depository
Trust Company ("DTC"). DTC is a limited purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code ("UCC") and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system also is available to others such as brokers, dealers, banks and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participant").
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the Certificates
from the Trustee through DTC and its Participants. Under a book-entry format,
Certificateholders will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede, as nominee for
DTC, on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Certificateholders. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of
Certificateholders under the Agreement indirectly through DTC and its
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Certificates and is
required to receive and transmit payments of principal of and interest of the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with
respect to specified percentages of the Certificateholders only at the
direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Certificates that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Certificates to the extent that such actions
are taken on behalf of Participants whose holdings include such current
principal amounts of outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to
Certificateholders or their nominees ("Definitive Certificates"), rather than
to DTC or its nominee only under the events specified in the related Agreement.
Such events may include the following: (i) the Seller advises the Trustee in
writing that DTC is no longer willing or able to properly discharge its
responsibilities as Depository with respect to the Certificates, and the
Trustee or the Seller is unable to locate a qualified successor, (ii) the
Seller, at its option, elects to terminate the book-entry system through DTC,
or (iii) after the occurrence of an Event of Default (defined herein),
Certificateholders representing not less than 50% of the aggregate Current
Principal Amount of the Certificates advise the Trustee and DTC through
Participants in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer
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in the best interest of the Certificateholders. Upon the occurrence of any of
the events specified in the related Agreement, DTC will be required to notify
all Participants of the availability through DTC of Definitive Certificates.
Upon surrender by DTC of the certificates representing the Certificates and
instruction for re-registration, the Trustee will issue the Certificates in the
form of Definitive Certificates, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders. Thereafter,
payments of principal of and interest on the Certificates will be made by the
Trustee directly to Certificateholders in accordance with the procedures set
forth herein and in the Agreement. The final distribution of any Certificate
(whether Definitive Certificates or Certificates registered in the name of
Cede), however, will be made only upon presentation and surrender of such
Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of
a Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of (i) the subordination of
one or more classes of the Certificates of such Series, (ii) the use of a Pool
Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond, FHA
Insurance, VA Guarantees, Reserve Accounts, a letter of credit, a limited
financial guaranty insurance policy, other third party guarantees, interest
rate or other swap agreements, caps, collars or floors, another method of
credit enhancement described in the related Prospectus Supplement, or the use
of a cross-support feature, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, holders of one or more
classes of Certificates will bear their allocable share of deficiencies. If a
form of credit enhancement applies to several classes of Certificates, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Unless otherwise
specified in the Prospectus Supplement, coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Seller if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates.
SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination thereof
that otherwise would have been payable to one or more classes of Subordinated
Certificates of a Series will instead be payable to holders of one or more
classes of Senior Certificates under the circumstances and to the extent
specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Loans and
losses on defaulted Mortgage Loans will be borne first by the various classes
of Subordinated Certificates and thereafter by the various classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans which must be borne by the Subordinated Certificates by virtue
of subordination and the amount of the distributions otherwise distributable to
the Subordinated Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Loans or aggregate losses in respect of such Mortgage
Loans were to exceed the total amounts payable and available for distribution
to holders of Subordinated Certificates or, if applicable, were to exceed the
specified maximum amount, holders of Senior Certificates would experience
losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may
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instead be deposited into one or more Reserve Accounts established with the
Trustee. If so specified in the Prospectus Supplement, such deposits may be
made on each Distribution Date, on each Distribution Date for specified periods
or until the balance in the Reserve Account has reached a specified amount and,
following payments from the Reserve Account to holders of Senior Certificates
or otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the Prospectus Supplement, amounts on deposit in
the Reserve Account may be released to the holders of the class of Certificates
specified in the Prospectus Supplement at the times and under the circumstances
specified in the Prospectus Supplement.
If so specified in the Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool of
Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy will
be obtained for the Mortgage Pool and issued by the insurer (the "Pool
Insurer") named in such Prospectus Supplement. Each Pool Insurance Policy will,
subject to the limitations described below, cover loss by reason of default in
payment on Single Family Loans or Cooperative Loans in the Mortgage Pool in an
amount specified in such Prospectus Supplement. As more fully described below,
the Master Servicer will present claims thereunder to the Pool Insurer on
behalf of itself, the Trustee and the holders of the Certificates. The Mortgage
Pool Insurance Policies, however, are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent described
below. Unless otherwise specified in the Prospectus Supplement, a Pool
Insurance Policy will not cover losses due to a failure to pay or denial of a
claim under a Primary Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Insurance Policy is in effect for the defaulted
Mortgage Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Mortgaged Property has been kept in force and
real estate taxes and other protection and preservation expenses have been
paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear
of liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance thereof plus
accrued and unpaid interest at the Mortgage Rate to the date of purchase and
certain expenses incurred by the Master Servicer on behalf of the Trustee and
Certificateholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Mortgage Loan plus accrued and unpaid interest at the
Mortgage Rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the Mortgaged
Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Insurance Policy. If any Mortgaged Property
securing a defaulted Mortgage Loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged Mortgaged Property to a
condition sufficient to permit recovery under the Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged Mortgaged Property unless it determines that (i) such restoration will
increase the proceeds to Certificateholders on liquidation of the Mortgage Loan
after reimbursement of the Master Servicer for its expenses and (ii) such
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expenses will be recoverable by it through proceeds of the sale of the
Mortgaged Property or proceeds of the related Pool Insurance Policy or any
related Primary Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the related Prospectus supplement, an endorsement to the Pool
Insurance Policy, a bond or other credit support may cover fraud in connection
with the origination of Mortgage Loans. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to an event specified
in clause (i) or (ii) above might result in a breach of the related Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan
if the breach cannot be cured by such Lender. No Pool Insurance Policy will
cover (and many Primary Insurance Policies do not cover) a claim in respect of
a defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Certificates by the aggregate dollar amount of
claims paid less the aggregate of the net dollar amounts realized by the Pool
Insurer upon disposition of all foreclosed properties covered thereby. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date
of payment of the claim. Accordingly, if aggregate net claims paid under any
Pool Insurance Policy reach the original policy limit, coverage under that Pool
Insurance Policy will be exhausted and any further losses will be borne by the
Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a
flood insurance policy if the Mortgaged Property is located in a federally
designated flood area, and (ii) loss caused by reason of the application of the
coinsurance clause contained in hazard insurance policies. See "The Pooling and
Servicing Agreement-Hazard Insurance". Each Special Hazard Insurance Policy
will not cover losses occasioned by war, civil insurrection, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear reaction, flood (if the Mortgaged
Property is located in a federally designated flood area), chemical
contamination and certain other risks. The amount of coverage under any Special
Hazard Insurance Policy will be specified in the related Prospectus Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or
flood insurance policy, if any, maintained by the Mortgagor or the Master
Servicer, the Special Hazard Insurer will pay the lesser of (i) the cost of
repair or replacement of such property or (ii) upon transfer of the property to
the Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan
at the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such
amount less any net proceeds from the sale of the property. Any amount paid as
the cost of repair of the property will further reduce
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coverage by such amount. So long as a Pool Insurance Policy remains in effect,
the payment by the Special Hazard Insurer of the cost of repair or of the
unpaid principal balance of the related Mortgage Loan plus accrued interest and
certain expenses will not affect the total insurance proceeds paid to
Certificateholders, but will affect the relative amounts of coverage remaining
under the related Special Hazard Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, since
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Pool Insurance Policy in circumstances in which such recoveries would
otherwise be unavailable because property has been damaged by a cause not
insured against by a standard hazard policy and thus would not be restored,
each Agreement will provide that, if the related Pool Insurance Policy shall
have been terminated or been exhausted through payment of claims, the Master
Servicer will be under no further obligation to maintain such Special Hazard
Insurance Policy.
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account in lieu thereof relating to such Certificates may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments
of principal and interest on a Mortgage Loan or a reduction by such court of
the principal amount of a Mortgage Loan and will cover certain unpaid interest
on the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash,
an irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust Fund to provide protection in lieu of or in addition to
that provided by a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account in lieu thereof
relating to such Certificates may be reduced so long as any such reduction will
not result in a downgrading of the rating of such Certificates by any such
rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured
by the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a Series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such loan.
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The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHA-insured Single Family
Loan, the Master Servicer or any Sub-Servicer is limited in its ability to
initiate foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor.
Such plans may involve the reduction or suspension of regular mortgage payments
for a specified period, with such payments to be made up on or before the
maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the Master Servicer or any Sub-Servicer in partial
or full satisfaction of amounts due under the Mortgage Loan (which payments are
to be repaid by the mortgagor to HUD) or by accepting assignment of the loan
from the Master Servicer or any Sub-Servicer. With certain exceptions, at least
three full monthly installments must be due and unpaid under the Mortgage Loan,
and HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal
to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses
and to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the Mortgage Loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured Single
Family Loan, bears interest from a date 30 days after the mortgagor's first
uncorrected failure to perform any obligation to make any payment due under the
Mortgage and, upon assignment, from the date of assignment, to the date of
payment of the claim, in each case at the same interest rate as the applicable
HUD debenture interest rate as described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain
instances the spouse of a veteran) to obtain a mortgage loan guarantee by the
VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no Single
Family Loan guaranteed by the VA will have an original principal amount greater
than five times the partial VA guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As
of January 1, 1993, the maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on
the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its
option and without regard to the guarantee, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
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With respect to a defaulted VA-guaranteed Single Family Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under
Sections 221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer.
Generally the term of such a mortgage loan may be up to 40 years and the ratio
of loan amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are
at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may be
made for up to, in general, a dollar amount per apartment unit established from
time to time by HUD or, at the discretion of the Secretary of HUD, 25% of the
value of the property. In general the loan term may not exceed 35 years and a
loan to value ratio of no more than 85% is required for the purchase of a
project and 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of
interest from the date of the default.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the Prospectus Supplement will be deposited by
the Master Servicer or Seller on the date specified in the Prospectus
Supplement in one or more Reserve Accounts established with the Trustee. Such
cash and the principal and interest payments on such other instruments will be
used to enhance the likelihood of timely payment of principal of, and interest
on, or, if so specified in the Prospectus Supplement, to provide additional
protection against losses in respect of, the assets in the related Trust Fund,
to pay the expenses of the Trust Fund or for such other purposes specified in
the Prospectus Supplement. Whether or not the Master Servicer or Seller has any
obligation to make such a deposit, certain amounts to which the Subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested, to the extent acceptable
to the applicable Rating Agency, in obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks,
certain repurchase agreements of United States government securities with
eligible commercial banks and certain other instruments acceptable to the
applicable Rating Agency ("Permitted Investments"). Unless otherwise specified
in the Prospectus Supplement, any instrument deposited in the Reserve Account
will name the Trustee, in its capacity as trustee for the holders of the
Certificates, as beneficiary and will be issued by an entity acceptable to the
applicable Rating Agency. Additional information with respect to such
instruments deposited in the Reserve Accounts will be set forth in the
Prospectus Supplement.
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Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto letters
of credit, financial guaranty insurance policies, third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, paying
administrative expenses, or accomplishing such other purpose as may be
described in the Prospectus Supplement. The Trust Fund may include a guaranteed
investment contract or reinvestment agreement pursuant to which funds held in
one or more accounts will be invested at a specified rate. If any class of
Certificates has a floating interest rate, or if any of the Mortgage Assets has
a floating interest rate, the Trust Fund may include an interest rate swap
contract, an interest rate cap agreement or similar contract providing limited
protection against interest rate risks.
CROSS SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be
made with respect to Certificates evidencing a beneficial ownership interest in
other asset groups within the same Trust Fund. The Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided hereby and of the application of such coverage
to the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Mortgage
Pool will vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise
specified in the related Prospectus Supplement, Single Family Loans,
Cooperative Loans and Contracts may be prepaid without penalty in full or in
part at any time. Multifamily Loans may prohibit prepayment for a specified
period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment penalty upon prepayment in full or in part.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans, Cooperative Loans and Contracts will contain
due-on-sale provisions permitting the mortgagee or holder of the Contract to
accelerate the maturity of the Mortgage Loan or Contract upon sale or certain
transfers by the mortgagor or obligor of the underlying Mortgaged Property. As
described in the related Prospectus Supplement, conventional Multifamily Loans
may contain due-on-sale provisions, due-on-encumbrance provisions, or both.
Mortgage Loans insured by the FHA, and Single Family Loans and Contracts
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on such Mortgage Loans may
be lower than that of conventional Mortgage Loans bearing comparable interest
rates. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes
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that it is entitled to do so under applicable law; provided, however, that the
Master Servicer will not take any enforcement action that would impair or
threaten to impair any recovery under any related insurance policy. See "The
Pooling and Servicing Agreement -- Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative
Loan, the Mortgagor is charged interest on the principal amount of the Mortgage
Loan so prepaid only for the number of days in the month actually elapsed up to
the date of the prepayment rather than for a full month. Similarly, upon
liquidation of a Mortgage Loan, interest accrues on the principal amount of the
Mortgage Loan only for the number of days in the month actually elapsed up to
the date of liquidation rather than for a full month. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full and liquidations will be to reduce the amount of interest passed through
in the following month to holders of Certificates because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment or liquidation. Interest shortfalls also could result from the
application of the Solders' and Sailors' Civil Relief Act of 1940, as amended,
as described under "Certain Legal Aspects of the Mortgage Loans -- Soldiers'
and Sailors' Civil Relief Act" herein. Partial prepayments in a given month may
be applied to the outstanding principal balances of the Mortgage Loans so
prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Prepayment penalties collected with
respect to Multifamily Loans will be distributed to the holders of
Certificates, or to other persons entitled thereto, as described in the related
Prospectus Supplement.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or another person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Certificates. See "The Pooling and Servicing Agreement -- Termination; Optional
Termination."
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely,
if prevailing interest rates rise appreciably above the Mortgage Rates borne by
the Mortgage Loans, such Mortgage Loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below such Mortgage
Rates. However, there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayment on Single
Family Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the enforcement of due-on-sale clauses and other
servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage loans,
graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage
loans. The rate of prepayment on Multifamily Loans may be affected by other
factors, including Mortgage Loan terms (E.G., the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and the relative tax benefits
associated with the ownership of income-producing real property.
The timing of payments on the Mortgage Assets may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on each Mortgage Loan from the
first day of the month, the distribution of such interest will not be made
earlier than a specified date in the month following the month of accrual.
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In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Certificates purchased at
a premium, a faster than anticipated rate of principal payments could result in
an actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Certificate will yield
its Pass-Through Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Certificates. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be no
assurance as to the rate of payment of principal of the Mortgage Assets at any
time or over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such Certificates.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Certificates of a Series, the Seller will cause the Mortgage Loans comprising
the related Trust Fund to be sold and assigned to the Trustee, together with
all principal and interest received by or on behalf of the Seller on or with
respect to such Mortgage Loans after the Cut-off Date, other than principal and
interest due on or before the Cut-off Date and other than any Retained Interest
specified in the Prospectus Supplement. The Trustee will, concurrently with
such assignment, deliver the Certificates to the Seller in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing
as an exhibit to the related Agreement. Such schedule will include information
as to the outstanding principal balance of each Mortgage Loan after application
of payments due on the Cut-off Date, as well as information regarding the
Mortgage Rate or APR, the current scheduled monthly payment of principal and
interest, the maturity of the loan, the Loan-to-Value Ratio at origination and
certain other information.
In addition, unless otherwise specified in the Prospectus Supplement, the
Seller will deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan, among other
things, (i) the mortgage note or Contract endorsed without recourse in blank or
to the order of the Trustee, (ii) in the case of Single Family Loans or
Multifamily Loans, the mortgage, deed of trust or similar instrument (a
"Mortgage") with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case the
Seller will deliver or cause to be delivered a copy of such Mortgage together
with a certificate that the original of such Mortgage was or will be delivered
to such recording office), (iii) an assignment of the Mortgage or Contract to
the Trustee, which assignment will be in recordable form in the case of a
Mortgage assignment, and (iv) such other security documents as may be specified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, (i) in the case of Single Family Loans or Multifamily
Loans, the Seller or Master Servicer will promptly cause the assignments of the
related Mortgage Loans to be recorded in the appropriate public office for real
property records, except in the discretion of the Seller in states in which, in
the opinion of counsel acceptable to the Trustee, such recording is not
required to protect the Trustee's interest in such loans against the claim of
any subsequent transferee or any successor to or creditor of the Seller or the
originator of such loans, and (ii) in the case of Contracts, the Seller or
Master Servicer will promptly make or cause to be made an appropriate filing of
a UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the
Seller will cause to be delivered to the Trustee (or to the custodian
hereinafter referred to), the related original cooperative note endorsed
without recourse in blank or to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Seller will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found
to be missing or defective in any material respect, the Trustee (or such
custodian) will notify the Master Servicer and the Seller, and the Master
Servicer will notify the related Lender. Unless otherwise specified in the
related Prospectus Supplement, if the Lender or an entity which sold the
Mortgage Loan to the Lender cannot cure the omission or defect within 60 days
after receipt of such notice, the Lender or such entity will be obligated to
purchase the related Mortgage Loan from the Trustee at the Purchase Price.
There can be no assurance that a Lender or such entity will fulfill this
purchase obligation. Although the Master Servicer may be obligated to enforce
such obligation to the extent described above under "Mortgage
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Loan Program -- Representations by Lenders; Repurchases," neither the Master
Servicer nor the Seller will be obligated to purchase such Mortgage Loan if the
Lender or such entity defaults on its purchase obligation, unless such breach
also constitutes a breach of the representations or warranties of the Master
Servicer or the Seller, as the case may be. Unless otherwise specified in the
related Prospectus Supplement, this purchase obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. Certain rights of substitution for
defective Mortgage Loans may be provided with respect to a Series in the
related Prospectus Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
ASSIGNMENT OF AGENCY SECURITIES. The Seller will cause Agency Securities
to be registered in the name of the Trustee or its nominee, and the Trustee
concurrently will execute, countersign and deliver the Certificates. Each
Agency Security will be identified in a schedule appearing as an exhibit to the
Agreement, which will specify as to each Agency Security the original principal
amount and outstanding principal balance as of the Cut-off Date, the annual
pass-through rate (if any) and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Seller will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be assignee
of record of any underlying assets for a Private Mortgage-Backed Security. See
"The Trust Fund -- Private Mortgage-Backed Securities" herein. Each Private
Mortgage-Backed Security will be identified in a schedule appearing as an
exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual
pass-through rate or interest rate and maturity date for each Private
Mortgage-Backed Security conveyed to the Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement or
provided in the Agreement, each Master Servicer and Sub-Servicer servicing the
Mortgage Loans will be required to establish and maintain for one or more
Series of Certificates a separate account or accounts for the collection of
payments on the related Mortgage Assets (the "Protected Account"), which must
be either (i) maintained with a depository institution the debt obligations of
which (or in the case of a depository institution that is the principal
subsidiary of a holding company, the obligations of such holding company) are
rated in one of the two highest rating categories by each Rating Agency rating
the Series of Certificates, (ii) an account or accounts the deposits in which
are fully insured by the FDIC, (iii) an account or accounts the deposits in
which are insured by the FDIC (to the limits established by the FDIC), and the
uninsured deposits in which are invested in Permitted Investments held in the
name of the Trustee, or (iv) an account or accounts otherwise acceptable to
each Rating Agency. A Protected Account may be maintained as an interest
bearing account or the funds held therein may be invested pending each
succeeding Distribution Date in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, the related Master Servicer or
Sub-Servicer or its designee will be entitled to receive any such interest or
other income earned on funds in the Protected Account as additional
compensation and will be obligated to deposit in the Protected Account the
amount of any loss immediately as realized. The Protected Account may be
maintained with the Master Servicer or Sub-Servicer or with a depository
institution that is an affiliate of the Master Servicer or Sub-Servicer,
provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer will be required to deposit or
cause to be deposited in the Protected Account for each Trust Fund on a daily
basis, to the extent applicable and unless otherwise specified in the related
Prospectus Supplement or provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal Prepayments
and, if specified in the related Prospectus Supplement, prepayment penalties,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
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(iii) to the extent specified in the related Agreement, all proceeds (net
of unreimbursed payments of property taxes, insurance premiums and similar
items ("Insured Expenses") incurred, and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) of the title insurance
policies, the hazard insurance policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation
or foreclosure ("Liquidation Expenses") and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received
with respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "Mortgage Loan Program -- Representations by
Lenders; Repurchases" or " -- Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described
under " -- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or Sub-Servicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the Protected Account
pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Certificates, a
Protected Account maintained by a Master Servicer or Sub-Servicer may commingle
funds from the Mortgage Loans deposited in the Trust Fund with similar funds
relating to other mortgage loans which are serviced or owned by the Master
Servicer or Sub-Servicer. The Agreement may require that certain payments
related to the Mortgage Assets be transferred from a Protected Account
maintained by a Master Servicer or Sub-Servicer into another Account maintained
under conditions acceptable to each Rating Agency.
The Trustee will be required to establish in its name as Trustee for one
or more Series of Certificates a trust account or another account acceptable to
each Rating Agency (the "Certificate Account"). The Certificate Account may be
maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. If
there is more than one Master Servicer for the rated Series of Certificates,
there may be a separate Certificate Account or a separate subaccount in a
single Certificate Account for funds received from each Master Servicer. Unless
otherwise specified in the Prospectus Supplement, the related Master Servicer
or its designee will be entitled to receive any interest or other income earned
on funds in the Certificate Account or subaccount of the Certificate Account as
additional compensation and will be obligated to deposit in the Certificate
Account or subaccount the amount of any loss immediately as realized. The
Trustee will be required to deposit into the Certificate Account on the
business day received all funds received from the Master Servicer for deposit
into the Certificate Account and any other amounts required to be deposited
into the Certificate Account pursuant to the Agreement. In addition to other
purposes specified in the Agreement, the Trustee will be required to make
withdrawals from the Certificate Account to make distributions to
Certificateholders. If the Series includes one Trust Fund which contains a
beneficial ownership interest in another Trust Fund, funds from the Mortgage
Assets may be withdrawn from the Certificate Account included in the latter
Trust Fund and deposited into another Account included in the former Trust Fund
prior to transmittal to Certificateholders with a beneficial ownership interest
in the former Trust Fund. If specified in the related Prospectus Supplement,
the Protected Account and the Certificate Account may be combined into a single
Certificate Account.
SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing entity
may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant
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to which a Series of Certificates is issued will provide that, if for any
reason the Master Servicer for such Series of Certificates is no longer the
Master Servicer of the related Mortgage Loans, the Trustee or any successor
Master Servicer must recognize the Sub-Servicer's rights and obligations under
such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but, unless otherwise specified
in the Prospectus Supplement, such Sub-Servicer will remain obligated under the
related Sub-Servicing Agreement. Each Sub-Servicer will be required to perform
the customary functions of a servicer of mortgage loans. Such functions
generally include collecting payments from mortgagors or obligors and remitting
such collections to the Master Servicer; maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of mortgagors or obligors for payment of taxes, insurance
and other items required to be paid by the mortgagor or obligor pursuant to the
related Mortgage Loan; processing assumptions or substitutions, although,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer is generally required to exercise due-on-sale clauses to the extent
such exercise is permitted by law and would not adversely affect insurance
coverage; attempting to cure delinquencies; supervising foreclosures;
inspecting and managing Mortgaged Properties under certain circumstances;
maintaining accounting records relating to the Mortgage Loans; and, to the
extent specified in the related Prospectus Supplement, maintaining additional
insurance policies or credit support instruments and filing and settling claims
thereunder. A Sub-Servicer will also be obligated to make advances in respect
of delinquent installments of principal and interest on Mortgage Loans, as
described more fully above under " -- Payments on Mortgage Loans; Deposits to
Accounts," and in respect of certain taxes and insurance premiums not paid on a
timely basis by mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the
related Prospectus Supplement. Each Sub-Servicer is also entitled to collect
and retain, as part of its servicing compensation, any prepayment or late
charges provided in the mortgage note or related instruments. Each Sub-Servicer
will be reimbursed by the Master Servicer for certain expenditures which it
makes, generally to the same extent the Master Servicer would be reimbursed
under the Agreement. The Master Servicer may purchase the servicing of Mortgage
Loans if the Sub-Servicer elects to release the servicing of such Mortgage
Loans to the Master Servicer. See " -- Servicing and Other Compensation and
Payment of Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
may terminate a Sub-Servicing Agreement without cause, upon written notice to
the Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement,
the Master Servicer may act as servicer of the related Mortgage Loans or enter
into new Sub-Servicing Agreements with other sub-servicers. If the Master
Servicer acts as servicer, it will not assume liability for the representations
and warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be
a Lender or meet the standards for becoming a Lender or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Seller. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur. In the event of such an assumption, the Master Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to
a Sub-Servicing Agreement or new Sub-Servicing Agreements may contain
provisions different from those which are in effect in the original
Sub-Servicing Agreement. However, each Agreement will provide that any such
amendment or new agreement may not be inconsistent with or violate such
Agreement.
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COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Mortgage
Loans and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to mortgage loans that are comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with
the coverage of such Mortgage Loan by a Pool Insurance Policy, Primary
Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance Policy,
Bankruptcy Bond or alternative arrangements, if applicable, arrange with a
Mortgagor a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment or such other
period as is specified in the Agreement. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will, to
the extent it has knowledge of such conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten
to impair any recovery under any related Primary Insurance Policy. If these
conditions are not met or if such Mortgage Loan is insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to
whom such property has been or is about to be conveyed, pursuant to which such
person becomes liable for repayment of the Mortgage Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon; provided,
however, that the Master Servicer will not enter into such an agreement if it
would jeopardize the tax status of the Trust Fund. Any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will be
retained by or on behalf of the Master Servicer as additional servicing
compensation. In the case of Multifamily Loans, and unless otherwise specified
in the related Prospectus Supplement, the Master Servicer will agree to
exercise any right it may have to accelerate the maturity of a Multifamily Loan
to the extent it has knowledge of any further encumbrance of the related
Mortgaged Property effected in violation of any due-on-encumbrance clause
applicable thereto. See "Certain Legal Aspects of the Mortgage Loans --
Due-on-Sale Clauses." In connection with any such assumption, the terms of the
related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans." This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring
such approval could limit the number of potential purchasers for those shares
and otherwise limit the Trust Fund's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid
or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under
Code Sections 163 and 164. In order for a corporation to qualify under Code
Section 216(b)(1) for its taxable year in which such items are allowable as a
deduction to the corporation, such Section requires, among other things, that
at least 80% of the gross income of the corporation be derived from its tenant-
stockholders (as defined in Code Section 216(b)(2)). By virtue of this
requirement, the status of a corporation for purposes of Code Section 216(b)(1)
must be determined on a year-to-year basis. Consequently, there can be no
assurance that Cooperatives relating to the Cooperative Loans will qualify
under such Section for any particular year. In the event that such a
Cooperative fails to qualify for one or more years, the value of the collateral
securing any related Cooperative Loans could be significantly impaired because
no deduction would be
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allowable to tenant-stockholders under Code Section 216(a) with respect to
those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each Single
Family Loan, Multifamily Loan or Contract to maintain a hazard insurance policy
providing for no less than the coverage of the standard form of fire insurance
policy with extended coverage customary for the type of Mortgaged Property in
the state in which such Mortgaged Property is located. Such coverage will be in
an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the
Master Servicer maintains a blanket policy insuring against hazard losses on
all the Mortgage Loans comprising part of a Trust Fund, it will conclusively be
deemed to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements or Manufactured Home
securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm and
hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to the
Mortgage Loans may have been underwritten by different insurers under different
state laws in accordance with different applicable forms and therefore may not
contain identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all-inclusive. If the Mortgaged
Property securing a Mortgage Loan is located in a federally designated special
flood area at the time of origination, the Master Servicer will require the
mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this
specified percentage, then the insurer's liability in the event of partial loss
will not exceed the larger of (i) the actual cash value (generally defined as
replacement cost at the time and place of loss, less physical depreciation) of
the improvements damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance the Master Servicer may cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in the
related Prospectus Supplement, a special hazard insurance policy or an
alternative form of credit enhancement will be obtained to insure against
certain of the uninsured risks described above. See "Credit Enhancement --
Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and
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the related borrower on a Cooperative Loan do not maintain such insurance or do
not maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY INSURANCE POLICIES. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which
such coverage is required. The Master Servicer will be required not to cancel
or refuse to renew any such Primary Insurance Policy in effect at the time of
the initial issuance of a Series of Certificates that is required to be kept in
force under the applicable Agreement unless the replacement Primary Insurance
Policy for such canceled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment
of the Mortgage Loan, (iii) amounts expended but not approved by the issuer of
the related Primary Insurance Policy (the "Primary Insurer"), (iv) claim
payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. Primary Insurance Policies will not
insure against, and exclude from coverage, a loss sustained by reason of a
default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (d) the related Master Servicer
not being approved as a servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY INSURANCE POLICY. As conditions precedent to
the filing of or payment of a claim under a Primary Insurance Policy covering a
Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a
Sub-Servicer, the Sub-Servicer, on behalf of itself, the Trustee and
Certificateholders, will present claims to the Primary Insurer, and all
collections thereunder will be deposited in the Protected Account maintained by
the Sub-Servicer. In all other cases, the Master Servicer, on behalf of itself,
the Trustee and the Certificateholders, will present claims to the Primary
Insurer under each Primary Insurance Policy, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Mortgage Loans. As set forth above, all collections by or
on behalf of the Master Servicer under any Primary Insurance Policy and, when
the Mortgaged Property has not been restored, the hazard insurance policy, are
to be deposited in the Protected Account, subject to withdrawal as heretofore
described.
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If the Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related hazard insurance policy are insufficient
to restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Insurance Policy, if any, the Master
Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i) that such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the Mortgaged Property securing the defaulted Mortgage Loan are
less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of expenses incurred
by the Master Servicer in connection with such proceedings and which are
reimbursable under the Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Protected Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Protected Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. See "Credit Enhancement."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
described in the Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Mortgage Loan, such amounts will
decrease as the Mortgage Loans amortize. In addition to primary compensation,
the Master Servicer or the Sub-Servicers will be entitled to retain all
assumption fees and late payment charges, to the extent collected from
Mortgagors, and, unless otherwise provided in the related Prospectus Supplement
or Agreement, any prepayment penalties and any interest or other income which
may be earned on funds held in any Accounts. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent
specified in the related Agreement, the Master Servicer will pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment in
certain cases of premiums for insurance policies, guarantees, sureties or other
forms of credit enhancement, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Certificateholders, and payment of certain
other expenses. The Master Servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with any defaulted Mortgage Loan as to
which it has determined that all recoverable Liquidation Proceeds and Insurance
Proceeds have been received.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such
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firm conducted substantially in compliance with the Uniform Single Audit
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the Master Servicer of mortgage loans,
agency securities or private mortgage-backed securities, under pooling and
servicing agreements substantially similar to each other (including the related
Agreement) was conducted in compliance with such agreements except for any
significant exceptions or errors in records that, in the opinion of the firm,
the Uniform single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC requires it to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of mortgage
loans, agency securities or private mortgage-backed securities by
Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC or FNMA (rendered
within one year of such statement) of firms of independent public accountants
with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of each Master Servicer to the effect that such Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of each Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that a Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, in
certain instances, the Seller nor any director, officer, employee, or agent of
the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the
Master Servicer, the Seller nor any such person will be protected against any
breach of warranties or representations made in the Agreement or any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. Each Agreement will
further provide that the Master Servicer, in certain instances, the Seller and
any director, officer, employee or agent of the Master Servicer or the Seller
will be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any
loss, liability or expense related to any specific Mortgage Loan or Mortgage
Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Agreement will provide that neither the
Master Servicer nor, in certain instances, the Seller will be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. The Master Servicer or
the Seller may, however, in its discretion undertake any such action which it
may deem necessary or desirable with respect to the Agreement and the rights
and duties of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund and the Master Servicer or the Seller, as the case may be, will be
entitled to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
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Any person into which the Master Servicer may be merged or consolidated,
or any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the class or classes of Certificates of such Series that
have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement or
Agreement, "Events of Default" under each Agreement will include (i) any
failure by the Master Servicer to cause to be deposited in the Certificate
Account any amount so required to be deposited pursuant to the Agreement, and
such failure continues unremedied for two business days or such other time
period as is specified in the Agreement; (ii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for sixty
days or such other time period as is specified in the Agreement after the
giving of written notice of such failure to the Master Servicer by the Trustee,
or to the Master Servicer and the Trustee by the holders of Certificates of any
class evidencing not less than 25% of the aggregate principal amount or
interests ("Percentage Interests") evidenced by such class; and (iii) certain
events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
If specified in the Prospectus Supplement, the Agreement will permit the
Trustee to sell the Mortgage Assets and the other assets of the Trust Fund in
the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only under
the circumstances and in the manner specified in the Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
Except as otherwise specified in the related Agreement, so long as an
Event of Default under an Agreement remains unremedied, the Trustee may, and at
the direction of holders of Certificates evidencing Percentage Interests
aggregating not less than 25% of the principal of the related Trust Fund and
under such circumstances as may be specified in such Agreement, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer under
the Agreement relating to such Trust Fund and in and to the Mortgage Loans,
whereupon, unless otherwise specified in the related Prospectus Supplement, the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement, including, if specified in the
Prospectus Supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling
or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a Mortgage Loan servicing institution with
a net worth of at least $10,000,000 to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
Except as otherwise specified in the related Agreement, no
Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
AMENDMENT
Unless otherwise specified in the Prospectus Supplement, each Agreement
may be amended by the Seller, each Master Servicer and the Trustee, without the
consent of any of the Certificateholders, (i) to cure any ambiguity; (ii) to
correct or supplement any provision therein which may be defective or
inconsistent with any
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other provision therein; or (iii) to make any other revisions with respect to
matters or questions arising under the Agreement which are not inconsistent
with the provisions thereof, provided that such action will not adversely
affect in any material respect the interests of any Certificateholder. In
addition, to the extent provided in the related Agreement, an Agreement may be
amended without the consent of any of the Certificateholders, to change the
manner in which the Certificate Account, the Protected Account or any other
Accounts are maintained, provided that any such change does not adversely
affect the then current rating on the class or classes of Certificates of such
Series that have been rated. In addition, if a REMIC election is made with
respect to a Trust Fund, the related Agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be necessary to
maintain the qualification of the related Trust Fund as a REMIC, provided that
the Trustee has received an opinion of counsel to the effect that such action
is necessary or helpful to maintain such qualification. Unless otherwise
specified in the Prospectus Supplement, each Agreement may also be amended by
the Seller, each Master Servicer and the Trustee with consent of holders of
Certificates of such Series evidencing not less than 66% of the aggregate
Percentage Interests of each class affected thereby for the purpose of adding
any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Certificates; provided, however, that no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Mortgage Assets which are required to be distributed on any
Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any class of holders which
are required to consent to any such amendment without the consent of the
holders of all Certificates of such class covered by such Agreement then
outstanding. If a REMIC election is made with respect to a Trust Fund, the
Trustee will not be entitled to consent to an amendment to the related
Agreement without having first received an opinion of counsel to the effect
that such amendment will not cause such Trust Fund to fail to qualify as a
REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in any
Accounts or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any such Mortgage Assets remaining in the Trust Fund and (ii)
the purchase by the Master Servicer or other entity specified in the related
Prospectus Supplement including, if REMIC treatment has been elected, by the
holder of the residual interest in the REMIC (see "Certain Federal Income Tax
Consequences" below), from the related Trust Fund of all of the remaining
Mortgage Assets and all property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer or other entity at a price, and in accordance with the procedures,
specified in the Prospectus Supplement. The exercise of such right will effect
early retirement of the Certificates of that Series, but the right of the
Master Servicer or other entity to so purchase is subject to the principal
balance of the related Mortgage Assets being less than the percentage specified
in the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets at the Cut-off Date for the Series. The foregoing is subject to
the provision that if a REMIC election is made with respect to a Trust Fund,
any repurchase pursuant to clause (ii) above will be made only in connection
with a "qualified liquidation" of the REMIC within the meaning of Section
860F(g)(4) of the Code.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Seller, each Master Servicer and
any of their respective affiliates.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state, or to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of
deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a security deed or deed
to secure debt are governed by law and, with respect to some deeds of trust,
the directions of the beneficiary.
CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is
a form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit
and also owns a proportionate undivided interest in all parts of the
condominium building (other than the individual condominium units) and all
areas or facilities, if any, for the common use of the condominium units. The
condominium unit owners appoint or elect the condominium association to govern
the affairs of the condominium.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii) leases the land generally by a long-term ground
lease and owns the apartment building. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupants under proprietary leases or occupancy
agreements to which the Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by
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an individual tenant-stockholder of Cooperative shares or, in the case of a
Trust Fund including Cooperative Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such
tenant-stockholder's pro rata share of the Cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
rights is financed through a Cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related Cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the Cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of Cooperative shares.
CONTRACTS. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest
in the Manufactured Home to secure repayment of such loan. The Contracts
generally are "chattel paper" as defined in the UCC in effect in the states in
which the Manufactured Homes initially were registered. Pursuant to the UCC,
the rules governing the sale of chattel paper are similar to those governing
the perfection of a security interest in chattel paper. Unless otherwise
specified in the Prospectus Supplement, under the Agreement, the Seller will
transfer or cause the transfer of physical possession of the Contracts to the
Trustee or its custodian. In addition the Seller will make or cause to be made
an appropriate filing of a UCC-1 financing statement in the appropriate states
to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
which have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and
payment of a fee to such office, depending on state law. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
required to effect such notation or delivery of the required documents and
fees, and to obtain possession of the certificate of title, as appropriate
under the laws of the state in which any Manufactured Home is registered. If
the Master Servicer fails, due to clerical errors or otherwise, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a
few states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home
under real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage
under the real estate laws of the state where the home is located. These
filings must be made in the real estate records office of the county where the
home is located. Generally, Contracts will contain provisions prohibiting the
obligor from permanently attaching the Manufactured Home to its site. So long
as the obligor does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or
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the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest originally retained by the Seller and transferred to the Seller.
The Seller will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Seller,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Seller or the Lender will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Seller's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest might not be held effective against creditors of the Seller
or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the security interest assigned to the Seller and the Trustee is not
perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Certificateholders as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws
of most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of
the certificate of title or it will receive notice as a result of its lien
noted thereon and accordingly will have an opportunity to require satisfaction
of the related manufactured housing conditional sales contract before release
of the lien. The Master Servicer will be obligated to take such steps, at the
Master Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE/REPOSSESSION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Foreclosure of a deed of trust
is generally accomplished by a non-judicial sale under a specific provision in
the deed of trust which authorizes the trustee to sell the property at public
auction upon any default by the borrower under the terms of the note or deed of
trust. In some states, the trustee must record a notice of default and send a
copy to the borrower-trustor, to any person who has
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recorded a request for a copy of any notice of default and notice of sale, to
any successor in interest to the borrower-trustor, to the beneficiary of any
junior deed of trust and to certain other persons. Before such non-judicial
sale takes place, typically a notice of sale must be posted in a public place
and published during a specific period of time in one or more newspapers,
posted on the property, and sent to parties having an interest of record in the
property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In general, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the mortgage is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of
trust receive notice longer than that prescribed by statute. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust does not involve sufficient
state action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares
in the Cooperative when the building was so converted.
COOPERATIVE LOANS. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
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required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on
a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
CONTRACTS. The Master Servicer on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (I.E., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a Contract must
give the debtor a number of days' notice, generally varying from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The law in most states also requires
that the debtor be given notice of any sale prior to resale of the unit so that
the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled
to be paid out of the sale proceeds before such proceeds could be applied to
the payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan. However,
some states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
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RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
CONTRACTS. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment
is a personal judgment against the borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of
the real property sold at the foreclosure sale. As a result of these
prohibitions, it is anticipated that in many instances the Master Servicer will
not seek deficiency judgments against defaulting mortgagors. Under the laws
applicable in most states, a creditor is entitled to obtain a deficiency
judgment for any deficiency following possession and resale of a Manufactured
Home. However, some states impose prohibitions or limitations on deficiency
judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Certificates
and possible reductions in the aggregate amount of such payments. Some states
also have homestead exemption laws which would protect a principal residence
from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal and
state laws impose specific statutory liabilities upon lenders who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
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Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor
on the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the
mortgagor or secured party. The Garn-St Germain Depository Institutions Act of
1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of Single Family Loans,
Cooperative Loans or Contracts with respect to prepayments on loans secured by
liens encumbering owner-occupied residential properties. Since many of the
Mortgaged Properties will be owner-occupied, it is anticipated that prepayment
charges may not be imposed with respect to many of the Single Family Loans,
Cooperative Loans and Contracts. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Single Family Loans, Cooperative Loans
or Contracts having higher Mortgage Rates or APR's, may increase the likelihood
of refinancing or other early retirement of such loans or contracts. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related Prospectus Supplement.
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
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or foreclosure with respect to the related unit. Title V authorized any state
to reimpose limitations on interest rates and finance charges by adopting
before April 1, 1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V was not so rejected,
any state is authorized by the law to adopt a provision limiting discount
points or other charges on loans covered by Title V. In any state in which
application of Title V was expressly rejected or a provision limiting discount
points or other charges has been adopted, no Contract which imposes finance
charges or provides for discount points or charges in excess of permitted
levels will be included in any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the mortgage loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Unless otherwise provided in the applicable Prospectus Supplement, any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates. In addition, the
Relief Act imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan during the borrower's period
of active duty status. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into
many building materials utilized in manufactured and other housing. As a
consequence, lawsuits may arise from time to time asserting claims against
manufacturers or builders of the housing, suppliers of component parts, and
related persons in the distribution process. Plaintiffs have won such judgments
in certain such lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by
a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Lender, and the Certificateholders would
suffer a loss only to the extent that (i) the Lender breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Lender, the Seller or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Certificateholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes
may not cover liabilities arising from formaldehyde and certain other chemicals
in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances may
have claims and defenses against the builders which could be asserted against
the Trust Fund.
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ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Mortgage Loan became the property of the Trust Fund in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
by statute impose a lien for any Cleanup Costs incurred by such state on the
property that is the subject of such Cleanup Costs (a "Superlien"). All
subsequent liens on such property are subordinated to such Superlien and, in
some states, even prior recorded liens are subordinated to such Superliens. In
the latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereby. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect (or,
in the case of certain regulations, proposed), all of which are subject to
change or possibly differing interpretations. Because tax consequences may vary
based upon the status or tax attributes of the owner of a Certificate,
prospective investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of Certificates. For purposes of this tax discussion
(except with respect to information reporting, or where the context indicates
otherwise), the terms "Certificateholder" and "holder" mean the beneficial
owner of a Certificate and the term "Mortgage Loan" includes Agency Securities
and Private Mortgage-Backed Securities.
REMIC ELECTIONS
Under the Code, an election may be made with respect to each Trust Fund
related to a series of Certificates to treat such Trust Fund or certain assets
of such Trust Fund as a REMIC. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election will be made with respect
to the related Trust Fund. To the extent provided in the Prospectus Supplement
for a series, Certificateholders may also have the benefit of a Reserve Account
and of certain agreements (each, a "Yield Supplement Agreement") under which
payment will be made from the Reserve Account in the event that interest
accrued on the Mortgage Loans at their Mortgage Rates is insufficient to pay
interest on the Certificates of such Series (a "Basis Risk Shortfall"). If a
REMIC election is to be made, the Prospectus Supplement will designate the
Certificates of such series or the interests composing such Certificates as
"regular interests" ("REMIC Regular Certificates," which where the context so
requires includes a reference to each interest composing a Certificate where
such interest has been designated as a regular interest, in lieu of such
Certificates) in the REMIC (within the meaning of Section 860G(a)(l) of the
Code) or as the REMIC Residual Certificates in the REMIC (within the meaning of
Section 860G(a)(2) of the Code). The terms "REMIC Certificates" and "Non-REMIC
Certificates" denote, respectively, Certificates (or the interests composing
Certificates) of a series with respect to which a REMIC election will, or will
not, be made. The discussion below is divided into two parts, the first part
applying only to REMIC Certificates and the second part applying only to
Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust Fund or certain assets of
such Trust Fund as a REMIC. Qualification as a REMIC requires ongoing
compliance with certain conditions. Upon the issuance of each series of REMIC
Certificates, Stroock
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& Stroock & Lavan LLP, counsel to the Seller, will deliver its opinion
generally to the effect that, with respect to each series of REMIC Certificates
for which a REMIC election is to be made, under then existing law, and assuming
a proper and timely REMIC election and ongoing compliance with the provisions
of the Agreement and applicable provisions of the Code and applicable Treasury
regulations, the related Trust Fund or certain assets of such Trust Fund will
be a REMIC and the REMIC Certificates will be considered to evidence ownership
of "regular interests" or "residual interests" within the meaning of the REMIC
provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, holders
of REMIC Regular Certificates who are entitled to payments from the Reserve
Account in the event of a Basis Risk Shortfall will be required to allocate
their purchase price between their beneficial ownership interests in the
related REMIC regular interests and Yield Supplement Agreements, and will be
required to report their income realized with respect to each, calculated
taking into account such allocation. In general, such allocation would be based
on the respective fair market values of the REMIC regular interests and the
related Yield Supplement Agreements on the date of purchase of the related
REMIC Regular Certificate. However, a portion of the purchase price of a REMIC
Regular Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. Holders of REMIC Regular
Certificates are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the Agreement, holders of
applicable REMIC Regular Certificates will agree that, for federal income tax
purposes, they will be treated as owners of the respective regular interests
and of the corresponding Yield Supplement Agreement.
STATUS OF REMIC CERTIFICATES. The REMIC 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 REMIC's assets are qualifying assets, but not to the extent
that the REMIC's assets consist of Yield Supplement Agreements. However, if at
least 95 percent of the REMIC's assets are qualifying assets, then 100 percent
of the REMIC Certificates will be qualifying assets. Similarly, income on the
REMIC Certificates will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Mortgage Loans, the REMIC's assets will include payments on Mortgage Loans held
pending distribution to holders of REMIC Certificates, amounts in Reserve
Accounts (if any), other credit enhancements (if any), and possibly buydown
funds ("Buydown Funds"). The Mortgage Loans will be qualifying assets under the
foregoing sections of the Code except to the extent provided in the Prospectus
Supplement. The regulations under Sections 860A through 860G of the Code (the
"REMIC Regulations") treat credit enhancements as part of the mortgage or pool
of mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Mortgage Loans and held pending
distribution to holders of REMIC Certificates ("cash flow investments") will be
treated as qualifying assets. It is unclear whether amounts in a Reserve
Account or Buydown Funds would also constitute qualifying assets. The
Prospectus Supplement for each series will indicate (if applicable) that it has
Buydown Funds. The REMIC Certificates will not be "residential loans" for
purposes of the residential loan requirement of Section 593(g)(4)(B) of the
Code.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust Fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Stroock & Stroock & Lavan LLP will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Agreement and applicable provisions of the Code and applicable Treasury
regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests"
or "residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
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Solely for purposes of determining whether the REMIC Certificates 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 Certificates is interest described in Section 856(c)(3)(B) of
the Code, the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
CURRENT INCOME ON REMIC REGULAR CERTIFICATES -- GENERAL. Except as
otherwise indicated herein, the REMIC Regular Certificates will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Certificates and not as ownership interests in
the REMIC or the REMIC's assets. Holders of REMIC Regular Certificates who
would otherwise report income under a cash method of accounting will be
required to report income with respect to REMIC Regular Certificates under an
accrual method.
Payments of interest on REMIC Regular Certificates may be based on a
fixed rate, a variable rate as permitted by the REMIC Regulations, or may
consist of a specified portion of the interest payments on qualified mortgages
where such portion does not vary during the period the REMIC Regular
Certificate is outstanding. The definition of a variable rate for purposes of
the REMIC Regulations is based on the definition of a qualified floating rate
for purposes of the rules governing original issue discount set forth in
Sections 1271 through 1275 of the Code and the regulations thereunder (the "OID
Regulations") with certain modifications and permissible variations. See "REMIC
Regular Certificates -- Current Income on REMIC Regular Certificates --
Original Issue Discount -- Variable Rate REMIC Regular Certificates," below,
for a discussion of the definition of a qualified floating rate for purposes of
the OID Regulations. In contrast to the OID Regulations, for purposes of the
REMIC Regulations, a qualified floating rate does not include any multiple of a
qualified floating rate (also excluding multiples of qualified floating rates
that themselves would constitute qualified floating rates under the OID
Regulations), and the characterization of a variable rate that is subject to a
cap, floor or similar restriction as a qualified floating rate for purposes of
the REMIC Regulations will not depend upon the OID Regulations relating to
caps, floors, and similar restrictions. See "REMIC Regular Certificates --
Current Income on REMIC Regular Certificates -- Original Issue Discount --
Variable Rate REMIC Regular Certificates," below, for a discussion of the OID
Regulations relating to caps, floors and similar restrictions. A qualified
floating rate, as defined above for purposes of the REMIC Regulations (a "REMIC
qualified floating rate"), qualifies as a variable rate for purposes of the
REMIC Regulations if such REMIC qualified floating rate is set at a "current
rate" as defined in the OID Regulations. In addition, a rate equal to the
highest, lowest or an average of two or more REMIC qualified floating rates
qualifies as a variable rate for REMIC purposes. A REMIC Regular Certificate
may also have a variable rate based on a weighted average of the interest rates
on some or all of the qualified mortgages held by the REMIC where each
qualified mortgage taken into account has a fixed rate or a variable rate that
is permissible under the REMIC Regulations. Further, a REMIC Regular
Certificate may have a rate that is the product of a REMIC qualified floating
rate or a weighted average rate and a fixed multiplier, is a constant number of
basis points more or less than a REMIC qualified floating rate or a weighted
average rate, or is the product, plus or minus a constant number of basis
points, of a REMIC qualified floating rate or a weighted average rate and a
fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
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Each Trust Fund will report original issue discount, if any, to the
holders of REMIC Regular Certificates based on the OID Regulations. OID
Regulations concerning contingent payment debt instruments do not apply to the
REMIC Regular Certificates.
The OID Regulations provide that, in the case of a debt instrument such
as a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations," and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less
than 0.25% of its stated redemption price at maturity multiplied by its
weighted average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any DE MINIMIS original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price
at maturity, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that the REMIC Regular Certificates will be prepaid in
future periods at a rate computed in accordance with the Prepayment Assumption
and (ii) using a discount rate equal to the original yield to maturity of the
REMIC Regular Certificates. For these purposes, the original yield to maturity
of the REMIC Regular Certificates will be calculated based on their issue price
and assuming that the REMIC Regular Certificates will be prepaid in accordance
with the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price
of such REMIC Regular Certificate, increased by the portion of the original
issue discount that has accrued during prior accrual
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periods, and reduced by the amount of any distributions made on such REMIC
Regular Certificate in prior accrual periods that were included in such REMIC
Regular Certificate's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although not entirely free from doubt, such a holder may be entitled
to deduct a loss to the extent that its remaining basis would exceed the
maximum amount of future payments to which such holder is entitled. It is
unclear whether the Prepayment Assumption is taken into account for this
purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued
with original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in
gross income, for each day on which it holds such REMIC Regular Certificate,
the daily portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of
such holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular
Certificate which qualifies as "qualified stated interest" for purposes of the
OID Regulations will not be includable in the stated redemption price at
maturity of the REMIC Regular Certificate. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Loans underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated
redemption price at maturity will be considered to have purchased such REMIC
Regular Certificate at a premium, and may, under Section 171 of the Code, elect
to amortize such premium under a constant yield method over the life of the
REMIC Regular Certificate. The Prepayment Assumption is probably taken into
account in determining the life of the REMIC Regular Certificate for this
purpose. Except as provided in regulations, amortizable premium will be treated
as an offset to interest income on the REMIC Regular Certificate.
PAYMENT LAG REMIC REGULAR CERTIFICATES; INITIAL PERIOD CONSIDERATIONS.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the DE
MINIMIS rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is DE MINIMIS, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
VARIABLE RATE REMIC REGULAR CERTIFICATES. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable Rate
REMIC Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i)
its issue price does not exceed the total noncontingent principal payments due
under the Variable Rate REMIC Regular Certificate by more than a specified DE
MINIMIS amount; (ii) it provides for stated interest, paid or compounded at
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least annually, at (a) one or more qualified floating rates, (b) a single fixed
rate and one or more qualified floating rates, (c) a single objective rate or
(d) a single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that
are contingent, as defined in the OID Regulations, except as provided in (i),
above. Because the OID Regulations relating to contingent payment debt
instruments do not apply to REMIC regular interests, principal payments on the
REMIC Regular Certificates should not be considered contingent for this
purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute
a qualified floating rate, but which is subject to one or more restrictions
such as a cap or floor, will not be a qualified floating rate for purposes of
the OID Regulations unless the restriction is fixed throughout the term of the
Variable Rate REMIC Regular Certificate or the restriction is not reasonably
expected as of the issue date to significantly affect the yield of the Variable
Rate REMIC Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC Regular Certificate that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a
Variable Rate REMIC Regular Certificate will not constitute an objective rate
if it is reasonably expected that the average value of such rate during the
first half of the Variable Rate REMIC Regular Certificate's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Variable Rate REMIC Regular Certificate's
term. Further, an objective rate does not include a rate that is based on
information that is within the control of the issuer (or a party related to the
issuer) or that is unique to the circumstances of the issuer (or a party
related to the issuer). An objective rate will qualify as a "qualified inverse
floating rate" if such rate is equal to a fixed rate minus a qualified floating
rate and variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate. The OID Regulations
also provide that if a Variable Rate REMIC Regular Certificate provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate REMIC Regular
Certificate's issue date is intended to approximate the fixed rate, then the
fixed rate and the variable rate together will constitute either a single
qualified floating rate or objective rate, as the case may be (a "Presumed
Single Variable Rate"). If the value of the variable rate and the initial fixed
rate are within 25 basis points of each other as determined on the Variable
Rate REMIC Regular Certificate's issue date, the variable rate will be
conclusively presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout
the term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates -- Current
Income on REMIC Regular Certificates -- Original Issue Discount" based on the
following: (i) stated interest on the Single Variable Rate REMIC Regular
Certificate which is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually will constitute qualified
stated interest; (ii) by assuming that the variable rate on the Single Variable
Rate REMIC Certificate is a fixed rate equal to: (a) in the case of a Single
Variable Rate REMIC Regular Certificate with a qualified floating rate
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or a qualified inverse floating rate, the value, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate REMIC Regular Certificate with an objective rate
(other than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Rate REMIC Regular
Certificate; and (iii) the qualified stated interest allocable to an accrual
period is increased (or decreased) if the interest actually paid during an
accrual period exceeds (or is less than) the interest assumed to be paid under
the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC
Regular Certificate") that qualifies as a "variable rate debt instrument" will
be converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The
OID Regulations generally require that such a Multiple Variable Rate REMIC
Regular Certificate be converted into an "equivalent" fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate REMIC
Regular Certificate with a fixed rate equal to the value of the qualified
floating rate or qualified inverse floating rate, as the case may be, as of the
Multiple Variable Rate REMIC Regular Certificate's issue date. Any objective
rate (other than a qualified inverse floating rate) provided for under the
terms of the Multiple Variable Rate REMIC Regular Certificate is converted into
a fixed rate that reflects the yield that is reasonably expected for the
Multiple Variable Rate REMIC Regular Certificate. (A Multiple Variable Rate
REMIC Regular Certificate may not bear more than one objective rate.) In the
case of a Multiple Variable Rate REMIC Regular Certificate that qualifies as a
"variable rate debt instrument" and provides for stated interest at a fixed
rate in addition to either one or more qualified floating rates or a qualified
inverse floating rate, the fixed rate is initially converted into a qualified
floating rate (or a qualified inverse floating rate, if the Multiple Variable
Rate REMIC Regular Certificate provides for a qualified inverse floating rate).
Under such circumstances, the qualified floating rate or qualified inverse
floating rate that replaces the fixed rate must be such that the fair market
value of the Multiple Variable Rate REMIC Regular Certificate as of the
Multiple Variable Rate REMIC Regular Certificate's issue date is approximately
the same as the fair market value of an otherwise identical debt instrument
that provides for either the qualified floating rate or qualified inverse
floating rate rather than the fixed rate. Subsequent to converting the fixed
rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate REMIC Regular Certificate is then converted
into an "equivalent" fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing
rules, the amounts of original issue discount and qualified stated interest, if
any, are determined for the "equivalent" fixed rate debt instrument by applying
the original issue discount rules to the "equivalent" fixed rate debt
instrument in the manner described in "REMIC Regular Certificates -- Current
Income on REMIC Regular Certificates -- Original Issue Discount". A holder of
the Multiple Variable Rate REMIC Regular Certificate will account for such
original issue discount and qualified stated interest as if the holder held the
"equivalent" fixed rate debt instrument. In each accrual period, appropriate
adjustments will be made to the amount of qualified stated interest or original
issue discount assumed to have been accrued or paid with respect to the
"equivalent" fixed rate debt instrument in the event that such amounts differ
from the actual amount of interest accrued or paid on the Multiple Variable
Rate REMIC Regular Certificate during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. It is not clear under current law how a Variable Rate REMIC Regular
Certificate would be taxed if such REMIC Regular Certificate were treated as a
contingent payment debt obligation since the OID Regulations relating to
contingent payment debt obligations do not apply to REMIC regular interests.
INTEREST-ONLY REMIC REGULAR CERTIFICATES. The Trust Fund intends to
report income from interest-only REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates
based on the assumption that the stated redemption price at maturity is equal
to the sum of all payments determined under the Prepayment Assumption. As a
result, such interest-only REMIC Regular Certificates will be treated as having
original issue discount.
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MARKET DISCOUNT. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise,
market discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue
discount, in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion
of the holder's interest expense on any debt incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Certificate that accrues during the
taxable year in which such interest would otherwise be deductible and, in
general, would be deductible when such market discount is included in income
upon receipt of a principal distribution on, or upon the sale of, the REMIC
Regular Certificate. The Code requires that information necessary to compute
accruals of market discount be reported periodically to the Internal Revenue
Service and to certain categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25%
of the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular Certificates --
Original Issue Discount"), taking into account distributions (including
prepayments) prior to the date of acquisition of such REMIC Regular Certificate
by the subsequent purchaser. If market discount on a REMIC Regular Certificate
is treated as zero under this rule, the actual amount of such discount must be
allocated to the remaining principal distributions on the REMIC Regular
Certificate in proportion to the amounts of such principal distributions, and
when each such distribution is made, gain equal to the discount, if any,
allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such
debt instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market
discount, as adjusted to account for any premium. Holders of REMIC Regular
Certificates should consult their own tax advisors regarding the availability
or advisability of such an election.
SINGLE-CLASS REMICS. In the case of "single-class REMICs," certain
expenses of the REMIC will be allocated to the holders of the REMIC Regular
Certificates. The deductibility of such expenses may be subject to certain
limitations. See "Deductibility of Trust Fund Expenses" below.
SALES OF REMIC REGULAR CERTIFICATES. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the
next two paragraphs, any such gain or loss generally will be capital gain or
loss provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includable in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC
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Regular Certificate was held by such seller, reduced by any market discount
includable in income under the rules described above under "Current Income on
REMIC Regular Certificates -- Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
a sale of a REMIC Regular Certificate by a bank or other financial institution
to which such section applies would be ordinary income or loss.
TERMINATION. The REMIC will terminate, if not earlier, shortly following
the REMIC's receipt of the final payment in respect of the underlying qualified
mortgages. The last distribution on a REMIC Regular Certificate should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests
is "portfolio income" which cannot be offset by "passive activity losses" in
the hands of individuals or other persons subject to the passive loss rules.
The Code also provides that all residual interests must be issued on the
REMIC's startup day and designated as such. For this purpose, "startup day"
means the day on which the REMIC issues all of its regular and residual
interests, and under the REMIC Regulations may, in the case of a REMIC to which
property is contributed over a period of up to ten consecutive days, be any day
designated by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC
must be the calendar year. The basis of property contributed to the REMIC in
exchange for regular or residual interests is its fair market value immediately
after the transfer. The REMIC Regulations determine the fair market value of
the contributed property by deeming it equal to the aggregate issue prices of
all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Loans held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Loans or as principal on the Mortgage Loans is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals
are generally entitled. Income or loss in connection with a "prohibited
transaction" is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. Although not entirely free from doubt, the related REMIC taxable
income may be recognized when the adjusted issue price of such REMIC Regular
Certificate would exceed the maximum amount of future payments with respect to
such REMIC Regular Certificate. It is unclear whether the Prepayment Assumption
is taken into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that
is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (I.E., the
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purchase price of the REMIC Residual Certificate), and will be reduced (but not
below zero) by the holder's share of cash distributions and losses and
increased by its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
MISMATCHING OF INCOME AND DEDUCTIONS; EXCESS INCLUSIONS. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to qualified mortgages, on the one hand,
and the timing of deductions for interest (including original issue discount)
on the REMIC Regular Certificates, on the other. In the case of multiple
classes of REMIC Regular Certificates issued at different yields, and having
different weighted average lives, taxable income recognized by the holders of
REMIC Residual Certificates may be greater than cash flow in earlier years of
the REMIC (with a corresponding taxable loss or less taxable income than cash
flow in later years). This may result from the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
the REMIC Regular Certificates, will increase over time as the shorter term,
lower yielding classes of REMIC Regular Certificates are paid, whereas interest
income from the Mortgage Loans may not increase over time as a percentage of
the outstanding principal amount of the Mortgage Loans.
In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Loans (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes of
the original issue discount provisions. Therefore, the Trust Fund will
calculate the taxable income of Tiered REMICs by treating the Lower Tier REMIC
regular interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily
accruals for such quarterly period. The daily accrual for any day on which the
REMIC Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus
the amount of the daily accruals of REMIC taxable income for all prior
quarters, decreased by any distributions made with respect to such Certificates
prior to the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset
by other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of
excess inclusions for that year, and (iii) the amount of any alternative
minimum tax net operating loss is computed without regard to any excess
inclusions. While these provisions are generally effective
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for tax years beginning after December 31, 1986, a taxpayer may elect to have
these provisions apply only with respect to tax years beginning after August
20, 1996.
If the holder of a REMIC Residual Certificate is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion,
except as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income
of a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a qualified mortgage other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a qualified mortgage or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the qualified mortgages pending distribution on the
REMIC Certificates. In addition, a tax is imposed on the REMIC equal to 100
percent of the value of certain property contributed to the REMIC after its
"startup day." No REMIC in which interests are offered hereunder will accept
contributions that would cause it to be subject to such tax. This provision
will not affect a REMIC's ability in accordance with the Agreement to accept
substitute Mortgage Loans or to sell defective Mortgage Loans.
A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust Fund initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificates, unless
otherwise specified in the Prospectus Supplement.
DEALERS' ABILITY TO MARK TO MARKET REMIC RESIDUAL CERTIFICATES. 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 Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be
considered a sale of property other than a capital asset, resulting in ordinary
income or loss. Although the tax treatment with respect to a REMIC Residual
Certificate that has unrecovered basis after all funds of the Trust Fund have
been distributed is unclear, the holder presumably would be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701 (i) of the Code) during the period beginning six months
before, and ending six months after, the date of
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such sale, such sale will be subject to the "wash sale" rules of Section 1091
of the Code. In that event, any loss realized by the seller on the sale
generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where
the transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and
telephone cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total
anticipated excess inclusions for periods after such transfer with respect to
the interest transferred multiplied by the highest corporate rate of tax. The
transferor (or agent, as the case may be) will be relieved of liability so long
as the transferee furnishes an affidavit that it is not a disqualified
organization and the transferor or agent does not have actual knowledge that
the affidavit is false. Under the REMIC Regulations, an affidavit will be
sufficient if the transferee furnishes (A) a social security number, and states
under penalties of perjury that the social security number is that of the
transferee, or (B) a statement under penalties of perjury that it is not a
disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF A
REMIC RESIDUAL CERTIFICATE. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear. The preamble to the REMIC Regulations
indicates that the Internal Revenue Service is considering the tax treatment of
these types of residual interests. A transferee of such an interest should
consult its own tax advisors.
RESTRICTIONS ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES. An entity or
segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(I.E., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring
the REMIC Residual Certificate is a disqualified organization. In addition, as
to the requirement that reasonable arrangements be made to ensure that
disqualified organizations do not hold a residual interest in the REMIC, the
REMIC Regulations require that notice of the prohibition be provided either
through a legend on the certificate that evidences ownership, or through a
conspicuous statement in the prospectus or other offering document used to
offer the residual interest for sale. As to the requirement that sufficient
information be made available to calculate the tax on transfers to disqualified
organizations (or the tax, discussed below, on pass-through entities, interests
in which are held by disqualified organizations), the REMIC Regulations further
require that such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the
entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless
the proposed transferee provides to the Trustee an affidavit that such
transferee is not a disqualified organization.
For taxable years beginning after December 31, 1997, all partners of
certain "electing large partnerships" having 100 or more 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, including deductions for servicing and guaranty
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fees and any expenses of the REMIC will be disallowed, 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" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Certificates that is an individual, estate or trust
will be subject to the limitation with respect to certain itemized deductions
described in Code Section 67, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount"
($100,000 (or $50,000 in the case of a separate return by a married
individual), adjusted for changes in the cost of living subsequent to 1990)
will be reduced by the lesser of (i) 3 percent of the excess of adjusted gross
income over the applicable amount, or (ii) 80 percent of the amount of itemized
deductions otherwise allowable for such taxable year. Such deductions will
include servicing, guarantee, and administrative fees paid to the Master
Servicer of the Mortgage Loans. These deductions will be allocated entirely to
the holders of the REMIC Residual Certificates in the case of REMIC Trust Funds
with multiple classes of REMIC Regular Certificates that do not pay their
principal amounts ratably. As a result, the REMIC will report additional
taxable income to holders of REMIC Residual Certificates in an amount equal to
their allocable share of such deductions, and individuals, estates, or trusts
holding an interest in such REMIC Residual Certificates may have taxable income
in excess of the cash received. In the case of a "single-class REMIC," the
expenses will be allocated, under Treasury regulations, among the holders of
the REMIC Regular Certificates and the REMIC Residual Certificates on a daily
basis in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In the case of a holder of a REMIC Regular
Certificate who is an individual or a "pass-through interest holder" (including
certain pass-through entities, but not including REITs), the deductibility of
such expenses will be subject to the limitations described above. The reduction
or disallowance of these deductions may have a significant impact on the yield
of REMIC Regular Certificates to such a holder. In general terms, a
single-class REMIC is one that either (i) would qualify, under existing
Treasury regulations, as a grantor trust if it were not a REMIC (treating all
interests as ownership interests, even if they would be classified as debt for
federal income purposes) or (ii) is similar to such a trust and which is
structured with the principal purpose of avoiding the single-class REMIC rules.
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FOREIGN INVESTORS
REMIC REGULAR CERTIFICATES. Except as discussed below, a holder of a
REMIC Regular Certificate who is not a "United States person" (as defined
below) generally will not be subject to United States income or withholding tax
in respect of a distribution on a REMIC Regular Certificate, provided that (i)
the holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of
a residual interest in the REMIC, and (iv) the holder is not engaged in a
United States trade or business, or otherwise subject to federal income tax as
a result of any direct or indirect connection to the United States other than
through its ownership of a REMIC Regular Certificate. For these purposes, the
term "United States person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity created or organized in
or under the laws of the United States or any political subdivision thereof,
(iii) an estate whose income is includable in gross income for United States
federal income taxation regardless of its source, and (iv) a trust for which
one or more United States fiduciaries have the authority to control all
substantial decisions and for which a court of the United States can exercise
primary supervision over the trust's administration. For years beginning before
January 1, 1997, the term "United States person" shall include a trust whose
income is includible in gross income for United States federal income taxation
regardless of source, in lieu of trusts described in (iv) above, unless the
trust elects to have its United States status determined under the criteria set
forth in (iv) above for tax years ending after August 20, 1996. Recently issued
Treasury regulations (the "Final Withholding Regulations"), which are generally
effective with respect to payments made after December 31, 1998, 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 -- Regular Certificates")
or to the extent a tax treaty reduces or eliminates the tax. Treasury
regulations provide that amounts paid with respect to residual interests
qualify as portfolio interest only if interest on the qualified mortgages held
by the REMIC qualifies as portfolio interest. Generally, interest on Mortgage
Loans held by a Trust Fund will not qualify as portfolio interest, although
interest on the Private Mortgage-Backed Securities, other pass-through
certificates, or REMIC regular interests held by a Trust Fund may qualify. In
any case, a holder of a REMIC Residual Certificate will not be entitled to the
portfolio interest exception from the 30% withholding tax (or to any treaty
exemption or rate reduction) for that portion of a payment that constitutes
excess inclusions. Generally, the withholding tax will be imposed when REMIC
gross income is paid or distributed to the holder of a residual interest or
there is a disposition of the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed
at or after the time at which the excess inclusion accrues, but not later than
the close of the calendar year following the calendar year of accrual. A safe
harbor in the REMIC Regulations provides that the reasonable expectation
requirement will be satisfied if the above test would be met at all assumed
prepayment rates for the Mortgage Loans from 50 percent of the Prepayment
Assumption to 200 percent of the Prepayment Assumption. A transfer by a foreign
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transferor to a domestic transferee will likewise be disregarded under the
REMIC Regulations if the transfer would have the effect of allowing the foreign
transferor to avoid the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale
of REMIC Certificates to or through certain brokers may be subject to a
"backup" withholding tax of 31 percent of "reportable payments" (including
interest accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and Schedules
Q thereto) must be filed as if the Trust Fund were a partnership for federal
income tax purposes. Information on Schedule Q must be provided to holders of
REMIC Residual Certificates with respect to every calendar quarter. Each holder
of a REMIC Residual Certificate will be required to treat items on its federal
income tax returns consistently with their treatment on the Trust Fund's
information returns unless the holder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from an incorrect
schedule received from the Trust Fund. The Trust Fund also will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC taxable income by the Internal Revenue Service. Holders of REMIC Residual
Certificates will have certain rights and obligations with respect to any
administrative or judicial proceedings involving the Internal Revenue Service.
Under the Code and Regulations, a REMIC generally is required to designate a
tax matters person. Generally, subject to various limitations, the tax matters
person has authority to act on behalf of the REMIC and the holders of the REMIC
Residual Certificates in connection with administrative determinations and
judicial review respecting returns of taxable income of the REMIC. Treasury
regulations exempt from certain of these procedural rules REMICs having no more
than one residual interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the
extent allowable, the Seller or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the Seller or
its designee will act as the holder's fiduciary in the performance of any
duties required of the holder in the event that the holder is the tax matters
person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made.
TAX STATUS OF THE TRUST FUND. Upon the issuance of each series of
Non-REMIC Certificates, Stroock & Stroock & Lavan LLP, counsel to the Seller,
will deliver its opinion to the effect that, under then current law, assuming
compliance with the Agreement, the related Trust Fund will be classified for
federal income tax purposes as a grantor trust and not as an association
taxable as a corporation or a taxable mortgage pool. Accordingly, each holder
of a Non-REMIC Certificate will be treated for federal income tax purposes as
the owner of an undivided interest in the Mortgage Loans included in the Trust
Fund. As further described below, each holder of a Non-REMIC Certificate
therefore must report on its federal income tax return the gross income from
the portion of the Mortgage Loans that is allocable to such Non-REMIC
Certificate and may deduct the portion of the expenses incurred by the Trust
Fund that is allocable to such Non-REMIC Certificate, at the same time and to
the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Loans and received
directly its share of the payments on the Mortgage Loans and incurred directly
its share of expenses incurred by the Trust Fund when those amounts are
received or incurred by the Trust Fund.
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A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount"
($100,000 (or $50,000 in the case of a separate return by a married
individual), adjusted for changes in the cost of living subsequent to 1990)
will be reduced by the lesser of (i) 3 percent of the excess of adjusted gross
income over the applicable amount, or (ii) 80 percent of the amount of itemized
deductions otherwise allowable for such taxable year. A holder of a Non-REMIC
Certificate that is not a corporation cannot deduct such expenses for purposes
of the alternative minimum tax (if applicable). Such deductions will include
servicing, guarantee and administrative fees paid to the servicer of the
Mortgage Loans. As a result, individuals, estates, or trusts holding Non-REMIC
Certificates may have taxable income in excess of the cash received.
STATUS OF THE NON-REMIC CERTIFICATES. The Non-REMIC Certificates
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-REMIC Certificates generally will be "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. However, the Non-REMIC Certificates may not be qualifying assets under
the foregoing sections of the Code to the extent that the Trust Fund's assets
include Buydown Funds, amounts in a Reserve Account, or payments on mortgages
held pending distribution to Certificateholders. The Non-REMIC Certificates
should not be "residential loans made by the taxpayer" for purposes of the
residential loan requirement of Section 593(g)(4)(B) of the Code.
TAXATION OF NON-REMIC CERTIFICATES UNDER STRIPPED BOND RULES. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Master Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Master
Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Mortgage Loans. In Revenue Ruling 91-46, the Internal Revenue Service
concluded that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-REMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-REMIC Certificate will account for any discount on the
Non-REMIC Certificate (other than an interest treated as a "stripped coupon")
as market discount rather than original issue discount if either (i) the amount
of original issue discount with respect to the Non-REMIC Certificate was
treated as zero under the original issue discount DE MINIMIS rule when the
Non-REMIC Certificate was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Mortgage Loans. If neither of the above exceptions
applies, the original issue discount rules will apply to the Non-REMIC
Certificates. See "REMIC Regular Interests -- Current Income on REMIC Regular
Interests -- Original Issue Discount" and " -- Market Discount" above.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year
equal to the income that accrues on the Non-REMIC Certificate in that year
calculated under a constant yield method based on the yield of the Non-REMIC
Certificate (or, possibly, the yield of each Mortgage Loan underlying such
Non-REMIC Certificate) to such holder. Such yield would be computed at the rate
that, if used in discounting the holder's share of the payments on the Mortgage
Loans, would cause the present value of those payments to equal the price at
which the holder purchased the Non-REMIC Certificate. With respect to certain
categories of debt instruments, Section 1272(a)(6) of the Code requires that
original issue discount be accrued based on a prepayment assumption determined
in a manner prescribed by forthcoming regulations. 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
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might require the use of the pricing prepayment assumption instead of the
prepayment assumptions used in the underlying transactions.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Loans allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Non-REMIC Certificate acquired at a discount
or premium (that is, at a price less than or greater than such principal
amount, respectively), the use of a reasonable prepayment assumption would
increase or decrease such yield, and thus accelerate or decelerate the
reporting of interest income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-REMIC
Certificate and the portion of the adjusted basis of the Non-REMIC Certificate
(see "Sales of Non-REMIC Certificates" below) that is allocable to the Mortgage
Loan.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-through Rate based on the weighted
average of the interest rates of the Mortgage Loans held by the Trust Fund,
which interest rates may be fixed or variable. In the case of a Variable Rate
Non-REMIC Certificate that is subject to the original issue discount rules, the
daily portions of original issue discount generally will be calculated in the
same manner as discussed above except the principles discussed in "REMIC
Regular Certificates -- Current Income on REMIC Regular Certificates --
Original Issue Discounts -- Variable Rate REMIC Regular Certificates" will be
applied.
TAXATION OF NON-REMIC CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY.
If the stripped bond rules do not apply to a Non-REMIC Certificate, then the
holder will be required to include in income its share of the interest payments
on the Mortgage Loans in accordance with its tax accounting method. In
addition, if the holder purchased the Non-REMIC Certificate at a discount or
premium, the holder will be required to account for such discount or premium in
the manner described below, as if it had purchased the Mortgage Loans directly.
The treatment of any discount will depend on whether the discount with respect
to the Mortgage Loans is original issue discount as defined in the Code and, in
the case of discount other than original issue discount, whether such other
discount exceeds a DE MINIMIS amount. In the case of original issue discount,
the holder (whether a cash or accrual method taxpayer) will be required to
report as additional interest income in each month the portion of such discount
that accrues in that month, calculated based on a constant yield method. In
general it is not anticipated that the amount of original issue discount to be
accrued in each month, if any, will be significant relative to the interest
paid currently on the Mortgage Loans. However, original issue discount could
arise with respect to a Mortgage Loan ("ARM") that provides for interest at a
rate equal to the sum of an index of market interest rates and a fixed number.
The original issue discount for ARMs generally will be determined under the
principals discussed in "REMIC Regular Certificates -- Current Income on REMIC
Regular Certificates -- Original Issue Discount -- Variable Rate REMIC Regular
Certificates."
If discount on the Mortgage Loans other than original issue discount
exceeds a DE MINIMIS amount (described below), the holder will also generally
be required to include in income in each month the amount of such discount
accrued through such month and not previously included in income, but limited,
with respect to the portion of such discount allocable to any Mortgage Loan, to
the amount of principal on such Mortgage Loan received by the Trust Fund in
that month. Because the Mortgage Loans will provide for monthly principal
payments, such discount may be required to be included in income at a rate that
is not significantly slower (and, under certain circumstances, faster) than the
rate at which such discount accrues (and therefore at a rate not significantly
slower than the rate at which such discount would be included in income if it
were original issue discount). The holder may elect to accrue such discount
under a constant yield method based on the yield of the Non-REMIC Certificate
to such holder. In the absence of such an election, it may be necessary to
accrue such discount under a more rapid straight-line method. Under the DE
MINIMIS rule, market discount with respect to a Non-REMIC Certificate will be
considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Loans allocable to the Non-REMIC Certificate
and (ii) the weighted average life (determined using complete years) of the
Mortgage Loans remaining at the time of purchase of the Non-REMIC Certificate.
See "REMIC Regular Certificates -- Current Income on REMIC Regular Certificates
- -- Market Discount."
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If a holder purchases a Non-REMIC Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize, as an offset to interest
income, the portion of such premium that is allocable to a Mortgage Loan under
a constant yield method based on the yield of the Mortgage Loan to such holder,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should
be allocated among the principal payments on the Mortgage Loan and allowed as
an ordinary deduction as principal payments are made or, perhaps, upon
termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal
amount of the Mortgage Loan that is allocable to the Non-REMIC Certificate and
the portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan.
SALES OF NON-REMIC CERTIFICATES. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC
Certificate. In general, such adjusted basis will equal the holder's cost for
the Non-REMIC Certificate, increased by the amount of any income previously
reported with respect to the Non-REMIC Certificate and decreased by the amount
of any losses previously reported with respect to the Non-REMIC Certificate and
the amount of any distributions received thereon. Any such gain or loss
generally will be capital gain or loss if the assets underlying the Non-REMIC
Certificate were held as capital assets, except that, for a Non-REMIC
Certificate to which the stripped bond rules do not apply and that was acquired
with more than a DE MINIMIS amount of discount other than original issue
discount (see "Taxation of Non-REMIC Certificates if Stripped Bond Rules Do Not
Apply" above), such gain will be treated as ordinary interest income to the
extent of the portion of such discount that accrued during the period in which
the seller held the Non-REMIC Certificate and that was not previously included
in income.
FOREIGN INVESTORS. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-REMIC Certificate to the extent attributable to
Mortgage Loans that were originated after July 18, 1984, provided that the
holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the holder of the
Non-REMIC Certificate under penalties of perjury, certifying that such holder
is not a United States person and providing the name and address of such
holder). Recently issued Treasury regulations (the "Final Withholding
Regulations"), which are generally effective with respect to payments made
after December 31, 1998, 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-REMIC Certificate
attributable to Mortgage Loans that were originated prior to July 19, 1984 will
be subject to a 30% withholding tax (unless such tax is reduced or eliminated
by an applicable tax treaty). For these purposes, the term "United States
person" means a citizen or a resident of the United States, a corporation,
partnership or other entity created or organized in, or under the laws of, the
United States or any political subdivision thereof, an estate the income of
which is subject to United States federal income taxation regardless of its
source, and a trust for which one or more United States fiduciaries have the
authority to control all substantial decisions and for which a court of the
United States can exercise primary supervision over the trust's administration.
For years beginning before January 1, 1997, the term "United States person"
shall include a trust whose income is includible in gross income for United
States federal income taxation regardless of source, in lieu of trusts just
described, unless the trust elects to have its United States status determined
under the criteria described in the previous sentence for tax years ending
after August 20, 1996.
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TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" is generally defined as an entity that meets the
following requirements: (i) the entity is not a REMIC (or, after September 1,
1997 a FASIT, as defined in Section 860L of the Code), (ii) substantially all
of the assets of the entity are debt obligations, and more than 50 percent of
such debt obligations consists of real estate mortgages (or interests therein),
(iii) the entity is the obligor under debt obligations with two or more
maturities, and (iv) payments on the debt obligations on which the entity is
the obligor bear a relationship to the payments on the debt obligations which
the entity holds as assets. With respect to requirement (iii), the Code
authorizes the Internal Revenue Service to provide by regulations that equity
interests may be treated as debt for purposes of determining whether there are
two or more maturities. If a Series of Non-REMIC Certificates were treated as
obligations of a taxable mortgage pool, the Trust Fund would be ineligible to
file consolidated returns with any other corporation and could be liable for
corporate tax. Treasury regulations do not provide for the recharacterization
of equity as debt for purposes of determining whether an entity has issued debt
with two maturities, except in the case of transactions structured to avoid the
taxable mortgage pool rules.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether
the investment satisfies the applicable diversification requirements; (iii)
whether the investment is in accordance with the documents and instruments
governing the plan; and (iv) whether the investment is prudent, considering the
nature of the investment. Fiduciaries of plans also should consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes are imposed upon
such persons by Section 4975 of the Code. The Seller, Bear, Stearns & Co. Inc.,
each Master Servicer or other servicer, any Pool Insurer, any Special Hazard
Insurer, the Trustee, and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a Plan. If so,
the acquisition, holding or disposition of Certificates by or on behalf of such
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. Furthermore, if
an investing Plan's assets were deemed to include the Mortgage Assets and not
merely an interest in the Certificates, transactions occurring in the
management of Mortgage Assets might constitute prohibited transactions and the
fiduciary investment standards of ERISA could apply to the assets of the Trust
Fund, unless an administrative exemption applies.
In DOL Regulation ss.2510.3-101 (the "Regulation"), the U.S. Department
of Labor has defined what constitutes Plan assets for purposes of ERISA and
Section 4975 of the Code. The Regulation provides that if a Plan makes an
investment in an "equity interest" in an entity, the assets of the entity will
be considered the assets of such Plan unless certain exceptions apply. The
Seller can give no assurance that the Certificates will qualify for any of the
exceptions under the Regulation. As a result, the Mortgage Assets may be
considered the assets of any Plan which acquires a Certificate, unless some
administrative exemption is available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage
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pool pass-through certificates." A "mortgage pool" is defined as an investment
pool, consisting solely of interest bearing obligations secured by first or
second mortgages or deeds of trust on single-family residential property,
property acquired in foreclosure and undistributed cash. A "mortgage pool
pass-through certificate" is defined as a certificate which represents a
beneficial undivided interest in a mortgage pool which entitles the holder to
pass-through payments of principal and interest from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1%
of the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Seller; and (iii) the payments made to
and retained by the Seller in connection with the Trust Fund, together with all
funds inuring to its benefit for administering the Trust Fund, represent no
more than "adequate consideration" for selling the Mortgage Loans, plus
reasonable compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Seller, the Special Hazard Insurer, the Pool Insurer,
the Master Servicer, or other servicer, or the Trustee is a party in interest
if the Plan does not pay more than fair market value for such Certificate and
the rights and interests evidenced by such Certificate are not subordinated to
the rights and interests evidenced by other Certificates of the same pool. PTCE
83-1 also exempts from the prohibited transaction rules any transactions in
connection with the servicing and operation of the Mortgage Pool, provided that
any payments made to the Master Servicer in connection with the servicing of
the Trust Fund are made in accordance with a binding agreement, copies of which
must be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly
approved by an independent fiduciary who has authority to manage and control
those plan assets being invested in Certificates; (ii) the Plan pays no more
for the Certificates than would be paid in an arm's length transaction; (iii)
no investment management, advisory or underwriting fee, sale commission, or
similar compensation is paid to the Seller with regard to the sale, exchange or
transfer of Certificates to the Plan; (iv) the total value of the Certificates
purchased by such Plan does not exceed 25% of the amount issued; and (v) at
least 50% of the aggregate amount of Certificates is acquired by persons
independent of the Seller, the Trustee, the Master Servicer, and the Special
Hazard Insurer or Pool Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust Fund is a "mortgage pool," that the Certificates constitute "mortgage
pool pass-through certificates," and that the conditions set forth in PTCE 83-1
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the
following general categories: single and multifamily residential or commercial
mortgages, motor vehicle receivables, consumer or commercial receivables and
guaranteed government mortgage pool certificates and the purchase, sale and
holding of mortgage-backed or asset- backed pass-through certificates
representing beneficial ownership interests in the assets of such investment
trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of the Certificates to
be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by certain Plans must be on terms that are at least as favorable
to the Plan as they would be in
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an arm's length transaction with an unrelated party. Second, the rights and
interests evidenced by the Certificates must not be subordinated to the rights
and interests evidenced by other certificates of the same trust. Third, the
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Structured Rating
Group, Moody's Investors Service Inc., Duff & Phelps Credit Rating Co. or Fitch
Investors Services, L.P. ("National Credit Rating Agencies"). Fourth, the
Trustee cannot be an affiliate of any member of the "Restricted Group" which
consists of any underwriter as defined in PTE 90-30, the Seller, the Master
Servicer, each servicer, the Pool Insurer, the Special Hazard Insurer and any
obligor with respect to obligations or receivables constituting more than 5% of
the aggregate unamortized principal balance of the obligations or receivables
as of the date of initial issuance of the Certificates. Fifth, the sum of all
payments made to and retained by such underwriters must represent not more than
reasonable compensation for underwriting the Certificates; the sum of all
payments made to and retained by the Seller pursuant to the assignment of the
obligations or receivables to the related Trust Fund must represent not more
than the fair market value of such obligations; and the sum of all payments
made to and retained by the Master Servicer and any servicer must represent not
more than reasonable compensation for such person's services under the Trust
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, (i) the investment pool consists only of assets of the type
enumerated in the exemption and which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating categories by one of
the National Credit Rating Agencies for at least one year prior to a Plan's
acquisition of certificates; and (iii) certificates evidencing interests in
such other investment pools have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
The Seller assumes that only Plans which are accredited investors under the
federal securities laws will be permitted to purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption may
provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the
Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity. Finally, in the case of initial
issuance (but not secondary market transactions), at least 50% of each class of
Certificates, and at least 50% of the aggregate interests in the trust, must be
acquired by persons independent of the Restricted Group.
Before purchasing a Certificate in reliance on any of these exemptions or
any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain
prohibited transactions to which neither PTCE 83-1 nor PTE 90-30 is applicable,
depending in part upon the type of Plan fiduciary making the decision to
acquire Certificates and the circumstances under which such decision is made,
including, but not limited to PTCE 90-1 (regarding investments by insurance
company pooled separate accounts), PTCE 91-38 (regarding investments by bank
collective investments funds), PTCE 84-14 (regarding transactions effected by
"qualified professional asset managers"), PTCE 95-60 (regarding investments by
insurance company general accounts) and PTCE 96-23 (regarding transactions
effected by "in-house asset managers"). However, even if the conditions
specified in either of these exemptions are met, the scope of the relief
provided by these exemptions might or might not cover all acts which might be
construed as prohibited transactions.
Any Plan fiduciary considering whether to purchase a Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the
related Certificates.
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LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement and for
so long as they are rated in one of the two highest rating categories by a
least one nationally recognized statistical rating organization, the
Certificates will constitute "mortgage related securities" for purposes of
SMMEA, and as such, absent state legislation described below, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under
the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that under applicable law obligations issued by
or guaranteed as to principal and interest by the United States or any agency
or instrumentality thereof constitute legal investments for such entities.
Under SMMEA, if a state enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Certificates will constitute
legal investments for entities subject to such legislation only to the extent
provided therein. Certain states adopted legislation which limits the ability
of insurance companies domiciled in these states to purchase mortgage-related
securities, such as the Certificates.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with Certificates
without limitation as to the percentage of their assets represented thereby,
federal credit unions may invest in Certificates, and national banks may
purchase Certificates for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. ss. 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
included guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Certificates under consideration for purchase constitutes a "mortgage
related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with
respect to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is not
suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from
acquiring high-risk mortgage securities for trading purposes.
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A depository institution must ascertain and document prior to purchase
and no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis,
it must use information derived from a source that is independent of the party
from whom the product is being purchased. The institution is responsible for
ensuring that the assumptions underlying the analysis and resulting
calculations are reasonable. Reliance on analyses and documentation from a
securities dealer or other outside party without internal analyses by the
institution is unacceptable.
In general, a high-risk mortgage security is a mortgage derivative
product possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities.
A mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the characteristics of a mortgage derivative product
are such that the first two tests cannot be applied (such as interest-only
strips), the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i) the
mortgage derivative product has an expected weighted average life greater than
10.0 years; (ii) the expected weighted average life of the mortgage derivative
product: (a) extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points, or (b)
shortens by more than 6.0 years, assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; and (iii) the estimated
change in the price of the mortgage derivative product is more than 17%, due to
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
When performing the price sensitivity test, the same prepayment
assumptions and same cash flows that were used to estimate average life
sensitivity must be used. The discount rate assumptions should be determined by
(i) assuming that the discount rate for the security equals the yield on a
comparable average life U.S. Treasury security plus a constant spread, (ii)
calculating the spread over Treasury rates from the bid side of the market for
the mortgage derivative product, and (iii) assuming the spread remains constant
when the Treasury curve shifts up or down 300 basis points. Discounting the
cash flows by their respective discount rates estimates a price in the plus or
minus 300 basis point environments. The initial price must be determined by the
offer side of the market and used as the base price from which the 17% price
sensitivity test will be measured.
Generally, a floating-rate debt class will not be subject to the average
life and average life sensitivity tests described above if it bears a rate
that, at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate ("LIBOR"). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10
years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to purchase
Certificates representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual
interests or stripped mortgage-backed securities. Investors should consult
their own legal advisors in determining whether and to what extent the
Certificates constitute legal investments for such investors and comply with
any other applicable requirements.
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METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Bear, Stearns & Co. Inc. ("Bear, Stearns"), an
affiliate of the Seller, acting as underwriter with other underwriters, if any,
named therein. In such event, the Prospectus Supplement may also specify that
the underwriters will not be obligated to pay for any Certificates agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Seller. In connection with the sale of the Certificates, underwriters may
receive compensation from the Seller or from purchasers of the Certificates in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Seller.
Alternatively, the Prospectus Supplement may specify that the
Certificates will be distributed by Bear, Stearns acting as agent or in some
cases as principal with respect to Certificates that it has previously
purchased or agreed to purchase. If Bear, Stearns acts as agent in the sale of
Certificates, Bear, Stearns will receive a selling commission with respect to
each Series of Certificates, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the Certificates sold
hereunder as of the Cut-off Date. The exact percentage for each Series of
Certificates will be disclosed in the related Prospectus Supplement. To the
extent that Bear, Stearns elects to purchase Certificates as principal, Bear,
Stearns may realize losses or profits based upon the difference between its
purchase price and the sales price. The Prospectus Supplement with respect to
any Series offered other than through underwriters will contain information
regarding the nature of such offering and any agreements to be entered into
between the Seller and purchasers of Certificates of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Seller anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Seller by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New
York 10038.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
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Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates under certain scenarios might fail to recoup
their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating.
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GLOSSARY
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------- -----
<S> <C>
Accounts .............................. 30
APR ................................... 6
ARM ................................... 80
Accrual Certificates .................. 32
Agency Securities ..................... 1
Agreement ............................. 9
Available Funds ....................... 31
Basis Risk Shortfall .................. 64
Bear, Stearns ......................... 87
Bankruptcy Bond ....................... 12
Buydown Funds ......................... 65
Buydown Loans ......................... 5
CMO ................................... 7
Capitalized Interest Account .......... 9
Cede .................................. 35
Certificateholders .................... 1
Certificate Account ................... 47
Certificate Register .................. 31
Certificates .......................... 1
Charter Act ........................... 22
Cleanup Costs ......................... 64
Code .................................. 14
Collateral Value ...................... 18
Commission ............................ 2
Contracts ............................. 1
Cooperative Loans ..................... 1
Cooperatives .......................... 4
Current Principal Amount .............. 32
Cut-off Date .......................... 10
Definitive Certificates ............... 35
Detailed Description .................. 16
Determination Date .................... 31
Distribution Dates .................... 2
DTC ................................... 35
ERISA ................................. 15
Events of Default ..................... 54
FDIC .................................. 28
FHA ................................... 4
FHA Insurance ......................... 30
FHA Loans ............................. 20
FHLMC ................................. 1
FHLMC Act ............................. 23
FHLMC Certificate group ............... 23
FHLMC Certificates .................... 7
Final Withholding Regulations ......... 77
FNMA .................................. 1
-89-
<PAGE>
FNMA Certificates ........................................ 6
FTC Rule ................................................. 62
GNMA ..................................................... 1
GNMA Certificates ........................................ 6
GNMA Issuer .............................................. 20
Garn-St Germain Act ...................................... 62
Guaranty Agreement ....................................... 20
HUD ...................................................... 25
Housing Act .............................................. 20
Indirect Participant ..................................... 35
Insurance Proceeds ....................................... 47
Insured Expenses ......................................... 47
Lender ................................................... 1
LIBOR .................................................... 86
Liquidation Expenses ..................................... 47
Liquidation Proceeds ..................................... 47
Loan-to-Value Ratio ...................................... 18
Lockout Periods .......................................... 6
Lower Tier REMIC ......................................... 73
Manufactured Homes ....................................... 20
Manufacturer's Invoice Price ............................. 18
Master Servicer .......................................... 1
Mortgage ................................................. 45
Mortgage Assets .......................................... 1
Mortgage Loans ........................................... 4
Mortgage Pool ............................................ 4
Mortgage Rate ............................................ 5
Mortgaged Properties ..................................... 16
Mortgagors ............................................... 32
Multifamily Loans ........................................ 1
Multiple Variable Rate REMIC Regular Certificate ......... 70
National Credit Rating Agencies .......................... 84
NCUA ..................................................... 85
Non-REMIC Certificates ................................... 15
OID Regulations .......................................... 66
Participants ............................................. 35
Pass-Through Rate ........................................ 2
Plan ..................................................... 82
PMBS Agreement ........................................... 25
PMBS Issuer .............................................. 8
PMBS Servicer ............................................ 8
PMBS Trustee ............................................. 8
Percentage Interests ..................................... 54
Permitted Investments .................................... 41
Policy Statement ......................................... 85
Pool Insurance Policy .................................... 12
Pool Insurer ............................................. 37
Pre-Funding Account ...................................... 8
Pre-Funded Amount ........................................ 8
Pre-Funding Period ....................................... 8
Prepayment Assumption .................................... 67
Presumed Single Qualified Floating Rate .................. 69
Presumed Single Variable Rate ............................ 69
Primary Insurance Policy ................................. 16
-90-
<PAGE>
Primary Insurer ........................................ 51
Principal Prepayments .................................. 33
Private Mortgage-Backed Securities ..................... 1
Protected Account ...................................... 46
PTCE 83-1 .............................................. 82
PTE 90-30 .............................................. 83
Purchase Price ......................................... 29
Rating Agency .......................................... 13
Record Date ............................................ 31
Refinance Loan ......................................... 18
Regulation ............................................. 82
Relief Act ............................................. 63
REMIC .................................................. 1
REMIC Certificates ..................................... 64
REMIC Regular Certificates ............................. 14
REMIC Regulations ...................................... 65
REMIC Residual Certificates ............................ 14
REIT ................................................... 74
Reserve Account ........................................ 2
Restricted Group ....................................... 84
Retained Interest ...................................... 30
RICs ................................................... 74
SMMEA .................................................. 13
Seller ................................................. 1
Senior Certificates .................................... 9
Single Family Loans .................................... 1
Single Variable Rate REMIC Regular Certificate ......... 69
Special Hazard Insurance Policy ........................ 12
Special Hazard Insurer ................................. 38
Sub-Servicer ........................................... 13
Sub-Servicing Agreement ................................ 47
Subordinated Certificates .............................. 9
Superlien .............................................. 64
Tiered REMICs .......................................... 65
Title V ................................................ 62
Trust Fund ............................................. 1
Trustee ................................................ 1
UCC .................................................... 35
United States person ................................... 77
VA ..................................................... 4
VA Guarantees .......................................... 30
VA Loans ............................................... 20
Variable Rate Non-REMIC Certificates ................... 80
Variable Rate REMIC Regular Certificate ................ 68
Yield Supplement Agreement ............................. 64
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<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY BSMSI OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE CERTIFICATES OFFERED HEREBY NOR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON
IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
</TABLE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Summary of Terms ........................................ S-4
Description of the Mortgage Loans ....................... S-19
The Servicers ........................................... S-19
Description of the Certificates ......................... S-20
Yield and Prepayment Considerations ..................... S-32
The Pooling and Servicing Agreement ..................... S-38
Federal Income Tax Considerations ....................... S-47
ERISA Considerations .................................... S-48
Legal Investment ........................................ S-49
Restrictions on Purchase and Transfer of the Residual
Certificates .......................................... S-50
Method of Distribution .................................. S-50
Legal Matters ........................................... S-51
Rating .................................................. S-51
Index of Principal Definitions .......................... S-52
Annex A -- Certain Characteristics of the Mortgage
Loans ................................................. A-1
PROSPECTUS
Prospectus Supplement ................................... 2
Available Information ................................... 2
Incorporation of Certain Documents By Reference ......... 2
Reports to Certificateholders ........................... 3
Summary of Terms ........................................ 4
The Trust Fund .......................................... 16
Use of Proceeds ......................................... 26
The Seller .............................................. 27
Mortgage Loan Program ................................... 27
Description of the Certificates ......................... 30
Credit Enhancement ...................................... 36
Yield and Prepayment Considerations ..................... 42
The Pooling and Servicing Agreement ..................... 45
Certain Legal Aspects of the Mortgage Loans ............. 56
Certain Federal Income Tax Consequences ................. 64
ERISA Considerations .................................... 82
Legal Investment ........................................ 85
Method of Distribution .................................. 87
Legal Matters ........................................... 87
Financial Information ................................... 87
Rating .................................................. 87
Glossary ................................................ 89
</TABLE>
$139,528,300
(APPROXIMATE)
BEAR STEARNS
MORTGAGE SECURITIES INC.
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1998-5
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PROSPECTUS SUPPLEMENT
-------------------------------------------------------
BEAR, STEARNS & CO. INC.
APRIL 27, 1998
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